06/03/2024
Swiss Limited Qualified Investor Fund
Switzerland is not very well known as a fund jurisdiction, in particular when it comes to alternative investment funds. One reason has been the lack of a fund vehicle, which does not require approval by the local supervisory authority, such as, for instance, the Luxembourg Reserved Alternative Investment Fund (RAIF). Therefore, Switzerland has introduced the Limited Qualified Investor Fund (L-QIF), which is available from 1 March 2024. The L-QIF is a fund for qualified investors which does not require approval by the Swiss Financial Market Supervisory Authority (FINMA). The present briefing gives an overview on the new Swiss fund vehicle, by providing an executive summary and addressing, in more detail, the following topics:Legal formAdministration and investment managementInvestment restrictionsIlliquid investments or investments difficult to valuateTaxThe L-QIF may be of interest to Swiss Managers and others looking at being active in the Swiss market. Executive summary The L-QIF is a new Swiss fund for qualified investors, which does not require approval by FINMA. The L-QIF is available from 1 March 2024 (date of entry into effect of the respective legal provisions). The L-QIF can take on the form of a Swiss contractual fund, a Swiss investment company with variable capital, or a Swiss limited partnership for collective investments. L-QIFs must be administered and managed by a licensed fund management company or, under certain circumstances, a manager of collective assets. These institutions must, as a rule, be Swiss. However, to a certain extent also licensed foreign managers may be involved, which presents an opportunity for them to enter the Swiss market. The standard risk diversification rules and investment restrictions applicable to regulated vehicles do not apply to L-QIFs. L-QIFs may thus be attractive for alternative or illiquid investments. Despite the new vehicle, the main disadvantages of Swiss funds in an international context, which are the lack of EU market access and Swiss withholding tax, remain. A L-QIF will thus likely be most suitable if mainly Swiss investors shall be targeted, or for asset pooling by sophisticated investors when an active distribution is not required to raise funds. Which legal forms are available to structure L-QIFs? L-QIFs can be structured as Swiss contractual funds (SCFs), Swiss investment companies with variable capital (SICAVs), or Swiss limited partnerships for collective investments (Swiss LPs). They will not need FINMA approval, which does, however, not imply the absence of any regulation. Rather, the L-QIF remains subject to the provisions of the Swiss Collective Investment Schemes Act and Ordinance unless they are expressly disapplied. In particular, L-QIFs must be administered or managed by a supervised entity. What are the requirements concerning the administration and management of L-QIFs? L-QIFs structured as SCFs can only be managed by a Swiss fund management company, which may, in turn, delegate the investment decisions to a manager of collective assets.L-QIFs structured as SICAVs will be required to delegate both the administrative and investment decisions to a fund management company, which may sub-delegate the portfolio management to a manager of collective assets.L-QIFs structured as Swiss LPs must delegate their executive management, including investment decisions, to a manager of collective assets. There will be no such requirement, however, if the general partners of the Swiss LPs are banks, insurance companies, securities firms, fund management companies, or managers of collective assets. Managers of collective assets, as defined in the Financial Institutions Act (FinIA), must be fully regulated investment managers under FinIA. De minimis collective asset managers with a license as portfolio manager are thus not eligible. When it comes to the delegation of the investment decisions, also foreign managers with an equivalent license may be involved. This may in particular be of interest to foreign managers with experience in managing similar vehicles, such as RAIFs. Which investment restrictions apply? The standard risk diversification rules and investment restrictions applicable to regulated vehicles do not apply to L-QIFs. This increased flexibility, however, will not exempt L-QIFs from defining in their documentation the applicable investment restrictions in line with the applicable limitations on leverage, collaterals and total exposure of net assets of L-QIFs. In addition, specific provisions, restrictions and limitations apply to open-ended L-QIFs investing in real estate, such as rules on co-ownership, risk diversification, transactions with related parties and requirements for experts in charge of valuation. Specific rules also apply to L-QIFs structured as Swiss LPs (i.e. closed-end vehicles) in terms of transactions with related parties. Requirements for valuation experts will also apply to such L-QIFs. Furthermore, the partnership agreements of Swiss LPs must expressly mention investment restrictions and authorised investment techniques.L-QIFs will be able to use the model-based approach as a risk measurement method (i.e. value at risk, VaR). The method will not be examined by FINMA, but ex post by the auditor. Finally, requirements applicable to securities lending, repo transactions, derivatives and security management for regulated vehicles apply also to L-QIFs. Are L-QIFs suitable for illiquid or investments difficult to valuate? L-QIFs may in particular be considered for alternative or infrastructure portfolios with illiquid investments. The most suitable legal form for such purposes is the Swiss LP. The open ended structures (SCFs and SICAVs) are generally less suitable for such type of investments, even if open ended L-QIFs with investments that are difficult to value or not negotiable may provide for termination possibilities only at specified intervals, but at least every five years.L-QIFs in the form of Swiss LPs may for instance be used for investments in private (early stage) companies. Open-ended L-QIFs, on the other hand, may be relevant for real estate investments as well as investments in digital or other alternative assets. For real estate investments, the Swiss LPs may, however, again be the better alternative depending on the type of real estate in question. Eventually, we may point out that side pockets require a specific approval by FINMA, in the absence of existing international standards or other points of comparison as well as empirical values. As a result, it will currently – unfortunately – not be possible for L-QIFs to create side pockets. What is to be considered from a tax perspective? L-QIFs are not treated differently in terms of tax, compared to other regulated funds/collective investment schemes. On the one hand, the L-QIF thus enjoys favourable treatment in terms of stamp duty and VAT. To the extent the L-QIF does not hold direct real estate, it is also treated transparently for income tax purposes. On the other hand, distributions and reinvested net income are subject to 35% withholding tax. This is an evident obstacle to the use of the L-QIF once also foreign investors shall be addressed. Coupled with the limited EU market access, the L-QIF will thus – like other Swiss funds – probably remain most suitable if (mainly) Swiss investors shall be targeted, or for asset pooling by sophisticated investors when an active distribution is not required to raise funds. Despite these limitations, the L-QIF is an attractive new fund vehicle, in particular when it comes to alternative investments. It also offers possibilities for foreign managers to enter into the Swiss market considering their experience with similar foreign vehicles. Looking ahead It will be interesting to see how L-QIFs evolve and if they become a popular investment vehicle for fund managers looking to enter the Swiss market. If you are interested in popular investment vehicles across Europe, please also see our popular investment vehicles guide. The information in this publication is for general purposes and guidance only and does not purport to constitute legal or professional advice.
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