10 Leaves

This episode is also available as a blog post: https://10leaves.ae/publications/difc/difc-licensing-categories

Firms interested in carrying out financial services from the DIFC are required to submit applications to the Dubai Financial Services Authority, or DFSA.

The type of business that the applicant wishes to engage in defines the category of Licence that is required. For example, a firm undertaking low-risk activities such as advising or arranging will require a DIFC Category 4 Licence, while a discretionary portfolio manager will require a DIFC Category 3C Licence. An STP broker, dealing on a matched principle basis will require a DIFC Category 3A Licence, whereas a market maker or provider of credit provider will require a DIFC Category 2 Licence. Full-fledged banks, that accept deposits, will come under a DIFC Category 1 License.

This episode is also available as a blog post: https://10leaves.ae/publications/difc/guide-to-the-difc-crowdfunding-business-license

Firms interested in carrying out crowdfunding activities from the DIFC are required to submit applications to the Dubai Financial Services Authority, or DFSA.

The DFSA, for the purposes of authorisation and supervision, categorises the crowdfunding business as a Category 4 entity, with the primary activity of “Operating a Crowdfunding Platform”. The base capital required for a DIFC Crowdfunding license is US$ 140,000.

The DFSA offers three types of crowdfunding licenses:

a. Investment-based Crowdfunding Platform

b. Loan-based Crowdfunding Platform

c. Property-based Crowdfunding Platform

DIFC Crowdfunding Platforms are able to cater to retail clients, with certain additional requirements to ensure retail client protection. For instance, retail investors will only be allowed to invest upto US$ 50,000 in a single calendar year.

Due to the nature of the license, and the recent issuance of crowdfunding regulations, the DFSA places slightly higher entry-level requirements and restrictions on the license itself.

This episode is also available as a blog post: https://10leaves.ae/publications/luxembourg/hedge-funds-in-luxembourg

Luxembourg funds and the GCC

Luxembourg is a jurisdiction of choice for investors based in the GCC. While the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM)also offer fund structures, Luxembourg funds have more diverse options, including SLPs – that can be unsupervised and allow for greater flexibility for lower AUMs.

Luxembourg is an excellent jurisdiction for startup funds due to lower setup and maintenance costs, in some cases, as low as 35% of the costs in similar onshore jurisdictions in the GCC. They can be established quickly, are more flexible and can easily be upgraded to supervised or passportable funds once higher AUMs are achieved.

Luxembourg funds can also be managed from the DIFC (and ADGM), by setting up a restricted fund manager. This allows for greater comfort to prospective investors, besides opening an option for directly marketing and passporting the fund within the UAE.

Most large banks and investment managers in the UAE and the GCC have Luxembourg fund options. In fact, Luxembourg domiciled investment funds dominate among foreign funds sold in the GCC.

United Arab Emirates – 64% of foreign funds are Luxembourg funds

Saudi Arabia – 50%

Kuwait – 75%

Bahrain – 75%

Oman – 99%

Qatar – 98%

What is a hedge fund?

Hedge funds got their name from investors in funds holding both long and short positions, to ensure that they made a profit despite market fluctuations. This practice is called hedging.

Hedge funds have moved onto many different kinds of structures with different assets and securities, and nowadays mean that the fund manager uses a combination of complex investment strategies and leverage to aim for higher returns. Contrast that to a equity fund or a property fund, which, as the name suggests, invests in listed equities or property assets.

As the first money manager to combine short selling, the use of leverage shared risk through a partnership with other investors and a compensation system based on investment performance, Alfred Winslow Jones earned his place in investing history as the father of the hedge fund.

This episode is also available as a blog post: https://10leaves.ae/publications/luxembourg/debt-funds-in-luxembourg

Why set up a debt fund in Luxembourg?

Luxembourg is a leading jurisdiction for investment funds and the second largest investment fund centre in the world after the United States. It is the largest fund jurisdiction in the European Union, with more than Euro five trillion of assets under management.

The country is a politically and financially stable EU country with a AAA-Rating. As a jurisdiction within the European Union, debt funds established in Luxembourg can be more easily distributed within the EU on the basis of existing passporting rights for EU funds.

What are the key advantages of setting up debt funds in Luxembourg?

1. The first big advantage is choice. Fund managers can choose the level of supervision they require, depending on the kind of clients that the fund will market itself to. Accordingly, hedge funds can be unsupervised (such as SLPs), supervised (such as SIFs) or attach themselves with a supervised AIFM (such as RAIFs).

2. A Luxembourg structure also offers comfort to investors, given the good reputation of the jurisdiction, the enhanced protections offered to investors and the existing network of globally-recognised service providers.

3. Distribution options are the next major advantage. A Luxembourg fund could be passported on the basis of the AIFMD framework, once it appoints an AIFM.

(i.)Then there are the tax benefits.

a.There is a choice of tax treatment according to the choice of investment vehicle. Debt funds can be fully taxable and have access to Luxembourg’s double tax avoidance treaties network, or can choose to be tax exempt, but with very limited access to double tax treaties.

b. Debt funds can also be tax neutral with either legal or no legal personality. In this event,  the partners of the fund will become taxable, and not the debt fund itself.

This episode is also available as a blog post: https://10leaves.ae/publications/adgm/adgm-foundations-regime

ADGM Foundations Regime provides a viable alternative to trusts for legacy planning and financial structuring. ADGM offers foundations incorporated under Common-Law for the first time in the region.

A foundation is governed by its Charter, which is a publicly available document, and By-laws, which are private to the Foundation. The affairs of an ADGM Foundation are managed by the members of a Council and may be supervised by a Guardian.

Foundations provide a mechanism to consolidate holdings of various assets (shares, real property, intellectual property, royalties, etc.) into a single holding entity. This allows for clarity on the transfer of assets during a succession process.

Foundations operate like common law trusts, with an important distinction – they are legally incorporated with a distinct legal personality. In effect, they have features common to a company. They can hold assets, but cannot issue shares or carry out commercial activities.

Foundations are operationally and tax-efficient. Much like a ‘Letter of Wishes” in a trust vehicle, a Foundation’s Charter and By-Laws help make the succession process much less challenging.

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This episode is also available as a blog post: https://10leaves.ae/publications/luxembourg/fund-of-funds-in-luxembourg

What is a fund of funds?

A fund of funds, or FoF, is a fund that invests into other funds. The FoF does not invest directly in underlying assets such as securities, bonds or real estate. Instead, it invests into portfolios of other funds. In some jurisdictions, FoFs are also referred to as as multi-manager funds.

FoFs can be focused on various sectors, such as hedge strategies, private equity, bonds and fixed income, and real estate, to state a few.

What are the advantages of setting up multi-manager funds?

Multi-manager funds offer the advantage of a diversified pool of investments that is managed by different fund managers.

In many cases, retail investors do not have access to funds that have high subscription costs and lack distribution channels. FoFs can provide such investors access to these funds.

An additional benefit is the risk spread. Investing in portfolios of different fund managers provides the investors an additional layer of security. Also, the FoF can be structured in a way that leads to the diversification of sectors and geographies, thus reducing the overall risk exposure.

This episode is also available as a blog post: https://10leaves.ae/publications/luxembourg/sicav-in-luxembourg

Why set up a SICAV in Luxembourg?

Luxembourg is a leading jurisdiction for investment funds and the second largest investment fund centre in the world after the United States. It is the largest fund jurisdiction in the European Union, with more than Euro five trillion of assets under management.

A big advantage is choice. Fund managers can choose the level of supervision they require, depending on the kind of clients that the fund will market itself to. Accordingly, hedge funds can be unsupervised (such as SLPs), supervised (such as SIFs) or attach themselves with a supervised AIFM (such as RAIFs).

A Luxembourg structure also offers comfort to investors, given the good reputation of the jurisdiction, the enhanced protections offered to investors and the existing network of globally-recognised service providers.

The country is a politically and financially stable EU country with a AAA-Rating. As a jurisdiction within the European Union, funds established in Luxembourg can be more easily distributed within the EU on the basis of existing passporting rights for EU funds.

This episode is also available as a blog post: https://10leaves.ae/publications/luxembourg/setting-up-an-umbrella-fund-in-luxembourg

What is an umbrella fund?

An umbrella fund is collective investment scheme that legally exists as a single entity but has several distinct compartments or sub-funds. These sub-funds may follow completely different investment policies and can have different investors for each compartment. Such sub-funds are treated as separate funds, with assets and liabilities being segregated and fund accounting also being done separately.

Luxembourg offers multiple fund structures with the flexibility of opting for supervision, lower requirements for diversification of assets and an option for passporting by appointing an AIFM.

Luxembourg also has a diverse ecosystem of existing funds and service providers, which makes it easier to rent a compartment or make a sub-fund of an existing umbrella fund. This is usually used by startup or first-time fund managers of smaller funds, due to the ease of setup and lower costs.

What are the advantages of setting up an umbrella fund in Luxembourg?

Luxembourg offers many advantages for the establishment of umbrella funds:

The first one being time-to-market.

1. Setting up an umbrella fund is a one-time process, with an incremental sub-procedure for each compartment.

a. The fund manager does not have to go through a separate setup process, nor re-negotiate terms with service providers, every single time.

2. Costs also play a big part here. An umbrella fund with multiple compartments costs much lesser than setting up distinct funds, especially for fund managers who wish to employee various strategies for specific investor groups.

3. The third is choice. Fund managers can choose the level of supervision they require, depending on the class of assets that the fund will invest in, and the kind of clients that the fund will market itself to. Accordingly, funds can be unsupervised (such as SLPs), supervised (such as SIFs) or attach themselves with a supervised AIFM (such as RAIFs).

4. A Luxembourg sub-structure offers comfort to investors, given the good reputation of the jurisdiction, the enhanced protections offered to investors and the existing network of globally-recognised service providers. Besides, this is a well-established practice, being tried and tested for many years.

5. Distribution options are also available. For instance, the umbrella and sub-funds could be passported on the basis of the UCITS or AIFMD framework.

This episode is also available as a blog post: https://10leaves.ae/publications/adgm/guide-to-the-adgm-category-3c-asset-manager-license

ADGM Category 3C Asset Manager License:

Firms engaging in the activity of ‘Asset Management’, can apply to the ADGM for a Cat 3C License. Asset management, in this context, means managing client portfolios on a discretionary basis, under a client mandate. This license also allows the firm to carry our non-discretionary investment advisory and arrangement services, if those activities have been applied for as well.

A recent trend has been for investment bankers and financial advisors working with larger asset management companies, to set up on their own, and continue to work with the existing investment banks and custodians, as External Asset Managers. The ADGM Category 3C Asset Manager License is an ideal license for this activity, should the target market be primarily Abu Dhabi.

Firms interested in managing client assets from the ADGM are required to submit applications to the Financial Services Regulatory Authority, or FSRA.

The FSRA has a fast-track process for Fund Manager licenses, which also come under Category 3C. The Fund Manager, if approved, can manage domestic professional (ADGM Exempt Fund and ADGM Qualified Investor Fund) and Foreign Funds in other jurisdictions as well. In case the firm wishes to also engage in discretionary portfolio management services, it has to go through a full-fledged license process.