Among the many considerations for fund managers when choosing the domicile or type of fund is the ability to distribute the fund in multiple jurisdictions. Funds in the Middle East, whether conventional or Islamic, face constraints on distribution. There are currently no arrangements in place for mutual recognition to permit a fund authorised in one jurisdiction to be distributed in another without complying with all the requirements set out by the host country.
There have been discussions over the introduction of a Gulf Cooperation Council (GCC) funds passport, but it appears highly unlikely that this will be implemented in the immediate future due to the need for a common regulatory framework to be drafted, setting out common standards and recognised fund types.
The GCC countries are inspired by the harmonisation efforts of the European Union, which launched the idea of an EU passport for financial services in the 1970s. A passport for investment funds was granted in 1985 under the first Undertakings for Collective Investment in Transferable Securities directive as part of the creation of a unified regulatory framework for investment funds. Today the UCITS brand has become an international gold standard, and has been adopted by many Islamic funds. The success of the UCITS brand and its global distribution has prompted the application of the passporting concept to other fund types, which may also be of increasing interest to Islamic fund managers.
Passporting has been extended to any EU or non-EU managers of EU-domiciled alternative investment funds under the Alternative Investment Fund Managers Directive, enabling managers to market their funds to professional investors throughout the EU through a single authorisation regime. The passport has also been granted to other fund types, including venture capital investment funds, European social entrepreneurship funds and, most recently, EU long-term investment funds. The ELTIF initiative aims to provide private capital for the financing of the economy in the form of investment in long-term projects such as infrastructure for energy, transport and climate change mitigation. Similarly to UCITS, the new fund vehicle may benefit from cross-border distribution to both professional and retail investors within the EU.
As the world’s second largest centre for investment funds and the global leader in cross-border distribution, Luxembourg is an ideal location for the domiciliation and administration of investment vehicles thanks to its business-friendly environment and a mature legal system that enables innovative solutions, and which is continuously being updated.
Luxembourg is also one of the first non-Muslim jurisdictions to specialise in offering the appropriate tools for Shariah-compliant investment funds.
The country's legal and regulatory framework offers a range of regulated and unregulated vehicles, and financial instruments to address the needs of investors who wish to invest in Shariah-compliant products. Together with Malaysia and Saudi Arabia, Luxembourg is one if the leading Islamic fund hubs; between them, the three countries host 71% of the world's Shariah-compliant funds.
Arendt, which advises on around 35% of all Luxembourg-domiciled investment funds, has helped many clients to obtain the EU alternative investment fund passport, with the assistance of Arendt Regulatory and Consulting, an affiliated business specialising in the management and implementation of complex legal and regulatory provisions. As with UCITS in the past, the passport for alternative investment funds offers major distribution opportunities within the EU, but also far beyond, including in the Middle East and North Africa.
Because of the firm’s expertise and longstanding involvement in Luxembourg's investment fund industry, in recent years Arendt has been involved in establishing numerous funds in the grand duchy with promoters from the Middle East.
Through its Middle East office, Arendt places its extensive experience in fund structuring and financial transactions required by clients in the region at their disposal, and can help implement their aims within the EU legal framework rapidly and efficiently. We assist leading GCC-based asset managers in establishing UCITS funds in Luxembourg in order to use the UCITS passport and increase their asset base, as well as investment in GCC markets.
Arendt has also created a multi-disciplinary desk to offer efficient solutions to clients in the Middle East and North Africa, consisting of lawyers with specialisations including tax, capital markets, banking, investment funds, structured finance and private equity, as well as advanced knowledge of Shariah-compliant finance.