This is Part 3 of Luxembourg Fund Formation, Translated: A Guide for Non-EU Fund Sponsors. Start here.
Every Luxembourg firm publishes a table comparing fund regimes. The tables are accurate and they are not much use, because they answer a question you cannot yet ask: which of six things do you want? This piece takes the other route. It treats the regimes as rungs on a single ladder, tells you what each rung costs, and describes each one in terms of the structure you already run.
The short answer: Luxembourg regulates funds at two levels, the product and the manager, and most confusion comes from treating them as one. Almost every non-EU sponsor with professional investors ends up with the same combination: an authorised EU manager, and a fund on one of the bottom two rungs, an unregulated partnership or a RAIF. The rungs above exist for reasons that are real but specific, and if none of those reasons applies to you, climbing costs money and buys nothing.
Two levels of regulation, not one
When a sponsor says “I want an unregulated fund,” they almost always mean an unregulated product. They are usually quite willing to accept a fully authorised manager (indeed, they often have no choice). Separating these two ideas is the single most useful thing you can do before comparing anything.
• Product regulation. Whether the fund vehicle itself is authorised and supervised by the CSSF: approved before launch, with its documents, its sponsor and its governance reviewed, and ongoing supervision thereafter. The RAIF is the exception: governed by a fund law, but not supervised as a product.
• Manager regulation. Whether the entity managing the fund is an authorised alternative investment fund manager under AIFMD, with the capital, conduct, risk management, valuation, reporting and delegation rules that entails.
You can have a completely unregulated product managed by a fully authorised manager. That combination is not a loophole; it is the mainstream structure for European private capital, and it is what the AIFMD was designed to produce. Regulation was deliberately moved from the fund to the manager.
The practical consequence: choosing your regime does not settle who regulates you. Part 4: The manager question: build, rent, or stay small deals with the manager, and for most sponsors that is the more consequential decision.
Because the two levels combine, it is worth setting out the three positions a non-EU sponsor actually ends up in:
• Unregulated partnership or RAIF, authorised EU manager. Full EU marketing passport and maximum freedom over investment policy. The passport belongs to the manager, so an entirely unregulated Luxembourg partnership can be marketed across the EU to professional investors once an authorised EU manager is appointed. For a RAIF, that appointment is a legal requirement rather than a choice, so the passport comes built in. This is the default for professional-investor private capital, and it is not an edge case.
• Unregulated vehicle, registered or non-EU manager. The cheapest position, and the most constrained. No passport, no RAIF, and marketing falls back on national rules country by country, where they exist. Suits capital that is already committed rather than capital you need to go and find.
• Regulated regime, authorised manager. Passport, plus product-level supervision and constraints, plus the comfort some institutions require before they can allocate at all.
Note what does not appear in that list: a position in which an unregulated vehicle gives you freedom over how you raise. It never does. Product regulation and marketing regulation are separate axes, and Part 5: How you are actually allowed to raise deals with the second one.
The ladder, and the exchange rate
These are not six parallel options. They form a rough sequence, and each step up trades away flexibility in exchange for a wider pool of investors you are permitted to reach.
Unregulated partnership → RAIF → SIF or SICAR → Part II UCI → ELTIF.
At the bottom, you can do almost anything and sell to almost nobody outside professional circles. At the top, the fund can be sold to a retail investor in Portugal, and in exchange your investment policy, your leverage, your redemption terms and your disclosures are all constrained by rules you did not write.
That is the exchange rate. The question is not “which is best” but “how far up do my investors force me to climb?”
Rung one: the unregulated partnership
An SCSp or SCS with no product regulation at all. No CSSF authorisation, no product supervision, no eligible-asset rules, no diversification requirement, no subscription tax. The partnership agreement governs, and Luxembourg law imposes very little on it.
If the vehicle is an alternative investment fund – which it usually is – regulation attaches through the manager rather than the product. Depending on assets under management and on whether you need the passport, that may be a fully authorised AIFM, a lighter registered manager, or your own non-EU manager (see Part 4: The manager question: build, rent, or stay small).
In Cayman or Delaware terms: this is the closest thing Luxembourg has to your Cayman ELP. Same contractual freedom, and an even lighter product regime: unlike a Cayman private fund, it is not registered with any regulator. The difference is the manager sitting above it.
What it forbids: no marketing passport of its own. The passport belongs to the manager, and a registered or non-EU manager does not have one. No access to investors whose internal rules require a supervised product. In practice, no comfort for the institution whose consultant wants to see a regulator’s name. And for now, no compartments: statutory ring-fencing is not yet available to an unregulated partnership, but is expected by the market to follow soon.
Rung two: the RAIF
Introduced in 2016 to solve one problem: sponsors wanted the flexibility of the SIF and SICAR regimes without waiting for CSSF product approval. The RAIF is not authorised or supervised by the CSSF as a product. Instead, it must appoint an authorised external AIFM, and supervision reaches the fund through that manager.
The practical parameters:
• Manager. An authorised external AIFM is mandatory. A RAIF cannot be managed by a registered manager, and cannot be self-managed in the way some other vehicles can.
• Investors. Well-informed investors: institutional investors, professional investors, and others who commit at least EUR 100,000 and confirm their status in writing, or who are assessed as sufficiently experienced by a credit institution, investment firm, management company or AIFM.
• Diversification. Risk spreading applies, unless the RAIF invests exclusively in risk capital, in which case it can take the SICAR-style route.
• Structure. Umbrella funds with ring-fenced compartments, and cross-compartment investment.
• Machinery. A Luxembourg depositary and an approved statutory auditor are required. The RAIF appears on a public list maintained by the trade and companies register.
In Cayman or Delaware terms: a RAIF is your Cayman closed-ended fund plus a mandatory authorised manager and a depositary, without the fund itself being registered with a regulator. That swap, supervision at the manager rather than the product, is the entire proposition.
What it forbids: you cannot economise on the manager. The authorised AIFM is not optional, and for a first-time sponsor it is usually the largest single line in the budget. And retail is out of reach altogether: only well-informed investors may invest.
Rung three: the SIF, and the SICAR beside it
The SIF is the RAIF’s supervised sibling: same well-informed investor base, same breadth of eligible assets, but authorised and supervised by the CSSF as a product. You wait for approval, and thereafter the regulator is in the room.
The SICAR sits alongside rather than above: a supervised vehicle reserved to risk capital, with no diversification requirement at all.
Both were recently modernised. The CSSF’s current framework gives SIFs more room to concentrate, including in infrastructure, and time to ramp up and wind down, and sets out more clearly what counts as risk capital for a SICAR.
In Cayman or Delaware terms: the SIF is a RAIF that has been through a regulator, and the SICAR is a supervised concentrated private equity vehicle with no diversification obligation and a narrow definition of what it may hold.
What they forbid: the SIF trades your launch timetable for supervision: you launch when the CSSF approves, not before. The SICAR trades breadth for focus: risk capital only, held with a view to exit. For an investor whose rules require a supervised product, that trade is the point.
Rung four: the Part II UCI
The first rung where a genuinely retail investor can be admitted. That single fact drives everything else: closer supervision, tighter diversification, and constraints on borrowing. A Part II UCI reserved to professional investors is possible, and is then treated much like a SIF, but for that audience the rungs below already offer the same with less.
In Cayman or Delaware terms: this is the point at which the vehicle stops being a private arrangement between professionals and becomes a consumer product. The US equivalent is the step from a private fund relying on the private fund exemptions to a fund registered under the Investment Company Act: the strategy can stay the same, but a regulator now reviews the documents, and custody, governance and investor-protection rules come with it. Cayman has no practical equivalent: a retail category exists, but it is rarely used, since the main onshore markets are closed to offshore retail funds.
What it forbids: concentration, and cross-border retail. If your strategy is three assets and conviction, retail Part II is not available to you, and no amount of drafting will make it so. And while it opens the door to retail investors, which nothing below it can, there is no EU passport for selling it to them across borders: each member state decides whether, and on what terms, its retail investors may buy it. That is what rung five is for.
Rung five: the ELTIF
Not a Luxembourg regime at all, but an EU label that a Luxembourg fund can wear. It is the only route to marketing a private assets fund to retail investors across the EU under a single passport, which is why it sits at the top of the ladder.
The trade is heavy: eligible asset rules, diversification and borrowing constraints, and (for open-ended and evergreen versions) a redemption and liquidity framework prescribed at EU level rather than negotiated with your investors.
In Cayman or Delaware terms: closest in spirit to the US interval fund, tender-offer fund or non-traded BDC: private assets packaged for the wealth channel, with liquidity windows set by rule rather than by negotiation. If you already run one of those for US private wealth, the ELTIF is the European counterpart, with one difference that matters: a single authorisation can be passported to retail investors across the EU, whereas the US product stays in the US. Cayman has no equivalent here either.
What it forbids: improvisation. The redemption terms, the diversification and the eligible assets are set by regulation, and the compensation for all of it is the retail passport. If you do not want the retail passport, the ELTIF is rarely worth the cost.
The regime vs the legal form
This confuses arriving sponsors more than anything else in Luxembourg fund work. A Delaware sponsor rarely has to separate the two: a private fund relies on an exemption rather than choosing a product regime, so the structuring conversation is mostly about the form. A Cayman sponsor will recognise the split, since a fund registers with CIMA whatever its form, but Luxembourg offers more regimes to choose from.
The regime (i.e., unregulated, RAIF, SIF, SICAR, Part II) is a regulatory category. The legal form (e.g., SCSp, SCS, SCA, SA, Sàrl, FCP) is a matter of company and contract law. They are chosen separately. A RAIF can be an SCSp, an SCS, an SCA, an SA or an FCP. A SIF can be several of the same. Choosing “a RAIF” tells you nothing yet about who signs, who sits on the board, how interests transfer, or what your investors are actually holding.
Get the regime from your investors. Get the legal form from your governance and your tax analysis. They are different conversations, and running them together is how sponsors end up with a structure that satisfies the regulator and irritates everyone else. Part 2: Your Delaware or Cayman fund, in Luxembourg terms covers the SCSp, the form most non-EU sponsors use.
The depositary, and why it is not a custodian
It appears above as a mandatory appointment and below as a line of cost, and most arriving sponsors assume it is a custodian. It is not, and the difference decides things.
A European depositary does three jobs. It safekeeps the assets: financial instruments in custody, and for everything else, such as private company shares or real estate, verification of ownership and a record of it. It monitors the fund’s cash, meaning every subscription in and every payment out. And it performs oversight duties: that interests are issued and valued correctly, that income is applied as the documents provide, that the manager is doing what the fund’s rules and the law require. It is liable to investors for the loss of financial instruments held in its custody, and the escape from that liability is narrow.
Accordingly, it is a second set of eyes on your operations rather than a service you buy and forget. And because it carries real liability, it decides whether it is prepared to take your asset class before you decide anything else, which is why it reappears in the next section as the constraint that binds first.
For closed-ended funds, there is a lighter option. Where investors have no redemption rights for five years and the fund either does not generally invest in assets that must be held in custody or invests in unlisted companies to potentially acquire control, as is typical for private equity and real estate, the depositary can be a specialised professional depositary rather than a bank. It is materially cheaper, and often overlooked.
In Cayman or Delaware terms: your custodian and your administrator combined, plus an oversight role that neither of them has. A Cayman sponsor will recognise part of it, since registered private funds already arrange custody and cash monitoring; the oversight duties are new. For a US private fund that meets the custody rule through its annual audit, there is no counterpart at all. Sponsors who budget for it as a custody fee and then meet it as a supervisor are the ones who find it uncomfortable.
If the strategy is lending
This cuts across the ladder rather than sitting on a rung of it. Whichever regime you choose, a credit fund is not a private equity fund holding different assets.
Lending strategies are treated more restrictively than acquisition strategies, under rules now harmonised across the EU, and they shape how the fund is built rather than just how it is documented: a ban on originate-to-distribute strategies, retention on loans sold, capped leverage, and a closed-ended structure by default. None of it is difficult to work with. It is simply a different starting point from a private equity fund, and considerably easier to plan for than to retrofit.
One consequence reaches back into Part 4: The manager question: build, rent, or stay small, where the AIFMD II changes are summarised: the manager’s authorisation has to cover lending. Most established host managers either hold that permission or can extend it, so it is rarely an obstacle, but it is worth confirming early rather than discovering it during onboarding.
What the comparison tables don’t tell you
Four things decide the outcome in practice and never appear in a grid.
• Your depositary’s appetite. A depositary must accept your asset class before anything else matters. Exotic, illiquid or novel assets narrow the field quickly, and the field narrows further if your fund is small. This constraint binds earlier and harder than any legal rule.
• Your investors’ own rulebooks. Some institutions require a supervised product regardless of what Luxembourg law permits. Their internal policy is not negotiable by you, and it can push you a full rung up the ladder for reasons that have nothing to do with regulation. The same investors will increasingly ask where the fund sits under the EU sustainability disclosure rules, and agreeing to a classification can embed commitments in your documents that are hard to unwind, even as the EU framework itself is being reformed.
• Real timelines versus legal ones. The absence of CSSF product approval removes one queue. It does not remove AIFM onboarding, depositary due diligence, bank account opening or your own document negotiation, and those, not the regulator, usually set the launch date.
• What happens at fund two. A regime that fits a first close can be wrong for the platform you intend to build. Umbrella structures, compartment segregation and the cost of migrating later are worth deciding now, when the decision is cheap.
Which conversation are you actually in?
Five questions, answered honestly, place you on the ladder without anyone needing to recommend anything.
1. Are all of your investors professional or well-informed, or do you need to admit retail investors?
2. Does any investor’s internal policy require a CSSF-supervised product, irrespective of what the law requires?
3. Is your portfolio concentrated enough that a diversification rule would bind you?
4. Are you holding risk capital exclusively, or a broader mix?
5. Do you need one fund, or a platform with compartments over several years?
If your investors are professional or well-informed and no policy forces supervision, you are on rung one or two, and your concentration, your assets and your need for compartments decide which. The rest of the ladder is a cost you do not need to incur. If either of the first two answers goes the other way, it is worth understanding precisely why before climbing.
What happens after you choose
Choosing a regime is a threshold you usually cross once. Almost everything that follows is not fund formation at all.
Below the fund sit the holding structures that actually own the assets, and their design drives treaty access, exit mechanics and financing capacity. Around them sit acquisition financings, security packages and intercreditor arrangements, where Luxembourg law has real and unfamiliar edges. Above them sit the directors, whose personal exposure is not theoretical. And in due course come the continuation vehicles, secondaries and restructurings.
That is where a fund spends the rest of its life, and it is worth knowing who advises on it before you need them. Our library covers several of these: securitisation vehicles, director liability, and the constraints on compounding interest in Luxembourg financings.
The Bottom Line: the regimes are a ladder, not a menu. Most non-EU sponsors with professional investors belong on the bottom two rungs, and the honest reason to climb is that a specific investor, or a specific distribution ambition, requires it. Climbing for reassurance is one of the most expensive mistakes available in Luxembourg fund structuring, and it is made regularly.
Common questions
Is a RAIF regulated?
Not as a product. It is not authorised or supervised by the CSSF. It must appoint an authorised AIFM, and supervision reaches it through that manager. Both halves of that answer matter.
Can I have an unregulated fund with no authorised manager at all?
Yes, with a registered manager below the thresholds, or with your own non-EU manager. Either way, you give up the marketing passport. See Part 4: The manager question: build, rent, or stay small.
What is a well-informed investor?
Institutional and professional investors, plus others who commit at least EUR 100,000 and confirm their status in writing, or who are assessed as adequately experienced by a qualifying financial institution.
Do I need a depositary?
You do need a Luxembourg depositary for a RAIF, a SIF, a SICAR and a Part II UCI. For an unregulated partnership, it depends on the manager rather than the vehicle: with an authorised manager, yes; with a registered or non-EU manager, generally no. For closed-ended funds, the lighter professional depositary described above may be enough.
Which is fastest to launch?
The unregulated partnership, then the RAIF. But see the section above on real timelines, as the regime alone is rarely what holds you up.
Next in this series – Part 4: The manager question: build, rent, or stay small.
Last updated 19 October 2026.
Disclaimer: Library articles are provided for general information purposes only and do not constitute legal advice. Accessing or relying on them does not create a lawyer-client relationship. Readers should seek advice on their specific circumstances before acting.