Introduction

At Kingsbury & Partners, we guide sophisticated investors through Luxembourg’s premier financial ecosystem. Two standout tools—Credit-Linked Notes (CLNs) and Reserved Alternative Investment Funds (RAIFs)—offer powerful but distinct advantages. They both benefit from Luxembourg’s tax efficiency and investor-friendly framework. This article unpacks how they differ and helps you determine which vehicle works best for your strategic goals.

1. What Are They?

Credit-Linked Notes (CLNs)

  • Structured as debt securities under Luxembourg’s Securitisation Law.
  • Return of principal and coupon payments is contingent on the credit performance of an underlier (e.g., a bond, loan, or portfolio).
  • Ideal for investors seeking targeted credit exposure through a bond-like instrument.

Reserved Alternative Investment Funds (RAIFs)

  • Established under the RAIF Law (2016), indirectly regulated via an authorized AIFM but not supervised by the CSSF directly.
  • Adaptable fund structures (e.g., FCP, SICAV, SCSp), investing across assets—real estate, private equity, private debt.
  • Flexible, quickly launched for sophisticated investors.

2. Purpose & Use Cases

Vehicle Purpose
CLNs Used by issuers (e.g., banks) to transfer credit risk, offering investors high-yield, credit-centric exposure.
RAIFs Collective investment vehicles for alternative assets, suited for fund managers deploying diversification or specialized strategies.

CLNs are laser-focused tools for credit risk exposure, while RAIFs provide broader investment flexibility.

3. Structuring & Flexibility

  • CLNs: Set up as securitisation vehicles with optional compartments to isolate exposures. Straightforward issuance and explicit credit reference linkage.
  • RAIFs: Structured as flexible fund formats including umbrella options. Compartmentalization and cross-compartment investments are supported.

4. Regulation & Supervision

  • CLNs: Governed by the Luxembourg Securitisation Law, with no supervisory oversight unless issuing to the public.
  • RAIFs: Not directly CSSF-authorized but must be managed by an authorized AIFM. Compliance mandated under AIFMD frameworks.

5. Investor Types

  • CLNs: Offered to well-informed, professional/institutional investors via private placements.
  • RAIFs: Similarly limited to well-informed investors—minimum €100,000 or demonstrated expertise required.

6. Risk vs. Return

  • CLNs: Credit risk is concentrated on the underlier. Investors face potential loss upon credit events but stand for enhanced yield.
  • RAIFs: Risk and return vary with strategy—can include credit, equity, real estate. Offers diversification, though exposure depends on fund mandate.

7. Tax Treatment

  • CLNs: Through securitisation vehicles, enjoy tax-neutral treatment; no withholding tax on interest and deductible issuer payouts.
  • RAIFs: Also tax-efficient—exempt from corporate income, wealth, and municipal taxes. Subscription tax is low (0–0.01%), and legal forms like SCSp can offer transparency.

8. Liquidity

  • CLNs: Often tradable if structured with an ISIN; liquidity depends on design and investor interest.
  • RAIFs: Generally illiquid or semi-liquid, especially if assets are long-term/unrealised strategies.

9. Costs

  • CLNs: Lower costs—No AIFM, lean legal setup. Principal expenses are structuring and issuance.
  • RAIFs: Higher operational costs including mandatory AIFM, administration, depositary, auditing, and compliance under AIFMD.

10. Distribution Dynamics

  • CLNs: Simpler delivery via securitisation framework and private placement channels. No fund-specific regulatory hurdles.
  • RAIFs: Marketing governed by AIFMD; requires AIFM and EU marketing passport—but offers access to the full EU professional distribution network.

11. Use Case Summary

Vehicle Best For
CLNs Issuers transferring discrete credit risk; investors wanting targeted exposure efficiently.
RAIFs Fund managers offering diversified strategies; investors seeking broad alternative allocations.

At Kingsbury & Partners, we often advocate CLNs when simplicity, cost-efficiency, and credit focus are top priorities. RAIFs excel as platform-level diversification vehicles—just note the added complexity and cost.