Pledge Fund in Luxembourg

Pledge Fund in Luxembourg

Updated on Friday 21st July 2023

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A pledge fund in Luxembourg resembles a traditional fund structure. The main difference is that it has certain differences when it comes to the options investors have related to the fee system they have to pay and their investment obligations (they can back out of investments they don’t fully trust). 
 
Investors can open a Luxembourg fund as a pledge fund if they incorporate a special limited partnership (SLP). Our team of financial advisors can provide step-to-step assistance on the incorporation of the SLP. 
 

What are the main characteristics of a pledge fund? 

 
A pledge fund in Luxembourg is characterized by the following: 
 
  1. it is suitable for investors interested in investments in fields such as real estate, venture capital, private equity; 
  2. the managers of a pledge fund must present more investment opportunities on a long-term basis to the investors of the fund; 
  3. the investors retain the right to invest on a deal-by-deal case;
  4. the investors must invest in a minimum number of deals, as agreed in the fund’s documents;
  5. they have the right to refuse to participate in various investments, as long as they maintain the investments in the agreed number of deals;
  6. provided that they do not meet the minimum number of deals, they can be excluded from participating in future investment deals. 
 
Another particularity of a pledge fund in Luxembourg is that the investors must cover the expenses and the fees associated with the fund through their minimum capital investment. 
 
It must be noted that those who will open an investment fund in Luxembourg as a pledge fund must also set up a special purpose vehicle (SPV) for each of the investment that is made through the fund that operates through a SLP. 
 

What are the conditions for setting up a SLP in Luxembourg? 

 
The SLP is a very common legal entity that is incorporated in Luxembourg because it offers many advantages for both commercial purposes and fund structuring. Our team of financial advisors can present the advantages of this business form and the ways in which it can be used for a pledge fund in Luxembourg. 
 
Below, you are invited to discover some of the highlights of the SLP: 
 
  • it was introduced in Luxembourg in 2013;
  • it is governed by the Luxembourg Law of 10 August 1915 on Commercial Companies; 
  • for its incorporation, it needs 2 partners (a general partner and a limited partner);
  • an audit is not generally required for a SLP, but if the balance sheet maintains for 2 consecutive financial years certain thresholds, then the audit will be necessary (if the company exceeds 2 out of the 3 - a balance sheet of EUR 4.4 million, 50 full-time employees, a net turnover of EUR 8.8 million). 
 
The entity must be registered with the Luxembourg Business Register. You can learn more on the basic requirements from our consultants.  
 

Pledge fund in Luxembourg – opt-in, opt-out system 

 
When you will open a Luxembourg fund, you will benefit from many rights, outside of the right of obtaining your return on investment. Investors can opt-in or opt-out of investments in a pledge fund. 
 
In a pledge fund, investors can opt-in for their participation in an investment project and if they do, they must confirm their participation after the fund manager provides information on their possible investment outcome. 
 
The investment outcome is calculated based on the participation of each investor in the said deal (the higher the capital invested, the higher the return options). The opt-in system implies that every time when a deal is presented to the investors, they must confirm the participation. 
 
The opt-out system implies that the investors will participate in all the investments presented, unless they inform the fund manager on the fact that they do not want to participate in a given project. 
 
If you want to open a Luxembourg fund, we invite you to contact our consultants for additional details and tax advice.