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Stricter borrowing limits for targeted unsophisticated retail investors

SIFs and Part II UCIs may borrow to invest or to meet fees, expenses or redemptions; SICARs may borrow only to invest in risk capital. Borrowing may be secured by fund assets.

For funds that may be marketed to unsophisticated retail investors, borrowing for investment purposes should not exceed 70% of assets or commitments. For funds reserved to well-informed or professional investors, no hard cap applies provided the maximum borrowing limit is disclosed in the Offering Document.

Temporary borrowings fully covered by capital commitments, and debt securities issued by the fund that are linked to asset performance, are generally not treated as “borrowing” for these purposes. Calculations under other applicable leverage regimes remain unaffected.

General principles for EPM techniques

The Circular consolidates expectations on repos, reverse repos, securities lending and borrowing or other types of arrangement. Efficient portfolio management (EPM) techniques must be in investors’ interests, economically appropriate to generate capital/income or reduce risks/costs, and must not alter investment objectives or the fund’s risk profile. Uncleared or non-collateralized counterparty risk must be limited by reference to counterparty quality and qualification, and collateral must be diversified to deliver risk-spreading comparable to that applicable to the fund’s investments.

Modernization of the risk capital concept for SICARs

The Circular modernizes the definition and assessment of “securities representing risk capital.” Investments may be made directly or indirectly and can encompass equity, loan origination, bonds, bridge and mezzanine financing, including secondary acquisitions of risk capital securities.

The CSSF emphasizes three cumulative elements:

• An intention to actively develop the value of the target entity (through launch, growth, restructuring or listing)
• The presence of specific risks exceeding general market risk considering the target’s profile, maturity, development project and expected holding period—the geographical location alone generally being insufficient to prove a risk
• A time-limited investment with a credible exit strategy, whether through IPO or private sale

While active involvement in value creation is commonly expected, the CSSF may accept risk-capital qualification where, viewed holistically, factors such as financing mode, instruments and remuneration of involved parties demonstrate genuine development risk. Active involvement is assessed for instance through board representation, value-creation measures like structuring, restructuring launch, modernization research or prospection.

SICAR authorization files should explain how the policy satisfies the risk-capital criteria. The Offering Document should describe the exit strategy, a non-exhaustive range of divestment options, expected holding periods, and where investing via target funds, confirm that such target funds apply comparable risk-capital and exit criteria than the fund.

Specific clarifications include the following:

• Listed securities may be eligible, for example where the listing venue is not an eligible UCITS regulated market, where the issuer itself qualifies as risk capital, where the investment supports a development project, or where a delisting is contemplated; small caps may be suitable. ABS/CDOs and similar instruments are in principle not eligible.
• Cash may be (i) held to meet liabilities or (ii) placed temporarily in low-risk liquid instruments as a management method for liquidities pending investment subject to prudent person principles and due care diligence to preserve capital.
• Mezzanine financing is eligible where the borrower constitutes risk capital; acquisitions of existing mezzanine or distressed debt are permissible when targeting value creation through restructuring.
• Derivatives may be used for hedging or where necessary to implement the policy but cannot be the object of the strategy.
• Real estate and infrastructure exposure is permissible only via intermediary vehicles or funds whose underlying assets meet risk-capital criteria.
• Commodities cannot be held directly, though indirect exposure via operating companies may be acceptable case-by-case if the risk and development criteria are satisfied at portfolio-company level.
• Indirect investments (e.g. through PE/VC/real estate funds) or intermediary vehicles are acceptable if their objectives restrict them to risk capital consistent with the SICAR’s policy; hedge funds are generally not eligible as they do not primarily create value at target-entity level. Incoming cash must be deployed into eligible risk-capital assets.

Enhanced investor disclosures in the Offering Document

Transparency expectations are reinforced, without prejudice to Article 23 AIFMD disclosures.

Where a prospectus under Prospectus Regulation is required, Chapter 8 content must in principle be included.

The Offering Document must be correct, clear and not misleading.

Investments

The Offering Document should set out the investment objective and strategy, eligible asset classes and portfolio composition, any use of intermediary vehicles, the calculation bases for investment limits, specific risks and conflict of interests, as well as the approach to temporary investments of significant cash for less liquid strategies.

They should specify whether investments in UCIs/vehicles are permitted; for funds that may be marketed to unsophisticated retail investors and intend to invest more than 25% in UCIs/vehicles, they should confirm that target-level risk-spreading is comparable to or stricter than the fund’s own. Where target UCIs/vehicles are not supervised by, or registered with, an authority with which the CSSF has a cooperation agreement, this must be disclosed and reflected in risk factors. Fees or charges applicable to investments in UCIs/vehicles of the same initiator or manager must be disclosed.

If efficient portfolio management techniques are contemplated, the documents should describe transaction types, conditions and limits, cash-collateral reinvestment conditions, and the inherent risks incurred, without prejudice to SFTR Annex Scheme B disclosures for AIFs managed by an authorized AIFM. The manner in which proceeds from asset sales or disposals are distributed should be explained where applicable.

Subscriptions and redemptions

The Offering Document should disclose subscription terms as well as redemption rights and all relevant conditions, including frequency, notice and settlement periods, other applicable conditions, available liquidity management tools with concise but appropriate descriptions of mechanics and activation conditions, execution processes, and redemption gate process. In respect of the latter, they should state whether unexecuted portions are cancelled or carried forward, and if carried forward, whether such orders receive priority over new orders and which NAV applies. Alternative treatments are permissible if AIFMD requirements are met (as applicable) and are justified to and approved by the CSSF. The determination date for issue/redemption prices must align with the issuance/redemption frequency of securities. Redemption frequency must be appropriate to the policy; for private assets strategies, lower than monthly frequency may be justified. Subscription and redemption frequencies need not match. NAV must be calculated in accordance with applicable law and regulation.

Borrowing

Borrowing disclosures must include the maximum borrowing limit, where applicable.

Additional disclosures for funds marketed to unsophisticated retail investors

For funds that may be marketed to unsophisticated retail investors and that invest primarily in private assets, a prominent risk warning is required to highlight that such investments may entail a high level of risk, are suitable only for investors able to bear that risk, and that the average subscriber should allocate only a portion of long-term capital.

If a fund’s life, or its no-exit period, exceeds or may exceed ten years, an additional warning is required on potential unsuitability for investors unable to maintain commitments over that horizon.

Offering document’s amendments

The Offering Document should describe procedures for modifying the investment policy or making other material changes, in compliance with applicable law. A notice period with a free redemption right may be required.

One-year life extensions are permitted up to three times where necessary to allow investments to reach their full potential, provided this possibility is set out in the constitutive documents or the Offering Document. In exceptional cases, the CSSF may grant derogations on duly justified grounds.

Immediate application and transitional provisions

The Circular enters into force on December 19, 2025. Open-ended funds authorized before that date may continue to apply their existing rules.