The Swiss Limited Partnership – A Silver Lining on the Horizon?
For a long time, limited partnerships for collective investments (KmGK) were not popular in Switzerland. However, recent changes in legislation present new opportunities for KmGKs, also known as Swiss Limited Partnerships.
(Author: Philip Hinsen, Head Legal & Compliance at Solutions & Funds)
The KmGK was introduced in Switzerland in 2007 as a counterpart to the Anglo-Saxon limited partnership. Given that this investment vehicle is a closed-end fund where investors do not have the right to redeem their shares at net asset value at any time, the KmGK is particularly suitable for illiquid investments such as real estate, private market investments and infrastructure assets.
Despite only being adopted to a limited extent in Switzerland (only 25 KmGKs are currently approved or authorised by the FINMA), it is anticipated that these numbers will soon increase due to recent legislative changes. The introduction of the Limited Qualified Investor Funds (L-QIF) in Switzerland as of March 1, 2024, allows funds in the form of a KmGK to be launched without requiring a prior licence or approval.
Also, the introduction of the Financial Services Act (FIDLEG) and the Financial Institution Act (FINIG) has significantly liberalised investments in building plots through the KmGK, subjecting them to less stringent rules compared to similar investments in open Swiss real estate funds. As a result, the KmGK has not only become more attractive for investments in venture capital of companies and projects but especially for investments in construction, real estate, and infrastructure projects.
Launch with or without an FINMA Licence
KmGKs can be set up as collective investment schemes licensed and approved by the FINMA, and, as of March 1, 2024, they can also be structured in the form of an L-QIF. The L-QIF is a distinct category of funds regulated under collective investment legislation, differing from authorised collective investment schemes in that they are not subject to the licensing and approval requirements of the FINMA. Although no licence or approval is needed, the L-QIF must still be managed by specific FINMA-approved entities.
For the KmGK, this means that management, including investment decisions, must be delegated in accordance with these requirements. The institutions responsible for managing these arrangements are accountable for complying with the regulations applicable to the L-QIF. This additional structuring option enhances the appeal and innovation potential of the Swiss fund industry.
Implementation of Project Development Funds in a KmGK
A KmGK invests in the venture capital of companies and projects, with particular focus on construction, real estate, and infrastructure projects. This means that a KmGK offers a reliable structure for real estate development, complementing the more tightly regulated Swiss real estate funds.
A KmGK works as a closed-end collective investment scheme. Unlike real estate funds, investors do not have a direct or indirect legal right to redeem their shares at net asset value at the fund’s expense. This significantly reduces liquidity risks associated with real estate developments. As a result, KmGKs can allocate their entire assets to real estate development projects, effectively serving as project development funds.
Under FIDLEG/FINIG, new opportunities have been introduced for KmGKs, streamlining investment in real estate development and opening up more options. On the one hand, explicit investments in real estate or infrastructure, as well as mixed forms with all other permissible investments of a KmGK, have been authorised. On the other hand, the previous complete ban on the acquisition of real estate and infrastructure assets by related persons and investors of a KmGK has been lifted. Assuming the transaction price and transaction costs conform to the market, and the shareholders’ meeting has approved the transaction, such transactions among related parties are now permissible. A corresponding provision also applies to KmGKs structured as L-QIFs.
Project Development Strategy – Convincing in Many Aspects
Transforming the traditional real estate fund strategy into a real estate development strategy represents one of the most promising opportunities in today’s fund market. Backward integration in the property value chain is not only conceptually appealing but also attractive in terms of returns.
Moreover, a KmGK is particularly compelling for a real estate development strategy, especially in the residential sector. Furthermore, a KmGK excels in corporate governance, regulatory compliance, and, most importantly, investability or investment allocation for institutional investors such as pension funds.
With the introduction of the L-QIF and the flexibility in the real estate and infrastructure sectors, a KmGK is significantly more appealing overall.