A Luxembourg alternative investment fund (“AIF”) managed by a Luxembourg authorized alternative investment fund manager (“AIFM”) must appoint a Luxembourg depositary (“Depo”).

The Depo of a Luxembourg AIF must be a Luxembourg banking type of institution. If the AIF does not generally intend to hold financial instruments in custody (“FIHIC”), such as listed shares and bonds, or to acquire control in non-listed companies the Depo can be a Luxembourg non-banking institution (sometimes referred to as a “depo-lite”), provided that the AIF does not offer redemption rights within 5 years from initial investment. Closed-end private equity and real estate AIFs typically rely on a depo-lite. Depo-lite services are typically part of a “one stop shop” fund service offering.

Firstly, a Depo is responsible for cash flow monitoring. To perform cashflow monitoring, a Depo must monitor the exclusive use of qualifying bank accounts by the AIF or by the AIFM on behalf of the AIF and should have access to these accounts. It is not required that the Depo is able to manage these accounts.

Secondly, a Depo is responsible for safekeeping of assets. The safekeeping function means acting as a custodian for FIHIC and ownership verification and record keeping for other assets. For the safekeeping function a look-though approach applies. For FIHIC the Depo looks though controlled legal and financial structures. For non-FIHICs the look through stops at the level of the controlled entities established by the AIF. The look-through also stops at structures that have their own Depo providing equivalent functions (e.g., master funds or target funds of fund-of-funds).

Thirdly, a Depo is responsible for oversight functions, meaning that it must ensure that asset valuation, NAV calculation and cash deployment is done in line with the fund’s organizational and offering documents. The Depo should be kept up to date in changes the relevant docs but does not have to approve these.

The first two functions prompt a frequent information flow between the Depo and the AIFM on the AIF’s affairs and may require some pre-deal involvement. The third function is a verification function with a ex-post character.

To perform its functions a Depo must have seamless access to relevant information held by other actors in the AIF structure. Information rights make up the core provisions of a Depo agreement. The Depo’s role should not frustrate the AIF’s investment process as it does not have to approve the AIF’s transactions.

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