Key Takeaways:

• On 19 December, the CSSF published Circular 25/901 (together with a new Compilation of certain key concepts in the alternative investment funds space), consolidating decades of guidance for Part II UCIs, SIFs and SICARs into a single, modernised rulebook that aligns prudential expectations with the profile of the end-investor and refreshes terminology and supervisory coherence.
• For Part II UCIs, the Circular introduces the new “unsophisticated retail investor” category and calibrates product rules accordingly, including hardwired diversification caps, a 70% borrowing limit (with bridging carveouts), look-through recognition of intermediary vehicles and practical ramp-up/ramp-down mechanics.
• For non-retail strategies, it modernises limits for SIFs (e.g., a 50% single-asset cap and flexible leverage) and clarifies and expands SICAR “risk capital” criteria and restrictions (including explicit treatment of debt strategies and exit strategy expectations). The guidelines also codify operational themes around liquidity management and structuring flexibility.
• Our update gives an overview of what the Circular and the Compilation change, specifically with regard to (i) retail alternatives, (ii) SIFs and SICARs and (iii) operational themes.

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Executive Summary

CSSF Circular 25/901 (the “Circular”) consolidates and updates the CSSF’s supervisory guidance applicable to Part II UCIs, SIFs and SICARs, setting out the regulator’s current expectations in respect of key prudential concepts such as diversification, leverage, risk spreading and risk capital, with certain product rules increasingly calibrated by reference to the investor base targeted.

The Circular was published together with the CSSF’s “Compilation of key concepts and terms used in the field of investment funds other than UCITS and MMFs” (the “Compilation”), an expressly nonbinding document intended to support the practical application of the Circular by providing a common vocabulary and descriptive context around investment strategies, asset classes and structuring techniques frequently encountered in alternative investment funds. The Compilation expressly does not constitute a regulation or a CSSF circular.

This briefing focuses on the implications of the Circular for CSSF-supervised alternative investment funds, highlighting (i) the revised framework for retail-facing Part II UCIs, (ii) key clarifications for SIFs and SICARs and (iii) selected operational and structuring themes.

Context and Purpose of the Circular

On 19 December 2025, as announced in a communiqué, the Luxembourg supervisory authority, the CSSF, published Circular 25/901 relating to CSSF-regulated alternative investment funds. As a reminder, CSSF circulars set out the regulator’s interpretation of applicable laws and regulations and describe its supervisory expectations and administrative practice.

Together with the Circular, the CSSF published a second document that it itself labelled as “somewhat innovative”: the Compilation of key concepts and terms used in the field of investment funds other than UCITS and MMFs and explanations on how the CSSF defines/understands them (the “Compilation”). The CSSF describes the Compilation as a nonbinding guidance intended to clarify commonly used concepts in the alternative investment fund space by explaining how the CSSF understands them in practice, with a view to facilitating exchanges with the supervisory authority. The CSSF notes that the document is provided for information purposes only, is not exhaustive and has not been formalised as a circular or regulation in order to preserve flexibility.

The Circular and the Compilation should be read against the backdrop of Luxembourg’s longstanding pragmatic approach to the regulation of alternative investment funds, where statutory regimes adopted by the legislator have been complemented over time by CSSF interpretative guidance and administrative practice. In the communiqué, the CSSF notes that SIFs, SICARs and Part II UCIs have shown such capacity for innovation that the existing circular framework no longer reflected current practices or market requirements, prompting a review and consolidation exercise. Building on the lineage of IML Circular 91/75 and later Circulars 02/80, 06/241 and 07/309, now repealed and replaced, the Circular groups the relevant guidance into a single thematically structured and navigable document, expressed in clear and consistent terminology, aligned with European regulatory developments and designed to calibrate risk and investor protection flexibly by reference to the targeted investor base while preserving the possibility for derogations on a justified case-by-case basis. Against the wider trend towards the retailisation of private assets and the convergence of traditional and private market strategies within regulated wrappers, these two documents together provide a clearer and more predictable supervisory “operating manual” for sponsors, distributors and investors across the Luxembourg toolbox while maintaining the CSSF’s hallmark pragmatism.

Key Takeaways for Retail Alternatives (Part II UCIs Targeting Retail)

A central innovation is the introduction of the “unsophisticated retail investor” category, defined residually as any investor who is neither a professional investor nor a well‑informed investor. This is a practical response to the limitations of the binary EU concepts: “professional investor” under MiFID is a European status with passporting consequences, while “retail” is essentially defined as “not professional” in regimes such as PRIIPs. That binary concept does not map cleanly onto market reality, where many investors are sophisticated but do not qualify as professional. Luxembourg’s longstanding “well‑informed investor” concept already filled that gap domestically for the purpose of allowing a specific category of nonprofessional investors to invest into SICARs, SIFs and reserved alternative investment funds (“RAIFs”) (while such funds are still limited by the European professional investor definition for cross-border marketing); other Member States use similar notions (e.g., semi‑professional in Germany), but there is no dedicated EU cross‑border passport for these intermediate categories. While the EU framework is evolving, as political agreement has been reached at the EU level on a retail investment strategy package to allow more retail investors to opt up to professional client status, the Luxembourg approach offers an immediate and pragmatic adjustment at the national level. The Circular does not create a new product category or extend the passport reach of Part II Funds; rather, it refines the application of certain product rules (including diversification and borrowing limits) by reference to the investor base targeted, namely, whether a Part II Fund is reserved for professional investors or well-informed investors. This investor-driven calibration, as opposed to a purely label-based approach, represents a measured and welcome evolution within the existing Part II framework.

For Part II Funds marketed to unsophisticated retail investors, the Circular prescribes both disclosure and prudential constraints:

• Prominent retail warning. A specific retail investor warning must be inserted in the sales documentation.

• Diversification: general assets. A 25% single-asset cap for assets other than infrastructure, increased from the historical 20% threshold under the prior regime (which, for the avoidance of doubt, applied, in principle, to all Part II UCIs, irrespective of their investor base).

• Funds of funds. The Circular permits investments above the 25% limit in a single target fund, provided the target itself is subject to an equivalent or stricter 25% diversification rule. This is especially valuable for global offerings where the Luxembourg Part II Fund invests via an underlying foreign fund also distributed outside Luxembourg/Europe. Notably, the approach no longer hinges on the underlying vehicle being regulated per se; the structure can include unregulated target funds where the look‑through diversification standard is met. The Circular also expressly recognises investments in funds managed by the same sponsor. These points come with safeguards: related‑party transactions must be negotiated at arm’s length, and the CSSF warns about the risk of redemption-frequency asymmetry between an investing Part II Fund and underlying funds.

• Diversification: infrastructure. A 50% cap per infrastructure asset, which formalises a more flexible administrative practice and removes previous uncertainty.

• Derogations. Case‑by‑case derogations remain possible, evidencing the CSSF’s willingness to accommodate specific portfolio constructions where justified and disclosed.

• Leverage/borrowing. A 70% maximum borrowing limit, excluding temporary borrowings that are fully covered by capital commitments. The new approach better aligns with private asset cash‑flow profiles. Sponsors should confirm the basis of calculation (e.g., assets, commitments or other, subject to CSSF approval) as applied in their specific structure and disclosures.

• Intermediary vehicles. Express recognition of intermediary vehicles whether or not majority-owned by the Part II Fund and without differentiating between professional and retail funds, aligning with recent European clarifications (including European Commission’s answers to ESMA’s questions on European Long-Term Investment Funds, see our Client Briefing). Use of intermediary vehicles should be disclosed in the offering documents and serve a legitimate purpose. Exposures are aggregated on a look-through basis for eligibility, concentration and leverage limits, and the Part II Fund and its manager are expected to keep “some control over the intermediary vehicles” to be able to monitor ownership of assets and associated risks.

• Ramp‑up/ramp‑down. A practical ramp‑up period of four years post‑launch, with a one‑year extension available, during which investment limits may be suspended to accommodate portfolio build‑out in private markets. A symmetric ramp‑down flexibility is also recognised to manage exits. This codifies an existing administrative practice.

Overall, the retail package is principled and workable. It shifts the supervisory lens from product labels to investor outcomes, while hardwiring diversification and leverage guardrails that reflect modern private asset fund mechanics. As further described below, the diversification limits raise to 50% maximum exposure to a single asset/fund and 70% in case of infrastructure strategy, where the Part II Fund is reserved to well-informed and professional investors.

Key Takeaways for Non‑Retail Alternatives (SIFs and SICARs)

For SIFs and professional‑only strategies, the Circular modernises limits and codifies practices long applied by the CSSF:

• Diversification: general assets. A 50% single-asset cap (up from 30% historically), which better reflects concentrated private asset underwriting and club deals.

• Funds of funds. Permission to exceed the 50% cap in a single target fund if that target is subject to an equivalent or stricter 50% diversification rule. Sponsors should, however, monitor AIFMD marketing consequences: where a Luxembourg AIF invests 85% or more in a non‑EU target fund, it is characterised as a feeder to a non‑EU master and loses access to the EU AIFMD passport for professional investors.

• Diversification: infrastructure. A 70% cap per infrastructure asset, consolidating a more permissive practice into a clear rule.

• Derogations. Case‑by‑case derogations remain available subject to justification, governance and disclosure.

• Leverage/borrowing. No prescriptive maximum in the Circular; SIFs set their own borrowing policy. Temporary borrowings used for bridging are not treated as structural borrowing. This is not new, but the clarification is welcome.

• Ramp‑up/ramp‑down. An explicit four‑year ramp‑up plus one‑year extension, with potential for further case‑by‑case accommodation where warranted by strategy and investor disclosures.

For SICARs, headline points include:

• Clearer framing of what SICAR “risk capital” can cover, including debt strategies. The Circular keeps the private equity and venture capital anchor but more explicitly recognises that “risk capital” may also encompass debt financing strategies for non-listed undertakings, and it expressly lists loan origination alongside capital contributions, bond subscriptions and bridge and mezzanine financing.

• Explicit “beyond market risk” threshold. The Circular states that the specific risk must go beyond mere market risk and reiterates that geography alone is not enough and that a case-by-case analysis may be needed.

• "Exit strategy” elevated from a general indicator to a structured criterion with disclosure expectations. Circular 06/241 treated holding duration as an important criterion and noted that the divestment method is not delimited by law. Circular 25/901 formalises “exit strategy” as a distinct assessment criterion, emphasising that the investment must be limited in time and that the SICAR’s objective is to sell. It also adds specific expectations for documentation, including that the sales document should describe the exit strategy (with a non-exhaustive list of divestment routes) and indicate the expected holding period.

• More explicit control expectation to support the development intent, especially in indirect structures. While Circular 06/241 indicated that active involvement was not systematically required, except in particular where a SICAR invested in a single portfolio company, the Circular adopts a more structured approach by expecting, as a general rule, that the SICAR exercises a sufficient degree of supervision to ensure that invested amounts effectively serve the development of the target undertaking. This expectation is expressly reinforced for indirect investments, where the SICAR is expected to have appropriate arrangements in place to ensure that capital contributed through intermediary vehicles is actually deployed in qualifying risk capital investments.

• Expanded and more granular list of “specific restrictions” and ineligible assets. Circular 25/901 consolidates and expands the restrictions into a structured list (securities, cash, debt, derivatives, real estate/infrastructure, commodities, UCIs/other funds). Notable additions or sharpened positions include:

• asset-backed securities (ABS), collateralized debt obligations (CDO) and similar securities are stated to be not eligible in principle.

• Cash management is elaborated with a “prudent person” style expectation for cash awaiting investment, reinvestment or distribution.

• Real estate or infrastructure exposure is expressly limited to being held only through intermediary vehicles (e.g., SPVs) or real estate funds, with the underlying asset still needing to meet the risk capital criteria.

• Circular 06/241 focused heavily on “private equity real estate” and the evidencing of development and risk but did not frame the point as “real estate or infrastructure only via intermediaries/funds” in the same consolidated restriction format.

• Commodities are dealt with expressly: a SICAR cannot directly invest in commodities, with only indirect exposure through companies exploiting commodities and a case-by-case assessment.

The Circular does not formally apply to reserved alternative investment funds, as RAIFs are not subject to direct CSSF supervision.

The RAIF Law embeds the concepts of risk spreading and risk capital at statutory level, without defining them in detail, and the explanatory notes to the respective bill of law expressly refer to the CSSF guidance applicable at the time those concepts were imported into the RAIF framework. In market practice, these concepts have therefore traditionally been interpreted, mutatis mutandis, by reference to the established SIF and SICAR doctrine, in particular Circular 07/309 for so-called SIF-like RAIFs and Circular 06/241 for SICAR-like RAIFs.

While the Circular will likely influence market practice for CSSF-supervised regimes following the repeal of the earlier circulars, it should not necessarily be viewed as displacing the interpretative relevance of that existing doctrine for RAIFs. Rather, the Circular may be expected to serve as a relevant, but non-exclusive, reference point alongside the established SIF/SICAR framework when assessing compliance with the risk spreading and risk capital concepts under the RAIF Law, in particular for eligibility analyses of SICAR-like RAIFs.

Other Notable Clarifications and Operational Themes

The Circular and the Compilation contain practical clarifications that will matter in day‑to‑day structuring and operations:

• Structuring flexibility within one vehicle. The CSSF acknowledges the possibility of having subscription‑based compartments and commitment‑based compartments within the same umbrella. While the Circular is silent at the share‑class level, the same logic supports having subscription‑based and commitment‑based share classes within a single compartment, provided the operational set‑up is robust, conflicts are managed and disclosures are precise.

• Liquidity management: measures vs tools. The CSSF distinguishes between permanent liquidity management measures (embedded in the fund’s design and disclosed ab initio) and contingent liquidity management tools (activated as needed, subject to governance and communication). This taxonomy aligns with the direction of travel under AIFMD II, and it complements the CSSF’s warnings on redemption frequency asymmetries across master/feeder or fund‑of‑funds stacks. The framework emphasises the alignment between redemption terms and the investment policy and distinguishes clearly between open-ended and closed-ended funds while acknowledging hybrid or discretionary models.

• Retail access with reinforced discipline and disclosure. The framework implicitly accommodates the distribution of commitment-based and semi-liquid structures to retail investors but only subject to heightened discipline around investor information, operational robustness and disclosure. In particular, investors must be clearly informed of capital availability obligations, lock-ups, redemption constraints and liquidity sequencing, and redemption terms must be designed so as not to make exits impossible or excessively complex. While differentiated redemption terms across share classes are permitted, the CSSF anchors this flexibility in a strong fair-treatment principle, requiring that any differentiation does not result in a significant overall disadvantage, especially for retail investors.

Conclusion

The Circular and the Compilation mark a thoughtful modernisation of Luxembourg’s alternative funds framework. They recognise the blurring lines between retail and professional products and pivot the regulatory focus to the attributes of the investor served, not merely the label of the fund. By codifying longstanding practices, aligning limits with private market realities and enabling calibrated access for unsophisticated retail investors, Luxembourg advances the retailisation (r)evolution while maintaining robust investor protections. The result is a clearer, more integrated rulebook that enhances both market access and supervisory coherence.

 

This publication is for general information purposes only. It is not intended to provide, nor is it to be used as, a substitute for legal advice. In some jurisdictions it may be considered attorney advertising.