Investment Funds in Malta, Cyprus & Luxembourg: The Transcript
Did you miss our webinar that focused on the investment funds industry in Cyprus, Malta and Luxwmbourg?
If so, do not despair, as the full transcript is now available for your reading pleasure.
A huge thank you to Pedro Paixao, Country Manager, Fidgen, Luxembourg; Thomas Jacobsen, Managing Director, Papilios Service Limited, Malta, and; Dr. Charis Savvides, Partner, Stelios Americanos & Co LLC, Cyprus, for covering their respective jurisdictions and providing us with plenty of great background information on their country's investment funds scene.
For now, here are a few highlights!
Presentation on Luxembourg's Investment Funds
Why Luxembourg? Luxembourg is the global leader of the fund industry in distribution, so it's the second largest investment fund center worldwide. The funds are distributed in over 70 countries with focus in Europe, Latin America, Asia and the Middle East. Luxembourg is also the home to 136 international banks and the European center for cross-border insurance and pension vehicles.
So this environment allows the fund industry in Luxembourg to have some advantages. The funds that are incorporated in Luxembourg are of two kinds: UCITs that are targeting retail clients and SIFs (Special Investment Funds) that are targeting well-informed investors, and more recently RAIFs (Reserve Alternative Investment Funds), that have the same structure as SIFs but a specific change regarding SIFs is that it is indirectly regulated. So it does not need to be submitted to the approval of the regulator. It has to be incorporated under an Alternative Investment Fund (AIF) Manager that is recognized by the regulator.
So to incorporate a fund, first of all, you have to hire the services of a law firm and draft a prospectus. Then the fund is composed of four entities: the fund manager, it can be an alternative investment fund manager or not; the central administrator that needs to be in Luxembourg; the custodian bank that needs to be in Luxembourg, and; the auditor.
Funds can also be submitted in two kinds of structures: as a SICAV that is a company, where you will have shares of this fund so you will benefit from voting rights in the fund, and as a SPF, where you will have unities or units like the traditional UCITs are incorporated. To incorporate a fund you have to reach 1.25 million assets under management in the first twelve months. Also, another important thing that is crucial for the fund is the asset distribution. You cannot concentrate more than 25% in one asset.
Presentation on Malta's Investment Funds
Two words about Malta itself and the size of the fund industry in Malta. In 2018, Malta's domiciled funds had together a net asset value of 11.7 billion, which was up by 8% from 2017. Malta managed funds—so not necessarily only Malta domiciled funds—had a net asset value of 24 billion, again up by 9%. So what you get from those figures is that Malta fund managers are relatively popular.
When we talk about Malta domiciled funds, we have almost 700 funds set up in Malta today. The vast majority, well over 50%, are what we call professional investment funds. We have a number of AIFs, we have some UCITs and other retail funds, but there is a reason we don't have too many, because we have 26 fund administrators established in Malta, we have more than 80 fund managers established in Malta, but we do not have enough custodians. So I know that the government is actively seeking more custodians to settle in Malta with real substance so that retail and UCITs funds can be better served.
So why do people choose Malta? Again, I think our strengths are typically we're being used as a jurisdiction for fund administration and fund management services and for smaller funds and startup funds. I think that's where we have carved out a little niche for ourselves. We have AIFs if the promoters are looking for EU passporting options, we have professional investor funds that can be easily managed by a de minimis manager, and we also have something called a notified AIF, which is manager-led and, as long as the manager is licensed, the speed to market here—we're talking about a matter of days, say, 10 days before you can have your fund up and running. But it relies on the regulation of the manager. And we also have the possibility of self-managed structures, so that's definitely an advantage that people are looking for.
We have something called the RICC or Recognized Incorporated Cell Company, which is a platform where you get standardized, so very popular for startups. You get standardized forms and documentation, you just add a cell to the existing cell, you cut on costs for the promoters, and so for smaller managers and startups, it's like a plug-and-play solution for them.
Presentation on Cyprus' Investment Funds
In terms of the development of the funds sector in Cyprus, we just need to go back five to six years, more specifically 2013, after what happened in Cyprus back then with the huge problem in the banking sector and the distrust towards banks and financial institutions, it was necessary for the government to find a solution to attract once again the interest of investors and business people to Cyprus. I think funds was an ideal solution for the government, so they gave a lot of attention on how to develop a legal framework which could add, let's say, a competitive advantage, if something like this exists between Cyprus and countries like Malta and Luxembourg, in the sense that we needed to attract the interest of investors to Cyprus. So we needed to provide a regulatory framework that could be seen as a bit more flexible and cost-effective in comparison to countries like Malta, Luxembourg and Ireland, of course.
At the same time, it was clear to the government that they wanted to connect the fund sector with passporting and citizenship schemes for investors that wanted to invest in Cyprus and get citizenship, so that they could make the investment via an AIF. So they could buy units, for example, in an AIF of value of 2 million plus the cost for the property where to stay, and this proved to be a good move in the sense—I don't know if it's a majority—but definitely a lot of AIFs in Cyprus are connected with this citizenship scheme.
In terms of the size of the industry, the latest valuations that we have estimate that the industry in Cyprus is worth about 6 billion. I'm sure that the prospects for both the government and service providers were and still are higher than that, and now everybody believes that with the new vehicle, RAIFs, we expect to attract more interest because it simplifies the procedures since you do not need to obtain a license authorization from the regulator; you just need to find a fund manager to work under its structure. So it's the responsibility of the fund manager to manage and control RAIFs. Of course, at the same time, this increased the interest for obtaining fund manager licenses in Cyprus. Definitely there is a market there, I'll say that it's good business for those who have the wealth to set up fund manager companies and be able to obtain the license from the regulator.