PIFs: a flexible regime for hedge funds, private equity and more
Malta’s success in attracting international fund business is mostly down to the Professional Investor Fund regime, introduced in 2000 when the Malta Financial Services Authority issued the Guide to the Establishment of Professional Investor Funds. Previously funds established in Malta had been largely aimed at the domestic retail market, but the launch of PIFs started to draw attention from international fund promoters and managers targeting sophisticated investors.
There are three categories of PIF with differing minimum investment levels and other rules, reflecting the type of investors at which they are aimed. Experienced Investor PIFs are designed for more affluent and sophisticated retail investors, and their minimum investment level was reduced last year from EUR15,000 to EUR10,000.
These funds carry the highest level of restrictions to protect investors, including the requirement to appoint a custodian or prime broker (optional for other types of PIF), diversification of investment rules (strengthened at the time the minimum investment was lowered), and a leverage ceiling of 100 per cent of net asset value.
The Qualifying Investor PIF carries an investment minimum of EUR75,000 and is not subject to any restrictions on investment scope, borrowing or use of leverage; it does not require the appointment of a custodian or prime broker. According to Katya Tua of Simon Tortell & Associates, these remain popular among promoters, but demand for Extraordinary Investor PIFs, which have a minimum threshold of EUR750,000, has increased.
Extraordinary PIFs offer customised disclosure requirements and benefit from a faster licensing process at the regulator; they are often used for private equity investment, not only by institutions but wealthy individuals. Promoters can also set up self-managed PIFs whose investment management is the responsibility of the board of directors and that must have a minimum capital of EUR125,000.
Tua says the PIF framework is flexible enough to accommodate a broad range of asset classes, including ‘alternative alternatives’ such as diamonds, wine, energy and loans, as long as diversification requirements are satisfied. “We get the whole spectrum,” she says. “It’s up to the investor to decide whether the underlying assets are suitable.”
Fenech & Fenech partner Joseph Ghio adds: “Malta has licensed fund vehicles that invest in assets as diverse as precious watches and aircraft finance. Creativity is the only barrier to what you can do with a PIF. In addition to traditional hedge fund strategies, we have seen funds investing in alternative energy, foreign exchange and Asian real estate – you name it, you’ll probably find an example in Malta.”
The regulatory framework may be flexible enough to accommodate wide diversity of assets, but various fundamental rules have to be satisfied. “PIFs are companies and must be audited annually, and the auditor must ensure that valuation is carried out according to IFRS standards,” Tua says. “In addition, there must always be safekeeping of the assets in whatever shape or form they are.
“Qualifying and Experienced PIFs do not need a custodian, but the regulator must be satisfied that the safekeeping arrangements and valuation policies are adequate. At the end of the day the PIF is lightly regulated, but it is regulated all the same. In most cases the key is disclosure to investors, who can then make up their own minds about whether they are comfortable with aspects of the fund such as charges, liquidity and risk.”
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