By FinanceMalta – Of the 600-plus investment funds registered in Malta it is estimated that at least 85 per cent of them can be characterised as being in the EUR20-100m range.
This means that for alternative fund managers who don’t have grand plans to grow their funds beyond the EUR100m threshold they can choose to remain under the PIF regime – which the island’s regulator the MFSA wisely chose to retain alongside the AIFMD – and privately place their fund(s). This can help managers avoid falling under the scope of the directive, providing them with an alternative fund product that other EU domiciles simply cannot offer.
There are in effect three types of PIFs that managers can select: those that are promoted to Experienced Investors, which come with a minimum investment of EUR10k; those that are promoted to Qualifying Investors, with a minimum investment of EUR75k (the most popular choice); and those that are promoted to Extraordinary Investors, with a minimum investment of EUR750k.
New licences for PIFs will continue to be issued under the updated Investment Services Rules for Professional Investor Funds in the following cases:
i) Applicants who opt to apply to be licensed as a ‘de minimis’ self-managed AIF;
ii) Applicants who opt to apply for a PIF licence provided the PIF is managed by a de minimis AIFM;
iii) Applicants who opt to apply for a PIF licence provided the PIF is managed by an AIFM in full compliance with the AIFMD;
iv) Applicants who opt to apply for a PIF licence provided the PIF is managed by a non-EU AIFM in terms of the relevant conditions of the AIFMD under which other EU-Member States may allow them to market to professional investors in their territory.
The potential problem with category (iii) is that hedge fund managers who choose the PIF and who exceed the ‘de minimis’ threshold will expose the fund to two regimes and layers of regulation. With that in mind, the PIF regime is better suited to promoters/managers who prefer to remain de minimis. If their fund does well and assets climb above EUR100m, they should then re-license the fund with the MFSA as an AIF, which is a relatively straightforward process.
Where a manager to launch a Qualifying Investor PIF, they would not be allowed to passport it across Europe because the fund would not fall within the scope of the Directive. It would only be available to investors through national private placement regimes of EU member states, or reverse solicitation.
Ultimately it boils down to the manager, how large they are, and what their long-term objectives are. Even if they qualify as ‘de minimis’, some managers might still choose to have an AIF – or a PIF – and comply with the Directive because it might help them attract potential investors.
And on this point – the nature of the investor – rests a crucial difference between a PIF and AIF, which could further influence a manager’s decision.
If a manager sets up an AIF under the AIFMD in Malta they can only sell it to professional clients as defined under MiFID I, which mainly covers institutions and other eligible professional clients. This is a much narrower definition than ‘qualifying investors’. For managers wishing to market their fund beyond the EU, in Switzerland for example, and who do not wish to be constrained by only targeting professional clients, then the PIF would be the fund vehicle of choice.
When thinking about which fund structure to use in Malta, it really is a case of considering the size of assets currently under management and how big the manager expects to grow going forward.
If the manager is a start-up, one of the most cost-effective ways to establish a Maltese fund is to leverage turnkey fund formation solutions offered by a number of service providers in Malta. This removes the burden of having to establish contractual relationships with different service providers. All the manager needs to do is focus on the process of investment management. These ‘incubation platforms’ are popular in many jurisdictions for new managers. Indeed, existing managers who want to re-domicile their fund(s) to Malta can also take advantage, safe in the knowledge that performance in the offshore fund is not lost. Fund management activities in Malta can continue without having to wind down the offshore fund and start the whole process from scratch.
Ultimately, a fund redomiciliation to Malta, either as a PIF or an AIF, merely involves a change of fund management address.
That said, an easier option for managers who would prefer to avoid redomiciliation is to establish a parallel fund structure; a clone of the offshore strategy aimed specifically at EU investors and which essentially acts as a feeder fund.
All the investment decisions are made at the Master Fund level with the feeder fund running pari passu, sharing the same investment objectives. This is another way foreign fund managers are choosing to react to the AIFMD. Malta, in that respect, is an attractive jurisdiction for managers to consider, not just for their funds, but to establish fund operations as well.
As is well known, Malta enjoys over 300 days of sunshine each year, it is an English-speaking island, it has excellent transport links to all of Europe’s leading financial centres and benefits from having both a low crime rate and a highly proactive business friendly regulator in the form of the MFSA.
In practical terms it is possible to hold a meeting with the MFSA within a matter of days. Not that the MFSA adopts a light touch to approving fund managers on the island. It has a strong reputation to uphold and whilst approachable, the MFSA conducts thorough due diligence on each manager that passes through its doors. The authorities emphasise substance and a real tangible commitment to the jurisdiction in terms of fund management operations.
New entrants are required to submit detailed documentation and references, which are vetted by the regulator as part of a rigorous process. The MFSA will not accept brass plates or soft operations, which are established in Malta in name only. Managers should put a lot of thought into the commitment they will bring here.
This in turn, ensures that licences issued in Malta enjoy a high level of international recognition.
Aside from all the lifestyle and location benefits of Malta to managers, tax considerations are also important. Maltese fund managers benefit from a highly competitive fiscal regime, which is FATF and OECD compliant. Malta is the only EU member state that operates a system of dividends based on full imputation. A fund management company would be required to pay the standard corporate tax rate of 35 per cent on its profits. However on distribution, the shareholder receiving the dividend qualifies for a credit in respect of the tax paid by the AIFM. Distributions to shareholders would trigger refunds to the shareholders of 6/7ths of the tax paid by the AIFM on the distributed profits.
It is also pertinent to note that in relation to Article 13 of the AIFMD, the MFSA’s approach is that remuneration policies and practices shall apply at the level of the AIFM – specifically to “those categories of staff, including senior management, risk takers, control functions, and any employees receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers, whose professional activities have a material impact on the risk profiles of the AIFMs or of the AIFs they manage.”
This means that the approach adopted by the MFSA does not require that entities to which portfolio management or risk management activities may have been delegated be subject to similar remuneration requirements as the AIFM.
Reference may also be made to the Highly Qualified Persons Rules, which ensure a flat rate of tax of 15 per cent on the personal tax for highly qualified professionals.
The cost of living is significantly lower and therefore the cost of services is significantly lower. For example, the turnkey cost of setting up a fund in Malta costs in the region of EUR15,000 to EUR25,000. When you apply that kind of cost to a fund of EUR30-40m, it becomes attractive as the overall impact on the TER is a manageable one.
Fund administration costs for a Maltese start-up fund are traditionally in the region of EUR15-20,000 per annum depending on the key features of the fund; e.g. the frequency of valuation, number of positions, trading volumes and number of share classes. Audit fees would be in the region of EUR6,000 per annum.
Malta has built out a solid infrastructure and boasts a wide range of top tier service providers such as HSBC, Deutsche Bank and the top four international audit firms all having robust operations in Malta. There are now over 130 asset servicing operators – including 28 fund administrators – delivering high-quality support to funds.
Whether its legal support for fund formation or ongoing administration, brokerage and custodial support, managers who look towards Malta will find a vibrant funds ecosystem when they set foot on the island.
