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James Williams, Hedgeweek

Malta’s service provider community sees good times ahead


Whether it’s providing AIFM management company solutions, depositary lite solutions, or simply providing start-up managers with a high-touch level of service, Malta’s service provider community continues to evolve with the times. 

The attractions of Malta's Notified AIF regime have been well documented in this report and whilst it presents a unique opportunity for authorised AIFMs, the regime will not necessarily be applicable to start-up and emerging managers. 

These are very much the lifeblood of Malta. Catering to this market segment has helped to differentiate the island from other, more established fund jurisdictions. So whilst the NAIF regime is an important development, Malta remains committed to supporting smaller fund managers who remain out of the full scope of AIFMD. 

"Start-up managers remain the primary client profile for our business in Malta," confirms Paulianne Nwoko, Managing Director of Apex Fund Services (Malta). "We do have a number of well-established managers on the books who continue to grow and launch new funds with us but we continue to see a strong flow of start-up managers. 

"From a regulatory perspective, AIFMD is more established and fully understood by managers. It's more of a `plain sailing' environment in which to launch funds – there is less fear and confusion. Managers can now decide more clearly where and when they wish to set up hedge funds in Europe."

Over the past 12 months, the majority of new launches have been AIFs by de minimis managers (sub EUR100 million in AUM), typically as self-managed AIFs, according to Nwoko. "One of the biggest products that Malta had to offer prior to AIFMD was the PIF regime. This remains in place and well used but is less rigorous than the AIFMD rulebook," says Nwoko, who adds that deciding on whether to launch an AIF or a PIF largely depends on the size of the fund and the fund promoter's distribution strategy. 

"Start-up managers will typically opt for a PIF and over time, as they grow their business, they convert it into an AIF. When you are launching a fund below EUR20 million, for example, the most effective regime is the PIF regime because whilst it is still a regulated fund product it gives managers more flexibility. They aren't required to have a local depositary for example." 

When it comes to legal structures, the Maltese SICAV remains the most popular option. If fund promoters are looking to launch more esoteric, illiquid strategies investing in non-financial assets, however, Malta has a strong network of service providers to provide proper guidance and understanding over the various tax advantages available at the structuring phase. 

"We have a strong community of law firms with expertise in all areas of fund structuring and tax to help fund promoters arrrive at the best decision on how to proceed. We always make sure that we try to be as involved as possible at the beginning. It's important for us to understand the operational functions around the fund so that we can help introduce the most suitable service providers," says Nwoko. 

One firm that chose Malta back in 2008 was FMG Malta Ltd (`FMG'). FMG, which is headquartered in Malta, is the owner and Investment Manager of the Comino Platform, a SICAV platform that offers fund hosting solutions under the AIFM Directive and one of a growing number of AIFMs operating in Malta to provide clients looking to bring European funds to market. 

"Malta was attractive to us in terms of its business friendly environment and the overall economics of setting up a fund management business. Malta has proven to be an excellent jurisdiction in terms of hosting the management company. We have a good mix of locals and internationals in the Malta office," comments Gunnar Detlie, Group Chief Operating Officer at FMG. 

"We have clients that launch Cayman funds, Bermuda funds, as well as Malta fund and wish to appoint an external AIFM for various reasons. As such, we package everything together under the `external asset management' monicker. Comino is just one of the products. We will soon be launching a UCITS platform as well, based on the same concept of providing external management company support," confirms Detlie.

Ronn Henry is Senior Advisor, External Asset Management, FMG (Malta) Ltd. He says that the concept of the Comino platform is to make launching a fund more cost-efficient "by leveraging our local expertise and professional services so that clients can concentrate on what they are good at; managing money. 

"We basically provide a `plug-and-play' solution so that our clients can focus on the front-office aspects of running a fund."

Other AIFMs are enjoying good traction in Malta as well. Cordium, for example, has the Cordium Total AIFM Solution or `CTAS' solution, which differs from other AIFM models in that rather than appointing an external AIFM, the fund manager owns the AIFM, which Cordium helps to set up and operate on the client's behalf in Malta minimising time, so that the fund manager can focus purely on the portfolio. 

"The premise of CTAS is that the client owns the AIFM and we operate it. CTAS is not a fund platform solution on which managers can launch sub-funds. We don't get involved in the distribution side of things at all; that's the front-office responsibility of the manager, however CTAS is now also coupled with the newly launch Notified AIF by MFSA," explains Adam de Domenico, CEO at Cordium Malta. Similarly, Malta is clearly well regarded as an EU solution to UK fund managers who wish to stay in UK while setting up an EU firm or branch.  Getting ahead of a surge in applications in the next two years is the current theme. 

For those that have seed capital in place and wish to get a fund to market as fast as possible, it's difficult – not to mention costly – to set up a management company and appoint the right service providers. 

"It makes sense, from multiple aspects, to set up on a fund platform because it allows you to benefit from economies of scale. You get to enjoy the same rates from service providers as you would if you were an USD1 billion manager – depositary services, prime brokerage services. There are so many areas that you don't have to worry about if you are a small manager by joining a platform – either to launch a sub-fund or a standalone fund," confirms Detlie.

To that end, some 80 per cent of FMG's clients choose to launch sub-funds, whilst those launching private equity-type vehicles with longer term capital commitments will typically opt for their own standalone fund and use FMG until they feel ready to set up their own management company. 

"Having their own SICAV enables them to do just that; it gives them greater flexibility. Whereas having a sub-fund is more difficult to go down that route as the fund promoter is not able to retain the track record if they decide to spin out of the platform," confirms Henry. However, he caveats the point by saying: "Having said that, it's more expensive going down the standalone fund route. You need to therefore carefully evaluate your financial budget and closely monitor the expense ratio within the fund."

Now that the NAIF regime is up and running there is a big opportunity for Malta-based AIFMs to support fund promoters but it will require them to establish a new umbrella structure to do so; AIFMs will not be able to use an existing SICAV license. 

Detlie says that the NAIF regime is already attracting interest, particularly within the private equity space: "It will be a more onerous task for us as we will have greater responsibility to oversee the running of a NAIF. It will require us to apply a different filter, as it were, and think about the types of client looking to launch such a product. 

"We expect to become the appointed AIFM to our first NAIF structure in the next few weeks."

Henry adds that the uptick in enquiries is coming largely from established managers, as opposed to emerging managers, who are looking for an expeditious route to market. 

There has been an 8 per cent increase of AIFMs coming to Malta, year-on-year. According to the MFSA, in 2015 there were 41 registered AIFMs.

But as Malta continues to attract more AIFMs, one area that still needs to improve is the depth and breadth of custodians on the island. There are currently six custodians, but none of them are global bulge bracket institutions; the BNY Mellon's and State Street's of this world.

In many ways it is a chicken and egg situation; is it the volume of business in Malta's funds industry that ultimately attracts a large custodian or is it funds that end up gravitating to the island because there is a global custodian? 

"This is one of the reasons I've long believed we are more likely to attract start-ups and smaller managers because the bigger managers want to have custody relationships with big names. The custody issue dictates the kind of fund promoters we service here in Malta," says Dr Louis de Gabriele, head of the Corporate and Finance practice group at Camilleri Preziosi Advocates.

That said, there are more fund administrators such as Alter Domus that are now able to provide depositary lite services to private equity and real estate funds, without requiring a bank license. Last year, the firm was issued with a Category 4b Investment Services License to act as a custodian solely in relation to non-financial AIFs, meaning that the firm is now able to offer depositary services to clients in Luxembourg, the UK, and now Malta. 

"The decision was based on the fact that we are one of the market leaders in private equity and real estate fund administration and we felt it was important to have a full service offering, which included the ability to provide `depo lite' services. In Malta, we saw it as a key opportunity given the shortage of administrators with expertise in supporting PERE funds, and lack of people who specialise in this area," explains Chris Casapinta, Country Executive Malta at Alter Domus. He says that the firm is encouraged by the level of interest in its depo lite service. 

"We were a first mover in Malta to support different types of funds, such as debt funds. Indeed, we were one of the first depositaries to start handling debt funds. We were also the first depositary to offer depositary services to Malta's inaugural NAIF, which launched in July this year," adds Casapinta. 

The fund in question also happens to be the first EU venture capital fund – the Digital Opportunities 1 Fund, which sits on the Ventura SICAV plc. The AIFM is Abalone Asset Management. 

Any fund that markets into the EU, even if it is not registered in the EU, needs to have a depositary in place under the AIFMD. Presently, EU-registered AIFs can appoint a depositary loated anywhere in the EU but from 2017, ESMA will introduce rules that stipulate a requirement to appoint a local depositary. This is both a significant challenge and an opportunity for a maturing jurisdiction like Malta. 

"No one yet knows if that delegation period will be extended or not. But there's quite a lot of interest in larger name custodians possibly coming to Malta. We are realistically optimistic on the future in terms of custodians setting up here," comments Casapinta. 

"Malta is pushing for the depositary passport. That would be the best solution," says Nwoko. This is something that the MFSA is aware of. Last December, it published: A Guide to the Establishment of Custody Operations (Depositaries) in Malta, providing practical steps and considerations. 

It is nevertheless worth going back to the point that roughly 70 per cent of Malta's funds are de minimis with less than EUR100 million. As such, they do not exactly offer an enticing business opportunity for tier one custodians. For Malta to attract bigger custodians, it needs bigger funds. 

"There are fewer banks in Malta than other jurisdictions so we thought it would put us in a good position to offer the depo lite service, not only as a new revenue stream for Alter Domus, but as a way to help the jurisdiction develop," says Casapinta. "We don't have the big global names but in terms of servicing PERE and infrastructures, I believe we are well positioned as a jurisdiction to support the managers of such funds." 

Overall, Malta appears to be as well placed as ever to support emerging managers. And with the NAIF regime now in place, it will give the island's AIFM community a compelling chance to build out their platform and management company businesses.

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