The island of Malta is establishing a solid reputation, particularly for small and emerging alternative asset managers, as an attractive location to establish their investment fund(s).
Currently, the number of funds domiciled in the island is 578 according to Malta’s main promoter, FinanceMalta. The majority of these funds – 460 to be precise – are Professional Investor Funds (PIFs). At 64, the number of UCITS funds is negligible but this is not a market in which Malta is trying to carve itself a niche given the EUR2.4trillion or so of UCITS assets under management in Luxembourg.
Alongside the PIF regime, which gives managers the choice to set up a cost-efficient fund structure, Malta has now successfully transposed the AIFM Directive into national law. This gives managers the choice of two alternative fund structures – either a PIF, which is a non-AIFMD compliant product and which managers can market to European investors using national private placement regime rules, or an AIF, which AIFMD-compliant managers can use to passport freely to all 27 EU Member States.
The AIFMD could well serve as a catalyst for further fund growth in Malta, particularly for non-European managers who right now have to decide carefully about whether to launch an AIF, and if so from which EU jurisdiction.
“Having Malta as your stepping stone into Europe is now even more relevant under the AIFMD. That’s probably the primary consideration for fund managers looking at where to relocate or set up new funds for the European market,” says Laragh Cassar, a partner at Camilleri Preziosi Advocates.
Choosing whether to have a PIF or an AIF will depend on the marketing strategy of each manager. Those that want to remain outside of the AIFMD will most likely want a PIF. There are three types of PIF to choose from: 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.
“The most important piece of advice that I would give to managers is to think in advance exactly what you want to do with the fund, how large you expect it to be, to whom do you expect to market the fund to, and what kind of strategy are you going to pursue. Be clear in terms of what you want to achieve with the fund and be very specific in your planning,” explains Charles Cassar, a partner at Chetcuti Cauchi Advocates. “It is really important that managers have a clear idea of where they want to go with the fund.”
Deciding on which fund structure to use also depends on the size of the manager. Those that are managing less than EUR100million in assets would qualify as ‘de minimis’ managers under the AIFMD and would therefore likely avail themselves of the PIF, although Charles Cassar caveats this point by adding: “Managers who think they are ‘de minimis’ and fall outside of the Directive may actually find that they are not. The MFSA has developed a self-assessment questionnaire and I encourage all managers to go through this questionnaire to avoid any unnecessary surprises. If you look at the way AuM is calculated, it doesn’t simply look at the amount of assets in the fund. It takes into consideration leverage. You can have funds that are relatively small in terms of actual commitments from investors, but if sufficient leverage is being employed it could mean that the manager falls under the Directive sooner than expected.”
Managers who qualify as an AIFM under the Directive will likely choose to establish an AIF. They could also choose a PIF, should they wish, but the problem with doing this is that the managers would expose themselves to two layers of regulation: the PIF regime for the PIF fund, and the AIFMD for the manager.
“Malta has traditionally attracted small to medium sized managers – these managers have the opportunity to either license their funds under the PIF or the AIF regime, the deciding factor being whether they fall within the de minimis threshold and whether they wish to fall within the full scope of the AIFMD. What we’ve seen recently is managers wanting to come on board under the PIF regime with a view to then becoming fully compliant under the Directive when they exceed the de minimis threshold of EUR100million,” comments Laragh Cassar.
At this point, the PIF would be re-licensed with the MFSA (Malta’s financial regulator) as an AIF, therefore avoiding the issue of dual regulation.
So when thinking about which fund structure to use in Malta, it really is all about considering the size of assets currently under management and how big the manager expects to grow going forward.
“The PIF regime is particularly relevant to small de minimis managers,” says Laragh Cassar. “Third country managers, particularly Swiss managers, are showing strong interest to set up their own self-managed de minimis PIFs in Malta with a view to opting in to the AIFMD rules once their assets under management increase.”
For many managers, particularly established managers running successful offshore funds and who now need to prepare for full compliance with the Directive, there are two choices to consider when looking at an onshore domicile like Malta: either re-domiciliation of the offshore fund, or the establishment of a clone structure (parallel fund structure) that runs pari passu with the offshore fund.
“Over the last three years we’ve seen a number of fund managers seeking to re-domicile their funds to EU-based jurisdictions in response to the AIFMD. While the majority of managers are stopping short of making the decision right now to re-domicile their funds we have nevertheless seen a number of managers proceed and Malta has certainly been a net beneficiary,” explains Joseph Camilleri of Bank of Valletta Fund Services, the island’s largest fund administrator.
The main advantage to re-domiciliation, as opposed to setting up an entirely new fund structure, is continuity. A manager can preserve the fund’s track record and demonstrate to the MFSA that they have run the fund properly in the original jurisdiction.
“For a fund re-domiciliation a manager and the fund will need to have local legal counsel which we can provide. We coordinate the whole process. We draft all the documentation for the Malta fund on the back of instructing the fund’s existing legal counsel to prepare the documents their side.
“We then co-ordinate and liaise with the regulator for the purpose of licensing the fund in Malta, and with the registrar of companies for the purpose of registering the actual corporate vehicle in Malta. Until the licensing and registration process is completed, the fund remains registered in its original jurisdiction and only gets officially re-domiciled when the license has been approved by the MFSA. It’s a very smooth process. Whilst the timing may change from fund to fund, I would say two months is a minimum period that managers should expect for the re-domiciliation process,” explains Laragh Cassar.
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 the likes of Bank of Valletta Fund Services. 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 but as Camilleri explains, existing managers who want to re-domicile their fund(s) to Malta can also take advantage: “The key is to ensure that performance in the offshore fund is not lost, that the same company continues with the process of fund management in Malta without having to wind down the fund and start the whole process from scratch. It is the same legal entity, the only difference being that it effectively changes its address.
“Also, for some managers, the re-domiciliation of the fund involves a change in service providers, in particular the fund administrator. Most managers tend to opt for a local administrator and that’s where we can add additional value. This tends to happen before the re-domiciliation process. It is easier for us because we already hold all the shareholder data and portfolio data as the official fund administrator.”
Laragh Cassar says that another consideration for managers looking to re-domicile their fund(s) is to look at the structure they have in place today. For instance, if they have an EU fund that is investing in China and using a Chinese custodian, under the AIFMD this would not be permissible, as they must have an EU custodian. “Then it would be advisable to look at the PIF regime, provided the manager fell under the threshold of the Directive as managers can appoint any global custodian under the PIF regime. Managers, however, must always consider the currently limited marketing scope of a non-AIFMD licensed fund.”
A slightly easier option for managers who would prefer to avoid re-domiciliation 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.
“We’ve seen managers pursuing this strategy. They want a replica fund to target EU investors whereby this feeder fund invests in the offshore Master fund. All the investment decisions are made at the Master Fund level with the feeder fund sharing the same investment objectives. This is another way foreign fund managers are choosing to react to the AIFMD,” confirms Camilleri.
But Malta is not just an attractive option for funds. Increasingly, investment managers are choosing to relocate there. There are many issues managers need to consider before doing so.
Adam de Domenico is founder and CEO of Zodiac Advisory Services (ZAS) Malta, a boutique firm that specialises in regulatory compliance, corporate governance within the asset management industry. The firm also offers Non-executive Directorship and Investment Committee members, as well as risk management oversight and accounting services. According to de Domenico: “Things for managers to consider should include the following:
When comparing to other jurisdictions consider ongoing costs besides set up costs – in Malta both compare very favorably to other jurisdictions.
Malta represents a highly attractive Plan B for hedge fund managers who already have existing operations elsewhere. As Chris Bond, HSBC Bank Malta Head of Global Banking and Markets says, “I’m meeting with hedge fund managers most weeks now, many of whom have recruited quality local graduates.
“We’re not seeing fully-fledged front-office teams relocating here but what we are seeing are many front, middle or back office operations increasingly basing themselves in Malta. These are people who hold senior roles within the fund manager, often the partners themselves. They tend to be HNW individuals and therefore have a real tangible impact on the local economy.”
Many of the funds being traded are not domiciled in Malta at all but remain domiciled offshore. In that sense, Bond says that while Malta has positioned itself to benefit from a wave of expected re-domiciliation under the AIFMD, “that wave has turned out to be more of a ripple. However, we are seeing growing interest in Malta as a location in which to base fund management operations.
“Malta is definitely upping its game as an attractive destination for HNW individuals. We enjoy over 300 days of sunshine a year; it’s a great lifestyle. It enjoys the same time zone as other European financial centres like Paris and Frankfurt and has excellent accessibility to London.
“I think it is quality of life as opposed to any potential cost savings that is the primary driver for managers choosing to relocate here. This is a great environment in which to bring up a family. It’s warm, it’s welcoming, and it has a low crime rate. You can enjoy a wonderful life on the island while at the same time still benefit from being well connected to London,” asserts Bond.
But managers should not adopt a light touch when considering Malta. The authorities emphasise substance and a real tangible commitment to the jurisdiction in terms of fund management operations according to Charles Cassar, who comments: “The regulator 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. I always tell my clients that the MFSA wants to grow the fund industry, they are pro-business but at the same time they don’t want to look silly. They want to see that you are able to present tangible proof that the business is indeed being managed in Malta.”
That said, the continued attraction of Malta is helped by the openness and approachability of the MFSA, the fact that it has a well-developed legal and support service infrastructure, and as Cliff Pace, product and business development manager at the Malta Stock Exchange explains, “there’s the connectivity factor – both electronically and in terms of physical location. The lifestyle is getting a little more hectic but nothing like other European capital cities. The cost of living is significantly lower and therefore the cost of services is significantly lower.
“One estimate is that we are 30 per cent more cost-effective than other jurisdictions such as Luxembourg. Another important factor is the skills and availability of Maltese practitioners. Anybody considering relocating to Malta will find that the Maltese financial service practitioners are extremely professional, trustworthy and well vested in Maltese as well as EU regulation. You’re paying a more cost-efficient price but you’re still getting a high-quality professional service, and that’s important to stress.”
“The MFSA is approachable and always willing to assist and to adopt a flexible stance when it comes to problem solving,” says Mel Roberts, a consultant with Maitland, a multi-jurisdictional administrative, advisory and fiduciary services firm. “In practical terms, it is possible to hold face-to-face meetings with the regulator within a matter of days. At the same time, adherence to the highest European standards is required. An extensive due diligence is conducted on every applicant, with new entrants being required to submit detailed documentation and references, which are vetted by the regulator as part of a rigorous process. This in turn, ensures that licenses issued in Malta enjoy a high level of international recognition.”
Being a small island, one of the main advantages is the networking opportunities on offer to managers. Everybody knows everybody.
“In Malta you’re only two times removed from knowing someone. That has good repercussions because networking is an enabler for businesses to work and function in line with clients’ requirements,” says Pace.
Aside from all the lifestyle and location benefits of Malta to managers, tax considerations are also important to consider. Reference may 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.
“This guarantees that human resources are maintained at a level sufficiently high to sustain the growth in the financial sector. In addition, Maltese fund managers benefit from a highly competitive fiscal regime, which is FATF and OECD compliant, whereby a refunds system results in a 5 per cent rate of net effective tax for the Maltese fund manager,” explains Roberts.
Already the island has global financial institutions such as HSBC and KPMG, amongst many others, and Pace thinks that, going forward, the trend of global firms establishing a local presence will continue in other areas of the financial services sector.
“That will be good for Malta because whilst having a local brand is good, a global brand creates a much stronger degree of networking opportunities and levels of connectivity which are very important to our international footprint,” says Pace.
“The local hedge fund community is growing steadily and many of our foreign client nationals have only good words to share about Malta,” concludes de Domenico.