Retaining its Professional Investor Funds (PIF) regime is possibly the single biggest development for Malta in recent memory. The island is now home to over 600 MFSA-authorised hedge funds and whilst a number of those are now being transitioned into AIFs to comply with the AIFMD, the fact that small and emerging managers can choose whether to run de miminis funds outside the scope of the directive cannot be underestimated.
“Pre-AIFMD Malta’s PIF regime had already generated a lot of interest among managers. The MFSA performed mental acrobatics working out how it was going to retain the PIF regime alongside AIF. They did a great job. For smaller managers, they can grow under the PIF regime and then graduate to an AIF when the manager’s gross assets exceeds the de minimis threshold,” says Dr Kurt Hyzler, Advocate at CSB Group.
According to James Farrugia, who spearheads the Investment Services & Funds team at Ganado Advocates, by running two rulebooks for both the PIF and AIFMD regimes Malta has a clear competitive advantage over other domiciles: “Ireland and Luxembourg have taken the decision, rightly or wrongly, that irrespective of whether the AIF is de minimis or not the manager will still be required to appoint a local depositary, a local administrator and so on.”
Of the 600-plus investment funds registered in Malta “at least 85 per cent of them can be characterised as being in the EUR20-50m range,” explains Joseph Camilleri, Head of Business Development at Valletta Fund Services, one of the island’s leading fund administrators. “For 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 and privately place their fund(s), which is typical of many of the funds that are domiciled here.”
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 number of funds domiciled in Malta can be expected to grow over the next few years as AIFMD beds in and more third-country AIFMs look for distribution solutions in the European market. Equally, however, the number of AIFMs being established will also likely grow. Indeed, signs of cluster formation are already in evidence.
“We are seeing that. Managers are coming here from a tax perspective because Malta offers them the right jurisdiction for their business. We are working with several start-up managers from the EU,” confirms Hyzler.
Malta’s tax regime is certainly attractive. From a personal tax perspective, the Highly Qualified Persons Rules ensure a flat rate of 15 per cent tax, which would apply to hedge fund professionals. With respect to AIFMs, Maltese fund managers benefit from a highly competitive fiscal regime, which is FATF and OECD-compliant, whereby a refunds system can be availed of.
Laragh Cassar, partner at law firm Camilleri Preziosi, explains this last point by saying: “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% 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.”
“This is an important consideration for an AIFM in determining which jurisdiction it should run its business from.”
Farrugia confirms that the bulk of Ganado Advocates’ clients have been approved as AIFMs by the MFSA, noting that the process has actually been quite smooth.
“There are a few managers still being processed but from an MFSA perspective the whole process has been relatively straightforward. The MFSA published a questionnaire which our clients completed as part of the transitioning into AIFMD. On average, the transition has taken two to three months,” says Farrugia.
He adds that this year has also seen increased demand in new AIFMs and AIFs setting up on the island: “We have received a number of enquiries from promoters wishing to set up AIFMs in Malta. On the fund side, there’s been a tangible increase in the number of promoters contacting us to set up new funds. Towards the end of last year it was a bit slower as managers were still getting used to AIFMD and how they could transition into it.”
What is becoming interesting in Malta is how managers, particularly non-EU managers, are exploring different fund structures within the PIF regime to cater to European investors yet ensuring that they remain out of scope of the directive. Some observe a pick up, for example, in fundsofone.
Another option is to establish the collective investment scheme (CIS) under the PIF regime as a SICAV investment company structure; an umbrella fund with legal segregation between sub-funds.
“By virtue of the separate patrimony between sub-funds of multi-fund SICAVs the assets and liabilities of one sub-fund will not contaminate the assets of other sub-funds. This gives peace of mind to managers who create sub-funds for particular investors who want exposure to a specific strategy and want to be insulated from other strategies of sub-funds of the same SICAV.
“Each sub-fund of the PIF can be managed by a different entity (though this is uncommon) – if the manager has, for example, two of the three sub-funds on the SICAV and together with any other funds it could be managing, its AuM goes beyond the de minimis threshold, then the entire Fund would have to become AIFMD-compliant. In such a scenario, all the sub-funds would need to be managed by the same Manager.
“The safest way for a Fund to stay out of scope of the AIFMD is for the Fund to be self-managed as it will not get ‘contaminated’ by the AuM of the Manager with respect to the other funds they manage. The self-managed PIF is a recent trend that we’ve started seeing in Malta,” explains Hyzler.
This self-managed de minimis PIF works very nicely for non-European managers targeting small numbers of investors. They may have a group of three of four investors looking to allocate EUR75m, for example. These assets would go straight into the self-managed PIF, which would then be closed to other investors. Farrugia says that investors are keen to invest into EU-domiciled funds but aren’t keen to pay the costs of AIFMD.
“This solution helps them to avoid AIFMD altogether. Malta’s self-managed PIF is quite unique in that sense,” comments Farrugia.
“A third country manager managing a de minimis self-managed PIF will avoid the need to register in a Member State of reference should the Third Country Rules under the AIFMD come into force in 2015/2016. On the assumption that they do, a Swiss manager, for instance, managing a Maltese fund, will need to be registered in a Member State of reference. But if the Swiss Manager is managing a de minimis self-managed PIF in Malta, that registration requirement will not apply.”
With a self-managed PIF, investment management decisions are retained by the PIF Board of Directors rather than have them delegated to an external discretionary investment manager.
“An internally managed AIF would outsource the day-to-day portfolio management function back to the Swiss manager. Therefore, if the Swiss manager sets up a self-managed PIF in Malta and keeps it below EUR100m, it would remain outside the scope of the directive. Moreover, the Swiss manager would then not be viewed as an external AIFM,” clarifies Farrugia.
Cassar further confirms that Camilleri Preziosi has received an increase in applications – in some cases from US-based private equity managers – to set up self-managed de minimis PIFs.
“It is the main selling story right now,” says Cassar.
Expect, then, to hear a lot more about self-managed PIFs going forward. One other interesting area to keep an eye on will be that of loan funds and direct lending vehicles, which continue to court the interest of institutional investors. Up until now, managers would never have considered Malta because the provision of loans required a financial institutions licence from the MFSA.
That has now changed. The MFSA will now allow PIFs and AIFs to engage in loan investing provided certain conditions are met – refer to Camilleri Preziosi’s article, page 10 in this report for further details.
Naturally, this is good news for private equity managers who wish to engage in lending activity as part of their investment strategy. Cassar observes that more clients this year have looked into setting up standalone loan funds in addition to engaging in a series of lending activities as part of the investment objective of the fund.
“Previously, in both cases there was a huge stumbling block from a regulatory perspective because it meant that in addition to your fund licence you would also need to become, in effect, a financial institution. You could have done it on a one-off basis, originating one loan, but that meant it was extremely restrictive,” says Cassar
She continues: “The MFSA amendment has opened up a real opportunity now although a few issues still need to be ironed out – for instance, where does one draw the line when determining what actually constitutes a ‘loan’? The previous regime allowed one-off lending activities to take place without triggering a licence requirement. However under the current rules, the one-off lending activity would bring the fund into the new loan fund regime. Nonetheless, all things being considered, this is a positive step for Malta since it offers a regulated product for an increasingly popular investment, particularly within the EU.”
To date, the MFSA has done a good job of keeping Malta in the spotlight for managers wishing to launch AIFs and/or AIFMs. If it can add more strings to its bow by promoting the benefits of self-managed PIFs, and by bringing further clarification to the loan funds market Malta will reap even more rewards.
But it’s not all peaches and cream. One area of Malta’s service provider infrastructure that remains slightly under-developed is the number of global custodians operating there. Yes, the likes of Deutsche Bank and Citco are present, but if, as mooted, the AIFMD introduces a requirement in 2017 that the depositary needs to be in the same jurisdiction as the AIF it could become an issue.
“I don’t understand the rationale behind it,” says Kenneth Farrugia, Chairman of FinanceMalta. “There is a clear drive under UCITS V to introduce the passport for custody services; currently the state of play is that as from 2017, a custodian registered say in London, will be prevented from providing their services to hedge funds domiciled in different Member states. As a result, this will complicate matters for a manager wishing to establish an AIF in a particular jurisdiction as they will be precluded from appointing a custodian of their choice operating in any other EU jurisdiction.”
The requirement to have a depositary in the same jurisdiction as the fund is set to be invoked in July 2017.
Currently, Malta allows the fund promoter to service the fund with foreign prime brokers, custodians and administrators; there is no restriction whatsoever. Why, for example, should a promoter that appoints JP Morgan in London to service the fund require the bank to have a local footprint? At the end of the day it’s the same counterparty no matter where it’s located.
“I believe that ultimately the Directive will follow the same path being taken by the UCITS regime. UCITS IV introduced the ability to passport management company services and one expects that the same cross-border capabilities will apply to depositaries under UCITS V,” opines Farrugia.
If it doesn’t, the likely solution for a Maltese AIF that prefers to work with JP Morgan (to continue the example) will be to appoint a local depositary such as Bank of Valletta and have them enter in to a sub-custodian arrangement. Not ideal, but it’s an option if the depositary passport hasn’t been ratified.
“In Malta, the great majority of the depositary and prime brokerage arrangements for hedge funds domiciled here are making use of foreign-based service providers such as Interactive Brokers, Saxo Bank, Credit Suisse, Goldman Sachs, JP Morgan, Deutsche Bank and UBS,” says Farrugia.
To conclude on an optimistic note, Hyzler confirms that CSB Group’s turnkey solution – which is available for all financial and investment services institutions – has started to generate interest from custodians.
“We can help with the process of getting custodians set up here in Malta, just as we can with fund managers. We are currently working with one European custodian at the moment,” says Hyzler.
