The NAIF: Europe’s missing piece of the jigsaw

The Maltese Notified Alternative Investment Fund (NAIF) fills a gap in Europe's fund market. According to Dr Stefania Grech, Financial Services Associate, Chetcuti Cauchi Advocates, an unregulated fund was the one product missing in the Maltese Fund Industry. "Now, from a European perspective, there is no discrimination when it comes to the creation of an unregulated vehicle, offshore versus onshore.

"The NAIF regime could create an opportunity for investment managers to set up an onshore European structure to market to European investors. This could be done pari passu to the offshore fund, creating the possibility for fund managers to have both an unregulated offshore fund and an unregulated onshore EU fund following the same underlying investment strategy," says Dr Grech.

By applying the regulatory gaze solely to the manager, and not the fund vehicle as well, the NAIF regime has, in effect, brought together the best elements of the offshore and the onshore world. 

"The investor has to be comfortable having an unregulated product; that is why I think it will be a benefit to managers who wish to set up similar structures to their offshore fund(s). There will be some EU investors who still want to invest in regulated funds, in which case the Alternative Investment Fund (AIF) would be the ideal route," says Dr Grech.

"This brings us closer to the offshore model, yet at the same time, regulators and investors can take comfort knowing that the manager is fully regulated," adds Dr Maria Chetcuti Cauchi (pictured), Partner and Co-Founder of Chetcuti Cauchi Advocates, emphasising that speed to market (a maximum of 10 business days) is one of the NAIF's biggest advantages. 

Dr Chetcuti Cauchi thinks that this new regime signals a shift for the better from a regulatory perspective. In the past, she says, Malta has historically focused on regulating the fund product itself – PIFs, UCITS (and non-UCITS) retail funds, and the Recognised Incorporated Cell Company (`RICC') regime. All are subjected to ongoing supervision by the MFSA. 

However, upon the adoption of the AIFMD, a new reality was presented, in Malta and across Europe. Being a manager-focused directive, AIFMD aims to ensure suitable regulation over the fund managers themselves (the AIFMs) rather than the funds. 

Whilst presenting challenges associated with double regulation, with the risk of an overly protective fund domicile, this scenario has also presented vast opportunities. 

"Malta identified this potential drawback of double regulation and came up with the NAIF regime, allowing for a new type of fund to be structured upon the appointment a duly authorised EU/EEA full-scope AIFM. There is a notification process rather than a licensing process. This is the shift that we refer to – away from product regulation and more towards manager supervision," explains Dr Chetcuti Cauchi. 

Given that AIFMs are already highly regulated, Dr Grech feels it was important to create a new fund that could ride on the coat tails of the AIFM's license, and do away with dual regulation. "The NAIF is really an AIFM product and we think it will be very important going forward."

"We've already seen a lot of interest. We expect investment managers to embrace this product," adds Dr Chetcuti Cauchi. "We think the SICAV will still be a popular legal vehicle, however, since the NAIF's obligations rest squarely with the AIFM, we don't exclude the contractual or limited partnership models from gaining momentum. It depends on the AIFM and their end investors. If the latter are used to a particular model, such as the limited partnership, we don't exclude that such managers will resort to that same familiar model.

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James Williams
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