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Notified PIFs: Flexibility and control through new fund structure

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Deminimis Alternative Investment Fund Managers (AIFMs) and third country AIFMs will soon have access to a new EU based fund structure which can offer flexibility, control and speed to market.

The Malta Financial Services Authority is on track to introduce the new framework for Notified Professional Investor Funds (Notified PIFs). This new structure will be attractive to Deminimis AIFMs and third country AIFMs looking for alternative fund structures based in an EU country. The fund will be an unregulated structure, with managers required to notify the Malta Financial Services Authority (MFSA), rather than going through a full blown licensing process.

“Investors’ main priorities are performance and manager skill,” says James Farrugia, partner in the investment services and funds team at Ganado Advocates. Whether a fund is regulated in the traditional manner has little impact on a managers’ fund raising capability. In light of this, Farrugia notes that the regulator, the MFSA, has evolved its approach to new products, creating structures which recognise the trend which is seeing the industry move away from regulated products for institutional investors.

The proposed framework for Notified PIFs decrees that these funds will be subject to a notification process and will not be licensed by the MFSA. This means managers can benefit from lower set up costs as well as fewer operational or regulatory costs, when compared to launching a fully licensed fund.

This proposed regime addresses the time-to-market pressure managers face as the MFSA will have 10 working days from the filing of a complete notification request to include the new structure in the official list of Notified PIFs.

“Speed to market is critical in investment management and having access to a structure which facilitates this is very attractive. This means managers do not need to go through a lengthy licencing process which anyway does not add value in the eyes of an institutional investor,” says Farrugia.

The Notified PIF structure can be considered a strong alternative to a fund domiciled in other fund centres such as Luxembourg, Ireland, the Cayman Islands, Bermuda or the British Virgin Islands. “The Notified PIF should be particularly attractive to managers based in major centres outside the EEA such as the US, UK, Switzerland, Singapore and the Channel Islands” notes Farrugia. This is due to the flexibility the structure offers. For example, under the Notified PIF regime, the fund can have multiple custodians and prime brokers and the selected custodians/ prime brokers do not need to be based in Malta.

“Managers get the flexibility of a fund structured in an offshore jurisdiction, without having to venture outside the EU,” Farrugia says.

Flexibility and control

In addition to the speed to market offered by the Notified PIF, the structure also allows Deminimis AIFMs and third country AIFMs to have more direct control over the portfolio management process. Farrugia outlines: “This structure provides a direct link between a Deminimis AIFM/ third country AIFM and the Notified PIF, which means it allows the manager to manage the fund directly without the need to interpose a fund management company between the Deminimis AIFM/ third country AIFM and the fund. With an AIFMD harmonised fund, the Deminimis AIFM/ third country AIFM would need to have a full scope EEA AIFM between themselves and the fund, meaning they lose the direct link with the fund.”

This makes it an ideal product for Deminimis AIFM/ third country AIFM that has investors lined up or a specific objective in mind. For example, when looking to execute a club deal to acquire a target, managers who have the investors lined up can set up a Notified PIF in a short space of time and move ahead with their acquisition plans. In situations like these, the marketing rights or the lack of passporting ability has no impact on fund raising efforts, given the manager already has investors lined up.

It is also well suited to Deminimis AIFMs. These managers cannot access the Notified Alternative Investment Fund structure, which is a fully harmonised structure under AIFMD. Within such a structure, they can only be included as sub-investment managers engaged by a full scope EEA AIFM. “If they want to manage the structure directly, they can launch a licenced PIF (Professional Investor Fund). But given it’s a regulated product, procuring such a license can take up to three/ four months. The Notified PIF is essentially creating an unregulated version of the licenced PIF model, allowing for a shorter time-to-market,” Farrugia says.

The industry has also seen a growing appetite for co-investment vehicles. A Notified PIF can be used very efficiently as a co-investment vehicle. “Investing in a chosen target through a Notified PIF rather than a Special Purpose Vehicle provides managers and their co-investors with certain advantages,” explains Farrugia, adding the structure can also be used as a feeder fund into a master structure. “A manager may have a Cayman Islands fund which they need to mirror in Europe as their institutional investors would rather invest in an EU-based vehicle. The Notified PIF is a quick and easy solution to this as it is straightforward to set up.”

Managers considering setting up their fund as a Notified PIF must be aware that this fund does not have access to the marketing passport under the AIFMD but can be sold under the national private placement rules of the target countries. These differ considerably as some countries require a simple registration while others might offer a blanket exemption.

“If you are looking to sell your fund to investors you already have a relationship with, then the fund passport does not offer much additional value. Having a fund with the ability to be passported is more beneficial to managers aiming to solicit new investors from new locations,” Farrugia says.

The Notified PIF structure is expected to be launched during the third quarter of this year.


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