Managing family wealth or venture capital in a structured manner has become more popular in recent years.
The best structures to use depend on asset protection mechanisms, tax and succession planning, jurisdiction, and so on. Family offices have historically used trust or foundation structures, maybe combined with special purpose vehicles, to hold and manage wealth. Such special purpose vehicles will, in turn, own assets like land/real-estate, trading companies and private businesses, securities and even super yachts, aircrafts, fine art and so on – thus could require very bespoke asset management services.
Investment funds are a more viable alternative that offer more transparency and a robust and clear regulatory environment whilst still achieving the same benefits. Even where the investors are related, the legal framework of a fund structure provides clarity on the rights and obligations of the investors and the manager.
Instead of managing multiple, unrelated, special purpose vehicles or accounts, it is more efficient to pool the assets into an investment fund. This will require the structure to have some regulation. Such a layer of regulation and the involvement of licensed gatekeepers also provide reassurance and facilitate banking arrangements which have otherwise become very challenging for less transparent and complex structures. Malta offers an array of structures that are suitable for this purpose such as the Professional Investment Fund (PIF), the Notified AIF and more recently the Notified PIF. Notified PIFs, in particular, will only be subject to a notification process with the regulator making them very efficient in terms of time and costs, whilst achieving the same benefits of a fully licensed structure.
Whilst offshore structures have been typically very popular, the wrong choice of jurisdiction today can create a level of averseness and difficulties in day-to-day transaction processing with banks and financial institutions.
Two further key elements which might make even a single-family office wish to adopt a fund type structure for the assets it manages are, control and incentivisation. A fund structure can provide an element of control to the family office in the same way a fund manager controls a private equity fund – the family office can either own all voting shares in the investment fund or set up a separate investment management vehicle, issue all voting shares to that investment management vehicle and own all shares of that vehicle. The family office or the manager will be bound by a clearly drafted investment management mandate, setting out investment objectives and strategies of the investment fund. By extension, a fund structure also permits the family office or manager to be remunerated using annual management fees, performance fees or even a fixed fee. Regular net asset calculations would be provided by third party fund administrators providing a further layer of transparency and assets could be kept in custody by reputable custodian banks or prime brokers – ensuring proper safekeeping and recourse on regulated entities with proper substance.
One of the first steps for setting up an investment fund as a family office vehicle will be to choose a suitable fund domicile. For obvious reasons, there will be a preference for a jurisdiction that does not tax the investment fund itself, i.e. which allows the investment fund to be operated as a tax neutral platform. Malta is one of the most popular and well-established jurisdictions for the formation and operation of investment funds. Investment fund structures in Malta allow also for a lot of flexibility on the investment policies/strategy and diversification requirements.
Costs are another element to consider. Malta does this very competitively both on setup and ongoing costs, whilst providing the same benefits of other more expensive jurisdictions particularly for new and smaller fund set-ups. More importantly, service providers in Malta offer a more boutique level of service to investment funds as they are typically not dealing with the larger multi-national operators and thus every client gets the right level of attention and due care. This is particularly important when high-net worth investors (which are the key factor for any family office or investment manager) are exposed and interacting with such service providers in the operation of the fund.
Key elements of Malta as a domicile for investment funds include the following:
- Tax neutrality for the fund and an extensive double tax treaty network with both EU and non-EU countries;
- A modern, recognised and robust legal and regulatory system;
- Full member of the European Union (onshore);
- A wide pool of experienced investment fund professionals and service providers;
- English speaking;
- Boutique service approach to clients and their investors;
- One of the most cost-effective (value for money) jurisdictions;
- Fast turn-around times;
- Flexibility on investment policies and diversification requirements;
- Stable political and economical environment.
The use of a fund structure provides a recognised and well-established legal framework, which allows the family office and investment managers themselves to operate in a more coordinated, professional, supported, and scalable manner.