Malta
18 Sep 2019
The PIF rulebook is a product of Malta’s homegrown regulation and an ideal solution for alternative fund managers falling out of the scope of AIFMD. Ivan Grech of FinanceMalta explains more
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Not only is Malta bursting with rich history and culture, but the economy has also been and continues to grow rapidly. In fact, the country recently welcomed Fitch’s outlook upgrade from stable to positive and its reaffirmation of the sovereign credit rating at A+.
The upgrade was attributed to the strong growth of the island’s economy which has been steadily increasing at the highest rate among other countries in the EuroZone, and which growth is projected to be sustained.
The Maltese economy is built on a vast variety of sectors: from tourism to education, transportation and logistics to financial services, advanced manufacturing and more. The financial services sector is the fastest-growing of the local economy, registering a 9.5 percent growth over the last year, and accounts for 12 percent of Malta’s GDP. Through time, Malta has gained international recognition as a world-class centre, attracting a number of industry players to set up operations. The funds industry, in particular, has grown considerably over the years.
While the size of the funds industry may look like a mere drop in the ocean when compared to the likes of larger and perhaps more established jurisdictions, it is notable that the net asset value (NAV) of Malta-domiciled funds has continued to grow steadily at comparably higher rates in comparison with some other EU domiciles, even when some of such domiciles were experiencing declines in the total NAV of their investment funds. Looking at figure one, the most common investment fund type to be registered in Malta is the professional investor fund (PIF), representing just over 60 percent of local investment funds in terms of the number of funds, yet a lesser 36 percent in terms of total NAV.
The private investment funds (PIFs) rulebook is a product of Malta’s homegrown regulation and an ideal solution for alternative fund managers falling out of the scope of the Alternative Investments Fund Managers Directive (AIFMD). When the AIFMD was implemented, Malta did not simply replace the old with the new, but rather, while being among the first jurisdictions to implement the directive, retained an attractive space for de minimis alternative fund managers with much less onerous requirements than stipulated within the European directive.
This rulebook coupled with a variety of other desirable other factors has established Malta as an ideal niche alternative fund domicile of choice, particularly attractive to the small-to-medium-sized fund managers. Apart from the flexible and less restrictive PIF rulebook, the island boasts a number of other advantages that make it the destination of choice for a large number of fund managers. Be it the time-to-market considerations, the cost-effectiveness in terms of both setup and operational running costs, the can-do mindset of the industry, the approachability and pro-business approach of the single regulator: the Malta Financial Services Authority (MFSA), and the presence of a large number of high-quality service providers.
So, what exactly are PIFs and what makes them so attractive?
PIFs are a type of alternative investment fund (AIF) of which managers fall out of the scope of the AIFMD, and such funds are thus less than €100 million in size—or €500 million if unleveraged, and with a minimum lock-in period of five years. PIFs may be promoted to “qualifying investors”, as defined in the PIF rulebook and have a minimum entry threshold per investor of €100,000, or the fund’s currency equivalent.
In terms of regulation, PIFs are subject to a lighter and more flexible regime than full-scope AIFs, in that there are no leverage restrictions, no investment restrictions and no portfolio diversification requirements. In terms of the depositary, the appointment of such an entity is not a requirement for PIFs, but rather adequate safekeeping arrangements suffice. The type of adequate safekeeping arrangements will be determined by the type of assets held by the fund. For instance, while cash is a bankable and not a custody asset, other financial assets such as bonds or equities would require the appointment of a suitable entity (not necessarily based in Malta) such as a bank or a prime broker for the safekeeping of said assets and the execution of trades. If on the other hand, the fund invests in non-financial assets such as real estate for instance, then here the contracts would be held for safekeeping either at a notary’s office, or a lawyer’s office, or the SICAV’s office or even the manager’s office.
In terms of the management of PIFs, such funds can host all alternative strategies, from hedge funds to private equity, to real estate, high-frequency trading strategies, and distressed debt, among others. Furthermore, PIFs can either be set up as a third-party managed fund, with the appointment of an external fund manager, or as a self-managed fund with or without delegation.
How does it work?
Funds in Malta, including PIFs, can be set up under various legal forms, the most common of which being the SICAV—an investment company with variable share capital. Both third-party managed and self-managed funds must have at least two founder shareholders who must be physical or corporate persons and will collectively hold, although not necessarily in equal portions, 100 percent of the voting rights of the SICAV.
The board of directors must be composed of at least three members, one of whom is to be based locally. Generally, the locally-based director would also cover the roles of money laundering reporting officer (MLRO) and compliance officer. One of the directors must also be independent and non-executive which means that such member may not be involved in the investment management or any other role on the scheme, including MLRO or compliance officer. In the third-party managed structure, the fund manager must, of course, be a de minimis manager, thus falling out of the scope of the AIFMD, and will assume the role of investment manager carrying out the day-to-day investment management activities with respect to the funds. Should the manager wish, an investment advisor may be appointed to advise with respect to investment, divestment and reinvestment?
Within the self-managed structure, on the other hand, the fund itself would act as its own manager by way of an investment committee appointed by the board of directors. Such investment committee would need to be composed of at least three members, one or more of which could be in common with the members of the board of directors, so long as the functions are non-conflicting.
Within the investment committee, two members must be appointed as portfolio managers: the main portfolio manager and a back-up. The role of the portfolio manager is to handle the day-to-day investment management decisions, although such function may be delegated to a third-party manager.
As for the fund administrator of both the structures mentioned above, as well as all other fund typologies and forms which may be set up in Malta, BOV Fund Services, Malta’s leading fund administrator and a fully-owned subsidiary of the Bank of Valletta, Malta’s largest banking group, is well-positioned to provide its suite of services in terms of both fund and fund management formation solutions on a turnkey basis as well as the ongoing administration covering core fund administration and ancillary services. Being local pioneers in fund administration, BOV Fund Services has the necessary skills and experience to be able to provide funds within a myriad of specialised services, allowing fund managers to focus on their core business.
The upgrade was attributed to the strong growth of the island’s economy which has been steadily increasing at the highest rate among other countries in the EuroZone, and which growth is projected to be sustained.
The Maltese economy is built on a vast variety of sectors: from tourism to education, transportation and logistics to financial services, advanced manufacturing and more. The financial services sector is the fastest-growing of the local economy, registering a 9.5 percent growth over the last year, and accounts for 12 percent of Malta’s GDP. Through time, Malta has gained international recognition as a world-class centre, attracting a number of industry players to set up operations. The funds industry, in particular, has grown considerably over the years.
While the size of the funds industry may look like a mere drop in the ocean when compared to the likes of larger and perhaps more established jurisdictions, it is notable that the net asset value (NAV) of Malta-domiciled funds has continued to grow steadily at comparably higher rates in comparison with some other EU domiciles, even when some of such domiciles were experiencing declines in the total NAV of their investment funds. Looking at figure one, the most common investment fund type to be registered in Malta is the professional investor fund (PIF), representing just over 60 percent of local investment funds in terms of the number of funds, yet a lesser 36 percent in terms of total NAV.
The private investment funds (PIFs) rulebook is a product of Malta’s homegrown regulation and an ideal solution for alternative fund managers falling out of the scope of the Alternative Investments Fund Managers Directive (AIFMD). When the AIFMD was implemented, Malta did not simply replace the old with the new, but rather, while being among the first jurisdictions to implement the directive, retained an attractive space for de minimis alternative fund managers with much less onerous requirements than stipulated within the European directive.
This rulebook coupled with a variety of other desirable other factors has established Malta as an ideal niche alternative fund domicile of choice, particularly attractive to the small-to-medium-sized fund managers. Apart from the flexible and less restrictive PIF rulebook, the island boasts a number of other advantages that make it the destination of choice for a large number of fund managers. Be it the time-to-market considerations, the cost-effectiveness in terms of both setup and operational running costs, the can-do mindset of the industry, the approachability and pro-business approach of the single regulator: the Malta Financial Services Authority (MFSA), and the presence of a large number of high-quality service providers.
So, what exactly are PIFs and what makes them so attractive?
PIFs are a type of alternative investment fund (AIF) of which managers fall out of the scope of the AIFMD, and such funds are thus less than €100 million in size—or €500 million if unleveraged, and with a minimum lock-in period of five years. PIFs may be promoted to “qualifying investors”, as defined in the PIF rulebook and have a minimum entry threshold per investor of €100,000, or the fund’s currency equivalent.
In terms of regulation, PIFs are subject to a lighter and more flexible regime than full-scope AIFs, in that there are no leverage restrictions, no investment restrictions and no portfolio diversification requirements. In terms of the depositary, the appointment of such an entity is not a requirement for PIFs, but rather adequate safekeeping arrangements suffice. The type of adequate safekeeping arrangements will be determined by the type of assets held by the fund. For instance, while cash is a bankable and not a custody asset, other financial assets such as bonds or equities would require the appointment of a suitable entity (not necessarily based in Malta) such as a bank or a prime broker for the safekeeping of said assets and the execution of trades. If on the other hand, the fund invests in non-financial assets such as real estate for instance, then here the contracts would be held for safekeeping either at a notary’s office, or a lawyer’s office, or the SICAV’s office or even the manager’s office.
In terms of the management of PIFs, such funds can host all alternative strategies, from hedge funds to private equity, to real estate, high-frequency trading strategies, and distressed debt, among others. Furthermore, PIFs can either be set up as a third-party managed fund, with the appointment of an external fund manager, or as a self-managed fund with or without delegation.
How does it work?
Funds in Malta, including PIFs, can be set up under various legal forms, the most common of which being the SICAV—an investment company with variable share capital. Both third-party managed and self-managed funds must have at least two founder shareholders who must be physical or corporate persons and will collectively hold, although not necessarily in equal portions, 100 percent of the voting rights of the SICAV.
The board of directors must be composed of at least three members, one of whom is to be based locally. Generally, the locally-based director would also cover the roles of money laundering reporting officer (MLRO) and compliance officer. One of the directors must also be independent and non-executive which means that such member may not be involved in the investment management or any other role on the scheme, including MLRO or compliance officer. In the third-party managed structure, the fund manager must, of course, be a de minimis manager, thus falling out of the scope of the AIFMD, and will assume the role of investment manager carrying out the day-to-day investment management activities with respect to the funds. Should the manager wish, an investment advisor may be appointed to advise with respect to investment, divestment and reinvestment?
Within the self-managed structure, on the other hand, the fund itself would act as its own manager by way of an investment committee appointed by the board of directors. Such investment committee would need to be composed of at least three members, one or more of which could be in common with the members of the board of directors, so long as the functions are non-conflicting.
Within the investment committee, two members must be appointed as portfolio managers: the main portfolio manager and a back-up. The role of the portfolio manager is to handle the day-to-day investment management decisions, although such function may be delegated to a third-party manager.
As for the fund administrator of both the structures mentioned above, as well as all other fund typologies and forms which may be set up in Malta, BOV Fund Services, Malta’s leading fund administrator and a fully-owned subsidiary of the Bank of Valletta, Malta’s largest banking group, is well-positioned to provide its suite of services in terms of both fund and fund management formation solutions on a turnkey basis as well as the ongoing administration covering core fund administration and ancillary services. Being local pioneers in fund administration, BOV Fund Services has the necessary skills and experience to be able to provide funds within a myriad of specialised services, allowing fund managers to focus on their core business.
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