Malta: Hot? Yes, but I’m not talking about the weather
25 Oct 2018
With Brexit fast approaching and regulation at the door, Mathieu Ganado of BOV Fund Services discusses how opportunities in Malta are presenting themselves
Image: Shutterstock
Choosing Malta as your fund domicile goes beyond assessing the island for its year-round sunshine and beautiful beaches. No bigger than 30 kilometres in length, size has not stopped Malta expanding itself into an established fund domicile in the Eurozone.
Economically speaking, Malta has boomed in the past decade and continues to do so, supported by high gross domestic product (GDP) growth, minimal to no unemployment, a booming tourism industry, extensive investment in infrastructure, a growing high value-added manufacturing and service industry, and blossoming new economic sectors such as iGaming and distributed ledger technologies (DLT)/blockchain industry.
The Malta Financial Services Authority (MFSA), the island’s sole regulators, operate in line and around European regulatory requirements so as to attract (amongst other financial services related activities), funds and fund managers to Malta in order to stand out as a cost competitive and innovative jurisdiction.
Let’s dive deeper into what the MFSA has to offer. First off, a fund in Malta can be set-up in a number of ways.
Funds can be set up as société d’investissement à capital variable (SICAV), contractual funds, investment companies, limited partnerships and unit trust funds. Taking the most popular, SICAVs are open-ended investment companies having a variable share capital.
Once a legal form has been chosen from the aforementioned options then different fund typologies are available to fund promoters, some in line with competing for EU jurisdictions and Euro-wide requirements and some unique to the Maltese regulatory system.
The Professional Investor Fund regime is Malta’s biggest selling point and the most popular fund type set-up for de-minimis fund managers looking to set-up alternative investment funds that do not necessarily have to abide by the complex, costly and thorough Alternative Investment Fund Managers Directive (AIFMD) requirements.
This regime targets ‘qualifying’ investors, as defined by the MFSA, where the minimum threshold per investor stands at €100,000. No leverage or investment restrictions apply and no custody requirements are needed other than safekeeping arrangements by a licensed entity.
Furthermore, fund managers do not have any portfolio diversification requirements and are allowed to invest in all alternative investment strategies.
This fund type, however, is restricted to distribution via private placement and does not benefit from the passporting rights the AIFMD provides.
Notified Alternative Investment Funds (NAIF) are another fund type somewhat unique to Malta, which can be seen as a fast track solution of getting an Alternative Investment Fund set-up and launched.
The process for setting up and launching is pretty straightforward. Notification documentation, templates of which are provided by the MFSA, are filed with the local regulators following the collation of due diligence responsibilities by the applying alternative investment fund manager (AIFM). These are then vetted by the MFSA and a fund is good to go with its launch in a maximum of 10 days after notification subject to being managed by a full scope AIFM in the EU.
Notified alternative investment funds (NAIFs) benefit from the AIFMD passport granted to the AIFM and are typically able to invest in most investment strategies including private equity and real estate.
Having said that, NAIFs are not licensed or supervised by the local regulators since these essentially are manager products, or more precisely investment products of fund managers that are heavily regulated themselves, and thus vested with the responsibility of ensuring adherence to all of the provisions of the directive by its own product.
Other fund types are available to Malta such as the well-known UCITS and AIFs (for example, alternative funds that are captured by the full provisions of the AIFMD) down to the less common loan funds and recognised incorporated cell companies. The latter two structures allow for, respectively, the setting up of funds that engage in the provision of credit to small- and medium-sized enterprises or acquisition of loan portfolios, and serve (in the latter case) as fund hosting platforms for third parties interested in setting up segregated incorporated cells within an existing structure on a rent-a-cell basis.
When structuring a fund, there is no one way to go about it. Whilst appointing an external manager is often the chosen option, for operational and cost-effective purposes, self-management is also a popular choice, especially among de-minimis fund managers. Regulated entities within the EU or European Economic Area licensed to provide investment management services to collective investment schemes typically opt for setting up third-party managed funds whereby the Malta-based funds appoint the same promoter entity as the external manager of the funds.
How to go about it
Self-managed funds are possible across the entire fund typology spectrum. It then comes down to a trade-off between cost and available resources to self-manage.
Self-management is the less costly option, but benefits funds of smaller net asset values, with less regulatory requirements to larger funds.
To self-manage a fund, taking the professional investor fund as an example, the newly set-up SICAVwould be required to set-up a board of directors, consisting of three independent members, who in turn appoint an investment committee, also consisting of three individuals with relevant experience in the investment management field.
Money laundering reporting officer and compliance duties are generally carried out by a member of the board of directors, provided they are residing in the Maltese Islands and possess the adequate knowledge of Maltese regulatory framework and have the necessary training to assume onto themselves the responsibilities that go with the roles. The investment and risk management functions are in turn carried out by the investment committee.
Delegation to third parties for certain appointments and functions are possible subject to conditions on a case by case basis.
A good portion of professional investor funds based in Malta, in fact, are self-managed with the number expected to increase further if the healthy business pipeline currently being experienced is anything to go by.
Malta has come a long way over the past decade, with no less than 600 investment funds currently based on the island. The number has gradually increased over two decades, firmly establishing Malta as a strong presence amongst the bigger fish on an EU wide basis.
Although Luxembourg and Ireland seem to be the domiciles of choice for UCITS funds and most AIF funds, Malta has and is ever continuing to attract de-minimis fund managers to set-up locally. The most recent regulatory development in Malta, which got fund promoters and locally based fund services providers mutually excited (not an exaggeration I dare add), was an amendment to the Professional Investor Fund regime to cater for virtual currency strategies. Since the regulation was announced, numerous crypto-fund managers have been enquiring to set-up on the island.
Malta’s position as a crypto-currency fund domicile is further supported by the local government’s agenda to position Malta as a global leader in the blockchain sector.
Numerous bills have been passed in recent months in parliament to cater for fintech and blockchain companies and start-ups to re-domicile or set-up respectively. The most well-known name to have so far set base in Malta is Binance, one of the world’s leading cryptocurrency exchanges.
Opportunities for Malta don’t only present themselves through direct regulatory competition. The Brexit scenario, which many anticipate will impact UK-based firms and asset managers, could lead to an influx of business to the Maltese islands, as well as to other European jurisdictions, as a result of the need for EU based funds to source a European AIFM for example, given their UK asset management firms would no longer be eligible to be appointed as managers under the AIFMD and benefit from the EU passporting rights.
All in all, Malta has a good case to establish itself as a permanent fund domicile. Credit rating agencies such as Fitch and DBRS have in fact confirmed the island’s credit rating at A+ and A respectively, as a result of a sound banking sector and improving bank assets.
No wonder Malta is increasingly the domicile of choice for several fund promoters from all across Europe.
Economically speaking, Malta has boomed in the past decade and continues to do so, supported by high gross domestic product (GDP) growth, minimal to no unemployment, a booming tourism industry, extensive investment in infrastructure, a growing high value-added manufacturing and service industry, and blossoming new economic sectors such as iGaming and distributed ledger technologies (DLT)/blockchain industry.
The Malta Financial Services Authority (MFSA), the island’s sole regulators, operate in line and around European regulatory requirements so as to attract (amongst other financial services related activities), funds and fund managers to Malta in order to stand out as a cost competitive and innovative jurisdiction.
Let’s dive deeper into what the MFSA has to offer. First off, a fund in Malta can be set-up in a number of ways.
Funds can be set up as société d’investissement à capital variable (SICAV), contractual funds, investment companies, limited partnerships and unit trust funds. Taking the most popular, SICAVs are open-ended investment companies having a variable share capital.
Once a legal form has been chosen from the aforementioned options then different fund typologies are available to fund promoters, some in line with competing for EU jurisdictions and Euro-wide requirements and some unique to the Maltese regulatory system.
The Professional Investor Fund regime is Malta’s biggest selling point and the most popular fund type set-up for de-minimis fund managers looking to set-up alternative investment funds that do not necessarily have to abide by the complex, costly and thorough Alternative Investment Fund Managers Directive (AIFMD) requirements.
This regime targets ‘qualifying’ investors, as defined by the MFSA, where the minimum threshold per investor stands at €100,000. No leverage or investment restrictions apply and no custody requirements are needed other than safekeeping arrangements by a licensed entity.
Furthermore, fund managers do not have any portfolio diversification requirements and are allowed to invest in all alternative investment strategies.
This fund type, however, is restricted to distribution via private placement and does not benefit from the passporting rights the AIFMD provides.
Notified Alternative Investment Funds (NAIF) are another fund type somewhat unique to Malta, which can be seen as a fast track solution of getting an Alternative Investment Fund set-up and launched.
The process for setting up and launching is pretty straightforward. Notification documentation, templates of which are provided by the MFSA, are filed with the local regulators following the collation of due diligence responsibilities by the applying alternative investment fund manager (AIFM). These are then vetted by the MFSA and a fund is good to go with its launch in a maximum of 10 days after notification subject to being managed by a full scope AIFM in the EU.
Notified alternative investment funds (NAIFs) benefit from the AIFMD passport granted to the AIFM and are typically able to invest in most investment strategies including private equity and real estate.
Having said that, NAIFs are not licensed or supervised by the local regulators since these essentially are manager products, or more precisely investment products of fund managers that are heavily regulated themselves, and thus vested with the responsibility of ensuring adherence to all of the provisions of the directive by its own product.
Other fund types are available to Malta such as the well-known UCITS and AIFs (for example, alternative funds that are captured by the full provisions of the AIFMD) down to the less common loan funds and recognised incorporated cell companies. The latter two structures allow for, respectively, the setting up of funds that engage in the provision of credit to small- and medium-sized enterprises or acquisition of loan portfolios, and serve (in the latter case) as fund hosting platforms for third parties interested in setting up segregated incorporated cells within an existing structure on a rent-a-cell basis.
When structuring a fund, there is no one way to go about it. Whilst appointing an external manager is often the chosen option, for operational and cost-effective purposes, self-management is also a popular choice, especially among de-minimis fund managers. Regulated entities within the EU or European Economic Area licensed to provide investment management services to collective investment schemes typically opt for setting up third-party managed funds whereby the Malta-based funds appoint the same promoter entity as the external manager of the funds.
How to go about it
Self-managed funds are possible across the entire fund typology spectrum. It then comes down to a trade-off between cost and available resources to self-manage.
Self-management is the less costly option, but benefits funds of smaller net asset values, with less regulatory requirements to larger funds.
To self-manage a fund, taking the professional investor fund as an example, the newly set-up SICAVwould be required to set-up a board of directors, consisting of three independent members, who in turn appoint an investment committee, also consisting of three individuals with relevant experience in the investment management field.
Money laundering reporting officer and compliance duties are generally carried out by a member of the board of directors, provided they are residing in the Maltese Islands and possess the adequate knowledge of Maltese regulatory framework and have the necessary training to assume onto themselves the responsibilities that go with the roles. The investment and risk management functions are in turn carried out by the investment committee.
Delegation to third parties for certain appointments and functions are possible subject to conditions on a case by case basis.
A good portion of professional investor funds based in Malta, in fact, are self-managed with the number expected to increase further if the healthy business pipeline currently being experienced is anything to go by.
Malta has come a long way over the past decade, with no less than 600 investment funds currently based on the island. The number has gradually increased over two decades, firmly establishing Malta as a strong presence amongst the bigger fish on an EU wide basis.
Although Luxembourg and Ireland seem to be the domiciles of choice for UCITS funds and most AIF funds, Malta has and is ever continuing to attract de-minimis fund managers to set-up locally. The most recent regulatory development in Malta, which got fund promoters and locally based fund services providers mutually excited (not an exaggeration I dare add), was an amendment to the Professional Investor Fund regime to cater for virtual currency strategies. Since the regulation was announced, numerous crypto-fund managers have been enquiring to set-up on the island.
Malta’s position as a crypto-currency fund domicile is further supported by the local government’s agenda to position Malta as a global leader in the blockchain sector.
Numerous bills have been passed in recent months in parliament to cater for fintech and blockchain companies and start-ups to re-domicile or set-up respectively. The most well-known name to have so far set base in Malta is Binance, one of the world’s leading cryptocurrency exchanges.
Opportunities for Malta don’t only present themselves through direct regulatory competition. The Brexit scenario, which many anticipate will impact UK-based firms and asset managers, could lead to an influx of business to the Maltese islands, as well as to other European jurisdictions, as a result of the need for EU based funds to source a European AIFM for example, given their UK asset management firms would no longer be eligible to be appointed as managers under the AIFMD and benefit from the EU passporting rights.
All in all, Malta has a good case to establish itself as a permanent fund domicile. Credit rating agencies such as Fitch and DBRS have in fact confirmed the island’s credit rating at A+ and A respectively, as a result of a sound banking sector and improving bank assets.
No wonder Malta is increasingly the domicile of choice for several fund promoters from all across Europe.
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