Island of funds
23 Jan 2019
Rebecca Xuereb of BOV Fund Services explains why Malta should be considered as the EU alternative fund domicile of choice
Image: Shutterstock
With uncertainties still surrounding the major political disruptor that is Brexit, it is no surprise that many financial industry players have started taking action toward creating a secure presence within the rest of the EU, while settlement over final negotiations is still awaited.
Choosing an alternative fund or fund-management domicile is no easy task and can, in fact, be considered as one of the biggest challenges facing industry players today.
There are a number of fundamental considerations involved in such decisions and Malta has positioned itself as an ideal contender on many fronts in this regard, offering a number of opportunities and advantages.
The key considerations listed below are in fact also the factors which have contributed to the growth in Malta’s fund industry over the past decades, thereby making it a jurisdiction surely to be considered.
Location
The geographic location of a domicile has multiple ramifications on various other business aspects and operational considerations including the location of the end investors and ease of access to the jurisdiction in terms of flight connections and time-zone.
Located in the centre of the Mediterranean, Malta has historically always been an extremely coveted island. With both English and Maltese recognised as official languages, and multiple daily flight connections to the largest European financial centres including Switzerland, London and Germany, the island is well-positioned as an ideal gateway to Europe while leaving an open door to the financial services businesses of the Arab world.
Economic stability
The economic stability of a jurisdiction is important both in terms of the development of the fund industry itself, as well as for the reassurance of the end investors according to their risk appetites. Over the past few years, Malta has seen strong growth in its economy, with a large current account surplus which may be attributed to the country’s internationally-oriented services sector. The growth in the country’s GDP is forecast by the European Commission to be among the highest in the EU, at around double the European average. In fact, the country was ranked first in economic stability 2017/2018 by the World Economic Forum.
The strong economic expansion, increased employment, and favourable macroeconomic performance set to continue have also led to Malta receiving a first time, unsolicited A+ credit rating from a number of agencies including Scope Ratings and German Creditreform Rating.
Legal and regulatory framework innovation
Again, these considerations are important both from an operational perspective in terms of how the fund or fund management company can operate, as well as from the end-investors’ perspective in assessing the security of their chosen investment vehicle. In this regard, it must be remembered that Malta has been a member of the EU since 2004 and is therefore fully compliant with all the relevant regulations, often being among the first EU jurisdictions to successfully adopt new EU directives. That being said, however, there is still room for variety and innovation across jurisdictions; an area in which Malta certainly does not lag behind.
With the introduction and implementation of the Alternative Investment Fund Managers’ Directive (AIFMD), the Malta Financial Services Authority (MFSA) announced that although it implemented all European Securities and Markets Authority’s (ESMA) guidelines on remuneration policy, it decided not to transpose ESMA’s controversial guideline that AIFMs should be required to impose equivalent remuneration policies and restrictions on its sub-manager and other delegates. This renders Malta the only member state that enables outsourcing of day-to-day investment management without the risk of claw-backs of management fees paid to the delegate.
In recent years, Malta’s fund industry has seen most of its growth occurring in the alternative space, through the professional investor fund (PIF) regime. This regime has easily become Malta’s strongest selling point and the most popular fund structure for de-minimis managers who fall out-of-scope of the full onerous AIFMD requirements, thereby benefitting from more flexibility and a lighter regime. PIFs target ‘qualifying investors’ with a minimum investment of €100,000 per investor and are attractive in that they can be self-managed by a fund-appointed investment committee. There are also no leverage or investment restrictions, no custody requirements beyond adequate safekeeping arrangements and PIFs can host all alternative strategies—for example, hedge funds, private equity, real estate, distressed debt.
Notified alternative investment funds (NAIFs) are another innovative fund type, this time benefitting from the AIFMD passport, unlike PIFs. NAIFs may be seen as a fast-track solution for alternative investment fund managers (AIFMs under AIFMD), based in any EU country, to set up and launch AIFs in Malta. Here, the MFSA provides templates for the application documentation. Once such an application is submitted by the AIFM, the AIF will be included in the list of notified AIFs in good standing within ten days, subject to satisfactory vetting by the MFSA.
NAIFs are essentially unlicensed and not subject to ongoing supervision by the regulator, rather the due diligence and ongoing monitoring responsibilities are vested within the AIFM filing the notification.
Malta is also widely embracing the digital advancements within the financial services sector. The MFSA has issued a supplementary PIF Rule Book for Virtual Currency Funds, while the local government is committed to supporting Malta’s positioning as a global leader in the blockchain sector with the approval of relevant legislation by the Maltese Parliament, namely: Virtual Financial Assets Act, Innovative Technological Arrangement and Services Act and Malta Digital Innovation Authority Act.
One of the most valued benefits of the regulator in Malta is the visible pro-business approach the MFSA has adopted.
The MFSA continues to be an accessible regulator and maintain a degree of flexibility in suiting the funds’ needs when these fall within the relevant regulation and are still fully compliant with EU rules.
Operational and service framework
Aside from the regulatory framework, funds also necessitate a jurisdiction with a highly developed operational and service infrastructure. The quality of service providers present is important to investors and managers alike as is the availability of experienced and competent support services such as legal and accounting firms.
In Malta, this framework continues to grow with the presence of no less than 26 fund administrators, 188 company services providers and 11 depositaries/custodians. Notable is also the strong presence of all the ‘Big Four’ accounting firms, as well as a large number of highly specialised law firms.
Workforce
A highly skilled and competent workforce is therefore also important to maintain the good quality and reputation of the service providers present. Malta is certainly not lacking in this regard. With the presence of an excellent education system and a growing number of students continuing on to pursue tertiary education and beyond, Malta boasts a highly-skilled, hardworking and multilingual workforce.
Time-to-market and set-up and ongoing costs
The speed of set-up from fund conception to launch is another significant consideration. Moreover, the set-up and particularly the ongoing fees charged to funds are of utmost importance, especially when it comes to smaller, de-minimis structures.
Malta is an ideal domicile for such smaller funds and managers, offering less onerous and more efficient solutions both from a timeliness perspective, as well as in terms of costs.
With reference to the above key considerations, Malta clearly ticks all the boxes as an alternative European fund domicile of choice.
With no less than 600 investment funds currently based on the island, Malta has firmly established itself as the EU alternative fund domicile of choice. It is very attractive to the de-minimis fund managers who often find setting up in the more traditionally established jurisdictions such as Luxembourg and Ireland, somewhat more challenging. It is, therefore, no wonder that the island is becoming an increasingly popular choice among fund promoters and managers from all over Europe, and some other parts of the world too, with redomiciliations of offshore funds to Malta also generating increased interest over the years.
Within this context, BOV Fund Services, Malta’s leading fund administrator, and a fully-owned subsidiary of the country’s largest banking group, Bank of Valletta, is well-positioned to provide its suite of services to fund managers seeking to set up and/or redomicile their funds or fund management companies in/to Malta.
BOV Fund Services currently services €3.8 billion in assets under administration, representing over 30 percent of the local market.
Being local pioneers in fund administration, BOV Fund Services has the necessary skills and experience to be able to provide funds with myriad specialised services, allowing fund managers to focus on their core business.
Choosing an alternative fund or fund-management domicile is no easy task and can, in fact, be considered as one of the biggest challenges facing industry players today.
There are a number of fundamental considerations involved in such decisions and Malta has positioned itself as an ideal contender on many fronts in this regard, offering a number of opportunities and advantages.
The key considerations listed below are in fact also the factors which have contributed to the growth in Malta’s fund industry over the past decades, thereby making it a jurisdiction surely to be considered.
Location
The geographic location of a domicile has multiple ramifications on various other business aspects and operational considerations including the location of the end investors and ease of access to the jurisdiction in terms of flight connections and time-zone.
Located in the centre of the Mediterranean, Malta has historically always been an extremely coveted island. With both English and Maltese recognised as official languages, and multiple daily flight connections to the largest European financial centres including Switzerland, London and Germany, the island is well-positioned as an ideal gateway to Europe while leaving an open door to the financial services businesses of the Arab world.
Economic stability
The economic stability of a jurisdiction is important both in terms of the development of the fund industry itself, as well as for the reassurance of the end investors according to their risk appetites. Over the past few years, Malta has seen strong growth in its economy, with a large current account surplus which may be attributed to the country’s internationally-oriented services sector. The growth in the country’s GDP is forecast by the European Commission to be among the highest in the EU, at around double the European average. In fact, the country was ranked first in economic stability 2017/2018 by the World Economic Forum.
The strong economic expansion, increased employment, and favourable macroeconomic performance set to continue have also led to Malta receiving a first time, unsolicited A+ credit rating from a number of agencies including Scope Ratings and German Creditreform Rating.
Legal and regulatory framework innovation
Again, these considerations are important both from an operational perspective in terms of how the fund or fund management company can operate, as well as from the end-investors’ perspective in assessing the security of their chosen investment vehicle. In this regard, it must be remembered that Malta has been a member of the EU since 2004 and is therefore fully compliant with all the relevant regulations, often being among the first EU jurisdictions to successfully adopt new EU directives. That being said, however, there is still room for variety and innovation across jurisdictions; an area in which Malta certainly does not lag behind.
With the introduction and implementation of the Alternative Investment Fund Managers’ Directive (AIFMD), the Malta Financial Services Authority (MFSA) announced that although it implemented all European Securities and Markets Authority’s (ESMA) guidelines on remuneration policy, it decided not to transpose ESMA’s controversial guideline that AIFMs should be required to impose equivalent remuneration policies and restrictions on its sub-manager and other delegates. This renders Malta the only member state that enables outsourcing of day-to-day investment management without the risk of claw-backs of management fees paid to the delegate.
In recent years, Malta’s fund industry has seen most of its growth occurring in the alternative space, through the professional investor fund (PIF) regime. This regime has easily become Malta’s strongest selling point and the most popular fund structure for de-minimis managers who fall out-of-scope of the full onerous AIFMD requirements, thereby benefitting from more flexibility and a lighter regime. PIFs target ‘qualifying investors’ with a minimum investment of €100,000 per investor and are attractive in that they can be self-managed by a fund-appointed investment committee. There are also no leverage or investment restrictions, no custody requirements beyond adequate safekeeping arrangements and PIFs can host all alternative strategies—for example, hedge funds, private equity, real estate, distressed debt.
Notified alternative investment funds (NAIFs) are another innovative fund type, this time benefitting from the AIFMD passport, unlike PIFs. NAIFs may be seen as a fast-track solution for alternative investment fund managers (AIFMs under AIFMD), based in any EU country, to set up and launch AIFs in Malta. Here, the MFSA provides templates for the application documentation. Once such an application is submitted by the AIFM, the AIF will be included in the list of notified AIFs in good standing within ten days, subject to satisfactory vetting by the MFSA.
NAIFs are essentially unlicensed and not subject to ongoing supervision by the regulator, rather the due diligence and ongoing monitoring responsibilities are vested within the AIFM filing the notification.
Malta is also widely embracing the digital advancements within the financial services sector. The MFSA has issued a supplementary PIF Rule Book for Virtual Currency Funds, while the local government is committed to supporting Malta’s positioning as a global leader in the blockchain sector with the approval of relevant legislation by the Maltese Parliament, namely: Virtual Financial Assets Act, Innovative Technological Arrangement and Services Act and Malta Digital Innovation Authority Act.
One of the most valued benefits of the regulator in Malta is the visible pro-business approach the MFSA has adopted.
The MFSA continues to be an accessible regulator and maintain a degree of flexibility in suiting the funds’ needs when these fall within the relevant regulation and are still fully compliant with EU rules.
Operational and service framework
Aside from the regulatory framework, funds also necessitate a jurisdiction with a highly developed operational and service infrastructure. The quality of service providers present is important to investors and managers alike as is the availability of experienced and competent support services such as legal and accounting firms.
In Malta, this framework continues to grow with the presence of no less than 26 fund administrators, 188 company services providers and 11 depositaries/custodians. Notable is also the strong presence of all the ‘Big Four’ accounting firms, as well as a large number of highly specialised law firms.
Workforce
A highly skilled and competent workforce is therefore also important to maintain the good quality and reputation of the service providers present. Malta is certainly not lacking in this regard. With the presence of an excellent education system and a growing number of students continuing on to pursue tertiary education and beyond, Malta boasts a highly-skilled, hardworking and multilingual workforce.
Time-to-market and set-up and ongoing costs
The speed of set-up from fund conception to launch is another significant consideration. Moreover, the set-up and particularly the ongoing fees charged to funds are of utmost importance, especially when it comes to smaller, de-minimis structures.
Malta is an ideal domicile for such smaller funds and managers, offering less onerous and more efficient solutions both from a timeliness perspective, as well as in terms of costs.
With reference to the above key considerations, Malta clearly ticks all the boxes as an alternative European fund domicile of choice.
With no less than 600 investment funds currently based on the island, Malta has firmly established itself as the EU alternative fund domicile of choice. It is very attractive to the de-minimis fund managers who often find setting up in the more traditionally established jurisdictions such as Luxembourg and Ireland, somewhat more challenging. It is, therefore, no wonder that the island is becoming an increasingly popular choice among fund promoters and managers from all over Europe, and some other parts of the world too, with redomiciliations of offshore funds to Malta also generating increased interest over the years.
Within this context, BOV Fund Services, Malta’s leading fund administrator, and a fully-owned subsidiary of the country’s largest banking group, Bank of Valletta, is well-positioned to provide its suite of services to fund managers seeking to set up and/or redomicile their funds or fund management companies in/to Malta.
BOV Fund Services currently services €3.8 billion in assets under administration, representing over 30 percent of the local market.
Being local pioneers in fund administration, BOV Fund Services has the necessary skills and experience to be able to provide funds with myriad specialised services, allowing fund managers to focus on their core business.
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