23 Dec 2010, Andre Zerafa, Ganado & Associates, Hedge Funds Review
Malta is emerging as one of the European domiciles of choice both for Ucits (Undertakings for Collective Investment in Transferable Securities)-type products as well as for alternative investment funds, known as professional investor funds (PIFs) with more complex investment strategies. Both PIFs and Ucits III funds need a collective investment scheme licence prior to launch.
As a European Union (EU) member state, Malta offers a Ucits regulatory framework based on the Ucits directive with the limitations and possibilities permitted under version III and shortly under Ucits IV.
Malta also offers a flexible comprehensive regulatory framework for PIFs based on sound regulatory principles and the acknowledgement by the Malta Financial Services Authority (MFSA) of the regulatory status of well regulated overseas service providers.
A PIF is not required to appoint a MFSA-regulated investment manager, administrator, custodian, prime broker or advisor. If these service providers are based and regulated in an MFSA recognised jurisdiction, it will respect the regulatory status of such service providers and not expect them to be authorised in Malta. PIFs are also required to appoint at least one independent director who does not need to be based in Malta.
The professional investor fund regime is based on the regulatory principles of: adequately regulated service providers that are held in good standing by their primary regulator, transparency and disclosure of relevant information to investors, fit and proper governing body (such as the board of directors) and controlling shareholders (where promoters retain most voting rights), sound corporate governancepractices by the governing body of the fund, and an open relationship with the regulator.
The PIF regime caters for three classes of funds targeting experienced investors, qualifying investors or extraordinary investors. PIFs targeting experienced investors are subject to a minimum investment amount of €10,000 and to certain investment, borrowing and leverage restrictions. This class of PIFs is also required to engage a custodian responsible for safekeeping and for monitoring compliance by the investment manager with the investment, borrowing and leverage limits set out in the MFSA rules applicable to the PIF and in the offering documentation.
PIFs targeting qualifying investors are subject to a minimum investment amount of €75,000 and €750,000 for extraordinary investors. Neither is subject to any investment, borrowing or leverage restrictions.
A PIF may be set up as standalone multi-class fund, as an umbrella fund with segregated sub-funds or as a master-feeder structure. PIFs may take the form of investment companies with variable share capital (Sicav), limited partnerships, unit trust, closed ended investment companies and foundations. Overseas based funds may also be continued in Malta as PIFs under re-domiciliation provisions.
With flexibility in the investment, borrowing and leverage limits, PIFs targeting qualifying and extraordinary investors may follow a multitude of investment strategies. PIFs have been set up as property, private equity and fund of funds as well as conventional hedge funds , life settlement funds, art funds and long only funds. The dealing frequency and liquidity arrangements within the PIF are also set by the promoters of the PIF. There are no specific MFSA requirements.
PIFs targeting qualifying or extraordinary investors may also be set up under a master feeder structure with a single offering document for both the feeder and the master fund. The master fund will be able to accept subscriptions from other feeder funds including Delaware or Cayman Islands registered feeders typically set up for US investors.
The master fund will be able to follow any investment strategy as set out in the offering documentation.
PIFs may be set up as closed ended or open ended property funds. The fund may seek commitments from investors and effect drawdowns to reflect the timing of any required cashflows. Promoters should familiarise themselves with the MFSA property funds policy to ensure that any limits set out therein fit within the proposed investment strategy of the property fund.
The MFSA would generally expect a property fund to engage independent valuers that are members of professional bodies to value the assets of the fund.
Property funds generally are not expected by the MFSA to appoint a custodian responsible for safekeeping because the fund’s assets would typically be interests in special purpose vehicles (SPVs) set by the fund for the purposes of acquiring the target property.
The MFSA would, however, expect the fund to keep all the relevant title documents in Malta at the registered office of the fund and to make those records available for inspection by the MFSA.
PIFs may be set up as hedge funds following conventional hedge fund strategies such as long/short equities, commodity trading advisers (CTA), distressed debt, special situations, relative value and strategies.
PIFs set up as hedge funds would generally engage prime brokers based in London or New York and independent administrators based and regulated in Malta or in a recognised jurisdiction.
The promoters of a PIF set up as a hedge fund would typically hold the voting, non-participating founder or management shares with investors subscribing to investor shares with limited or no voting rights but full participation rights to the performance of the fund.
Funds of funds
PIFs may also be set up as funds of funds. PIFs targeting experienced investors set up as funds of funds are generally expected to invest in at least five different hedge funds. There is no such requirement for PIFs targeting qualifying or extraordinary investors. The MFSA may exempt a fund of funds set up as PIFs targeting qualifying or extraordinary investors from the requirement to appoint a custodian to the extent that it is satisfied that there are adequate safekeeping arrangements.
Private equity funds
PIFs may be set up as private equity funds. As with property funds, the fund may seek commitments from investors and effect drawdowns on such commitments as necessary.
Where the private equity fund invests in unlisted securities, the MFSA would generally not expect the fund to appoint a custodian responsible for safekeeping. The MFSA would expect the fund to keep all the relevant title documents in Malta at the registered office of the fund and to make such records available for inspection by the MFSA.
PIFs are able to follow a multitude of investment strategies, may take various legal forms and enjoy extensive flexibility in the selection of the service providers. These features make this fund structure an attractive alternative for promoters wishing to set up or redomicile funds in the EU.