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Posts Tagged ‘Malta

How to set up an investment fund in EU

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Written by A.S.

March 8, 2015 at 1:13 am

Marketing restrictions for investment funds in EU and how to overcome those

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Investment ideas are rather scarce. Many small and medium size investors sit on lots of cash with little idea how to deploy it productively. It may be in bank deposits, in a number of banks so to benefit for deposit insurance scheme, if any of the bank go down. Bank deposits? Yes, earning nothing. Some of the cash is spilled occasionally, by investing in another vacation house (usually sold at the top of price range – usually a fact well known to the buyer, yet blissfully ignored).

New specialized funds with fresh investment strategies should be welcome in this environment, but needless to say that they are not. If someone has a strategy to offer to investors, he or she has to face a tough regulations. Even if you want to talk to the most advanced investors and asking for minimum investment starting at €125k.

In 2011 EU has issued Directive 2011/61/EU on Alternative Investment Fund Managers. The Directive, effectively, disallows marketing of any funds unless such fund has a fund management company licensed in EU. Funds with AUM under €100 million may opt out and be exempt of certain regulations as set out in the Directive. However, if it does so, such fund must be marketed under private placement rules which are left to national governments to be set.  Private placement rules in the biggest markets – France, Germany and UK — are prohibitively strict. In practice it means, if one registers a fund in Luxembourg or Malta, and chooses to opt out of the regulations set out in the Directive, such fund may be marketed under private placement rules in its country of registration. In other words, for a Luxembourg fund you invite potential investors, all of whom should be professional investors, to Luxembourg for marketing presentation. If you cross the nearby border into bordering France for an investor presentation, you break the law. In addition, the private placement rules are expected to be reviewed in 2018 and a new EU regulation may be on the way.

On the other hand, if one chooses to comply with the requirements as set forth in the Directive and as implemented in national laws of the member countries, such fund has EU “passporting rights”. By following a simple notification procedure, the fund can be marketed in all the EU. For example, if your fund has a licence in Luxembourg, you state to the regulator in Luxembourg that you want to market in Spain and Luxembourg regulator notifies the Spanish regulator and the fund is ready to be marketed to eligible investors in Spain.

How long it takes to launch a new investment fund in EU

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It should be around 5-6 months, providing that the founders and managers are acceptable to the regulators. It takes about 1 month to prepare documents for the regulator and they’re likely to use most of the 6 month period  allowed to them for decision to approve or deny licence.

It took us about 18 months. But we started at the very grass roots level and there were a lot of issues to consider, not least how to ensure client confidenciality. Most of our clients are based in Europe and the legislation is likely to change so that it is very difficult to market offshore funds in Europe. So the choice was to register the fund in Europe. The next decision to be made was in which country. Traditional fund domiciles like Ireland and Luxembourg were considered initially alongside with Switzerland. All of those are the highest cost countries for fund registration. Switzerland has an disadvantage of being outside European Union.

Our final choice was Malta for a number of reasons. It is EU country, the regulator is efficient (something we felt is true after the first meeting with the regulator there), business language is English and the registration costs are a fraction of what they would be in Ireland or Luxembourg. Malta currently is still a small, but the fastest growing fund domicile in EU.

There were thousands of email exchanges with prospective service providers (custodians, administrator, auditor, brokers …) and legal counsel. In typical situation this would be more simple, but in this case the fund principals did want to double-check every single detail themselves and a lot of time and effort was spent on understanding how even the slightest detail in the whole setup works.

I’m happy how it worked out this time — no mistakes were made, no cost overruns and no major delays (some minor delays were mostly due to the fact that big institutions sometimes are slow with new things). I believe the next time for the same people it would take 4-6 months to launch a new fund.

Written by A.S.

October 2, 2012 at 12:01 am

Malta as a Fund Domicile

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Visited Malta about two weeks ago to work on a fund setup and meet prospective service providers. Generally, the impression is very good. In terms of professionalism of lawyers, auditors, administrators etc. it looks and feels the same as in London. Particularly, Malta Financial Services Authority (MFSA) was represented by expierienced persons who acted in a highly professional and polite manner.

What one gets by registering in Malta, is a European Union domiciled fund. First, it means as little as possible restrictions when it comes to marketing in European Union. Second, potential investors consider EU, including Malta, as properly regulated and clean jurisdiction with little legal risks. Third, the fund is more acceptable counterparty for brokerage companies, banks, investees etc. if compared to funds registered in offshore jurisdictions.

Currently, there are  just a bit more than 400 funds registered in Malta, but the number is growing exponantially. As a fund domicile, Malta still looks tiny, if compared to Ireland or Luxembourg. I believe that the rapid growth of the Malta fund industry will accelerate. The reasons for choosing Malta are efficiency and costs.

Costs are a fraction of what you’d pay for similar setup in Ireland or Luxembourg, yet the fund structure you get are functionally the same.

Approximate setup costs are as follows:

1. Legal services: €9000-20000 (it should be noted that there is no regulatory requirement to engage local lawyer for the work).
2. Government fees: €6000.

Approximate annual costs:

1. Government fees: €2000.
2. Local director:  €6000.
3.  Company Secretary and Registered Office: €2500.
4. Audit fees: €8000.
5. Administration: up to 10 bp of assets, subject to minimum fee of at least €30000 per annum. It should be noted, that initially, the offers may be up to 25 bp for smaller funds.

Overall, setup budget of € 20 000 and annual budget of €50 000 should be be sufficient for  most fund structures. Our budget is closer to €15 000 for setup and €40 000 in running costs. However, for fund structuring purposes we choosed to use Bermuda registered investment advisor and it will add about €4000 to setup costs and €5000 to running costs.

 

Written by A.S.

September 30, 2011 at 10:25 am

Posted in investment

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Umbrella Fund Structures for Emerging Fund Managers

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A new fund manager is typically interested in to get his fund going in possibly short time and at the lowest cost.

Several fund administrators have set up umbrella structures to offer shorter launch times at a fraction of cost compared to the setup time and cost of a stand-alone fund structure.

Under the umbrella fund structure every new fund is registered as a sub-fund. Such umbrella fund is usually maintained by a fund administrator.

In Bermudas the launch time is 2 weeks and costs USD 5’000, in Malta – 3-4 weeks and EUR 10’000. Typically, the launch time is about 2-3 times faster and setup costs are 2-4 times lower.

In a hindsight, such sub-fund structure may be a viable solution if the management team is unable to pass regulator’s “fit and proper” test.

The ongoing annual costs are about the same or may even exceed the maintenace cost of stand-alone fund structure . The key disadvantage is that the fund manager is tied to one administrator as a service provider.

Some of the service providers offering umbrella fund structures to emerging fund managers are Apex Fund Services (in Bermudas and Malta) and Altarius Asset Management in Malta.

Written by A.S.

August 13, 2011 at 10:50 pm

The Best Domicile for Licenced Investment Fund

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The person has investment performance to show, recently left a very top level management position, have raised nearly $20 mio seed capital, has team,  wants to launch his own fund …

What domicile to choose? What fund structure? I´ll recount the process we just went through.

Funds are easy to incorporate and relatively easy to licence in the Carribean (BVI, Cayman, Bahamas etc.). Cost is reasonable, but marketing of such fund in EU is difficult and the domiciles in Carribean generally are not well perceived by our potential investor base.  The investors are mainly from EU, Eastern Europe and Far East. Some investors clearly prefer to have the money onshore rather than offshore. Basically, their key source of discomfort is that ¨it is difficult to bring money back from offshore¨ and they would rather accept 15% corporate tax and keep it onshore.

U.S. as a fund domicile is no-go area for the managers and potential investors alike. The key reason is managers´ and investors´ perception of U.S. as a country which has went a way too far with their version of policing financial transactions in post-9/11 period. Even small transfer amounts may be blocked with no apparrent reason and unblocked only upon presentation of additional documention justifying the transaction. Based on experience, the controls and regulation may be brute, probably effective, but definately not efficient, and overdone to the point of not being acceptable. So U.S. didn´t make it to the short-list as a fund domicile.

Selected EU countries or Switzerland were perceived as the best domicile due to marketing considerations and favourable perception by potential investors. UK, Ireland, Luxembourg, Switzerland are obvious choices, but the only setback with those seem to be high setup cost and even higher maintenance cost. Setup budget of €100k and annual maintenance cost of €200-300k was something to be expected. This is way too much for a small hedge fund startup with $20 mio seed capital.

We didn´t research in detail Dubai, Singapore and Hongkong options as we decided to focus on EU as the preferred area due to marketing implications. However, quick and dirty analysis showed substantial capitalization requirements as well as high setup and maintenance costs in the aforementioned domiciles.

Our final choice was Malta. It is in EU, Malta law is pretty much as copy of UK law (I hope I don´t hurt anybody´s sentiments here), English is official language in Malta. The fund industry in Malta seems to be properly regulated, while not overregulated. Reportedly, Malta Financial Services Authority (MFSA) is efficient and easy to deal with, if the fund directors meet the ¨fit and proper¨ criteria. At least, it is what we have learned from someone who has just launched a startup fund of similar size in Malta.

We´re planning a visit to Malta in mid-September to meet potential services providers. With telephone calls to Middle East and Switzerland for recommendations and with more telephone calls to Bermuda, UK and Malta we hope we have identified domicile and service providers who are a good fit for us. We expect setup costs to be in €20k area and annual maintenance cost in €30k area – this is a small fraction of what it would cost in UK, Ireland or Luxembourg, yet offers basically the same functionality in terms of structure quality in general and for marketing purposes in particular.

There are several fund setup structure options. In one of the subsequent blog posts I´ll recount our reasoning about which fund structure is the most appropriate for a startup hedge fund.

 

Written by A.S.

August 9, 2011 at 9:41 am