Managers and promoters of start-up hedge funds will usually think of the warm tropical climates of Caribbean islands when thoughts turn to their preferred domicile for funds. However, financial regulations and practicalities are now convincing more and more early-stage managers to consider Malta as their domicile of choice, and not just because of the Mediterranean island climate with excellent tourism opportunities and 300 days of sunshine per year. Whilst it was the bloodthirsty pirates that first ventured from Europe into the Caribbean islands, invasions are nothing new to the Maltese either. Phoenician sailors, Roman centurions, Arab traders, pirates and Norman mercenaries were also drawn to the island’s natural harbours and strategic location between Europe and North Africa. The later British ‘stay in residence’ eventually proved beneficial to Malta’s rise as a financial hub, via the legacy of the English language, with English commercial law having been grafted onto the island’s civil law system, alongside the “Anglo-Saxon” work ethic, as some like to describe it.
Malta is already earning independent plaudits from within the hedge funds industry for its quality as a launch pad for fund vehicles. This is not just because of the fact that the climate is far superior to that of its main rivals in that category, Dublin and Luxembourg, but mainly because of Malta’s flexible yet robust regulation and reputation as a world-class centre for hedge fund services. According to Finance Malta, the public/private initiative aiming to promote Malta’s financial services centre: “Whilst Malta may be the smallest European Union member state, it has developed a significant financial services sector and, within that, a growing hedge fund business. The sector should get a significant boost from Europe-wide regulation of the industry, as well as the preference for start-up managers to choose a jurisdiction that offers flexibility and responsiveness, tempered with pragmatism.” Malta’s professionals report that they have begun to win business from the more established fund jurisdictions. Malta has benefited from a growing demand from investors for transparency as well as from fears among hedge funds that the EU was becoming increasingly hostile to outside firms.
EU membership has positioned Malta on a level playing field with other European Union countries, and introduced passporting rights so that investment services and schemes may be registered in Malta and passported to any EU country. The Malta Financial Services Authority (MFSA) provides a sound regulatory and legislative framework which inspires confidence. Adoption of the euro in 2008 has further boosted the attraction of Malta within the EU financial markets.
The MFSA regulates banks, insurance and investment services in a flexible yet diligent manner. It carries out regular due diligence on an applicant’s fund manager, board of directors and investment committee members. A key benefit is that regulatory and statutory issues may be discussed with the regulator, even at the fund’s gestation stage.
The basic structure used for collective investment schemes in Malta is the SICAV, with its variable capital nature and the possibility to establish sub-funds within such a structure. Professional Investment Funds (PIFs) would be the structure of choice for start-up hedge funds, with the benefit of lighter regulation for funds targeting more financially experienced investors. PIFs can be set up as an Experienced Investor Fund, a Qualifying Investor Fund or an Extraordinary Investor Fund. The minimum investment threshold for the three categories is, respectively, €10,000, €75,000 and €750,000. PIFs promoted to Experienced Investors are subject to investment or borrowing (leverage) restrictions, unlike the other two categories of PIF which are not subject to such restrictions. PIFs have been extensively used for investment in non-traditional investments and/or specialist instruments including, by way of example, private equity, derivatives and immovable property/real estate. Multi-fund companies within the same investment company are a regular feature, enabling the creation of separate sub-funds, each having a separate identity with varying investment objectives.
The MFSA aims for time-sensitive handling of all applications in an approachable and pragmatic manner. Target time-frames are seven days for issue of licence for Malta PIFs and three months for CIS or UCITS schemes, subject to the submission of a complete application form. Further attractions are the cost-effective regulatory and professional fee structures, a high level of professional services and the presence of all major audit firms. All business is conducted in the English language, providing international clients with a comfortable working environment in a Central European time-zone.
PIFs are usually structured to be managed by an external fund manager. Where anexternal manager is appointed, such a manager may be established in Malta or outside Malta. If established in Malta, the proposed manager should be in possession of a Category 2 Investment Services Licence and be duly licensed and authorised by the MFSA to provide investment management services to collective investment schemes. If the manager, on the other hand, is established outside Malta, the MFSA will conduct its “fit and proper” test in respect of the manager to ascertain whether it possesses the business organisation, systems, experience and expertise deemed necessary by the MFSA for it to act as manager. Aspiring foreign fund managers, having achieved fund and manager registration for their PIF structure, would then be able to promote their fund under private placement guidelines in each relevant jurisdiction. The vast majority of existing Malta funds are licensed as PIFs for this reason.
Malta and the AIFMD
In June 2013 the MFSA updated its regulations as part of the implementation of the Alternative Investment Fund Managers Directive (AIFMD). As first proposed in April 2009 by the European Commission, the AIFMD would have allowed only fund managers headquartered in the EU to market funds within the bloc, barring funds based in the Caymans or Switzerland, not to mention the US, from raising money in the EU.
Following several years of consultation and fine tuning, the AIFMD was introduced and now offers the prospect of an ‘EU marketing passport’ for ‘professional investors’, as defined therein, without the need for individual applications for authorisation in each EU state. Maltese professional commentators recommend that the PIF regime is more suitable for early-stage investment managers – that is managers having AUM of less than €100 million (leveraged) or €500 million (unleveraged). AIFMs below that threshold are exempt from the majority of the AIFMD’s requirements, but do not benefit from marketing passporting benefits and must therefore rely on the normal private placement regime in each relevant country. The intention of the EU is for these private placement exemptions to be phased out by 2018. By that stage, managers using the PIF regime could upgrade to the passporting opportunities under AIFMD authorisation.
One alternative for early-stage fund advisers seeking access to the benefits of AIFMD passporting possibilities would be a joint venture with an established licensed fund manager/promoter in Malta, whereby the Malta AIFM delegates the portfolio management decisions to the third-party adviser. The MFSA, as the AIFM’s regulator, must give prior consent to delegation of portfolio or risk management, unless the delegate is both authorised or registered and supervised for the purposes of asset management. Opportunities also exist for such joint ventures in existing regulated PIFs. Such a joint venture arrangement would give an overseas fund adviser a cost-effective way of accessing the EU market.
Graham May is head of structuring at Hawksmoor Partners, specialising in offshore solutions for new and small hedge funds.