1. Professional Investor Funds (PIFs)
A Professional Investor Fund, commonly referred to as a PIF, is a type of collective investment scheme intended for particular categories of high net worth investors who are able to meet certain minimum investment requirements. The licensing and supervision of PIFs is carried out by the Malta Financial Services Authority (MFSA). Since they can only be offered to investors who have adequate expertise, experience and knowledge to understand the risks involved, PIFs are regulated in a more lenient manner and are not subject to the same investment restrictions as retail funds. This enables PIFs to adopt innovative or unorthodox investment strategies.
A PIF can be set up as a SICAV, INVCO, a public limited company, a limited partnership or a unit trust, and could be constituted as an umbrella fund or a multi-class fund. The licensing process and ongoing compliance obligations will vary according to the category of target investors. There are three types of PIFs:
- PIFs promoted to Experienced Investors (Experienced Investor Funds);
- PIFs promoted to Qualifying Investors (Qualifying Investor Funds);
- PIFs promoted to Extraordinary Investors (Extraordinary Investor Funds)
2. Relevance of PIFs post-AIFMD
Following the final implementing measures transposing the Alternative Investment Fund Managers Directive (AIFMD), it is possible to set-up Alternative Investment Funds (AIFs) in Malta in accordance with the AIFMD. Nevertheless, the existing Professional Investor Fund (PIF) regime has been retained in parallel with the AIF Regime, thus enabling de minimis fund managers and third country managers to set up collective investment schemes under the Investment Services Act, which will be regulated by the Investment Services Rules for Professional Investment Funds.
De minimis fund managers are AIFMs which are not subject to all the provisions of Directive 2011/61/EU by virtue of an exemption which applies upon fulfilling one of the following criteria:
- The assets of AIFs which the AIFM manages directly or indirectly do not exceed in the aggregate €100 million; or
- In the case of unleveraged funds, if the assets of the AIFs under management directly or indirectly do not exceed in the aggregate €500 million, provided there are no redemption rights during the first 5 years from initial investment.
3. Distinction between AIFs and De minimis PIFs
Directive 2011/61/EU defines AIFs as collective investment schemes, including investment compartments thereof which raise capital from a number of investors with the purpose of investing it in accordance with a defined investment policy for the benefit of investor. Moreover, an AIF is a collective investment scheme which does not qualify as a UCITS Scheme in terms of the UCITS Directive.
A Maltese PIF does not qualify as a UCITS Scheme under the UCITS Directive, therefore it is a type of Alternative Investment Fund. However, a PIF is a special type of AIF, since to qualify as such a PIF must be compliant with the Investment Services Rules for Professional Investors Funds issued by the MFSA. As highlighted above, there are three categories of PIFs, those targeting experienced investors, those targeted at Qualifying Investors, as well as PIFs promoted to Extraordinary Investors.
4. Different Categories of PIFs
4.1. Professional Investor Funds targeting Experienced Investors (Experienced Investor Funds)
To qualify as an experienced investor, a person has to fulfil one of the following criteria:
- adequate work experience of at least one year in a professional position in the financial sector
- experience in dealings with similar funds
- has performed investment transactions of a considerable size at a certain frequency
- provides any other appropriate justification to prove that the investor has sufficient expertise and knowledge to understand the risks involved and be able to make his/her own investment decisions
There is a minimum investment threshold of €10,000 or currency equivalent and the PIF may leverage up to 100% of its Net Asset Value. In the case of property funds, there are additional specific leverage restrictions. The PIF must appoint a Custodian to carry out safekeeping and monitoring functions, and an offering document must be issued.
4.2. Professional Investor Funds targeting Qualifying Investors (Qualifying Investor Funds)
A qualifying investor must satisfy at least one of the following eligibility criteria:
- a body corporate or unincorporate, or trust, which has net assets in excess of €750,000, or else a body corporate which forms part of a group having net assets in excess of €750,000
- a person who has reasonable experience in the acquisition or disposal of funds of a similar risk nature or profile of the same kind as that to which the particular PIF relates
- a person whose net worth, or joint net worth with that person’s spouse, exceeds €750,000
- senior employee or director of service providers to the PIF
- A PIF which targets Qualifying or Extraordinary Investors
- An entity investing on own account having more than €3.75 million under discretionary management
The entry investment threshold is set at €75,000 or currency equivalent, and a QIF is not subject to any investment restrictions other than those featured in the offering document. Moreover, leverage is unlimited, unless the PIF is a property fund. Whilst an offering document is a must, the PIF need not appoint a custodian if there are appropriate safekeeping arrangements in force.
4.3. Professional Investor Funds promoted to Extraordinary Investors (Extraordinary Investor Funds)
For an investor to qualify as an extraordinary investor, such person must satisfy at least one of the following requirements:
- A body corporate or unincorporate, or a trust, which has net assets in excess of €7.5 million.
- A body corporate which forms part of a group having net assets in excess of €7.5 million
- A natural person whose net worth, or joint net worth with that person’s spouse, exceeds €7.5 million
- A senior employee or director of service provider to the PIF
- A PIF promoted to extraordinary investors
Investors must invest a minimum of €750,000 or currency equivalent, and no investment restrictions apply unless the PIF invests in immovable property. Leverage is unlimited, and there is no need to appoint a custodian if the PIF has adequate safekeeping arrangements in place. The PIF may provide a marketing document instead of a detailed offering document, and the licensing procedure is much quicker than that involved in the case of other PIFs, provided all the relevant documentation is in place.
5. Service Provider Requirements
The main service providers which a PIF requires to operate are a manager, an administrator and a custodian. However, it is possible to have self-managed PIFs, and a third-party custodian is only mandatory in the case of PIFs targeting experienced investors. In fact, PIFs promoted to Qualifying and Extraordinary Investors do not need to appoint a custodian if there are appropriate safekeeping arrangements in place. Moreover, the appointment of a third-party administrator is optional (though highly recommended in practice), and administrative services could be provided by the Manager instead. Recognition from the MFSA is required in the case of a person established in Malta providing administration services.
The details of the relevant service providers must be disclosed to the MFSA for approval, and the service providers need not necessarily be located in Malta. If a service provider is not established in an EU/EEA state or in a country with which the MFSA has a Memorandum of Understanding, the MFSA may still give its approval provided it is considered to be adequately regulated.
A PIF may appoint an Investment Adviser which has adequate experience and expertise necessary to fulfil such role. Furthermore, a PIF is required to appoint a Local Representative if the Scheme does not have a Director resident in Malta or a Maltese General Partner or some other form of local presence. The local representative will serve as the point of reference between the MFSA and the PIF, as well as receive/provide information from/to the MFSA. The role of the MLRO can be fulfilled by the PIF’s compliance officer.
Every PIF is bound to appoint an auditor approved by the MFSA to carry out the auditing of the PIF. A signed letter of engagement defining the auditor’s responsibilities and the terms of appointment has to be submitted to MFSA at application stage.
6. Regulatory Costs
On submission of an Application for a Preliminary Indication of Acceptability of a Professional Investor Fund, a non-refundable Application Fee of €600 is payable, irrespective of the number of sub-funds. In the case of an application for a PIF licence, the Application fee is €1,500 for the Scheme, €1,000 in respect of each sub-fund and €1,500 in respect of an incorporated cell.
An annual supervisory fee of €1,500 is payable on the date when the PIF Licence is granted, whilst the annual supervisory fee in respect of each sub-fund and incorporated cell is €500 and €1,500 respectively. These fees may change from time to time.
7. Documentation Required
Application for a Preliminary Indication of Acceptability of a PIF
When an Application for a Preliminary Indication of Acceptability of a Professional Investor Fund is submitted, the applicant must provide details of the PIF, such as the target category of investors, the legal form of the PIF, information about the promoters and the nature of the units to be issued as well as minimum subscription per investor. Details of the Service Providers as well as information about the investment objectives, policies and restrictions should also be provided. The making of such an application is optional - most applicants proceed directly to a formal application.
Application for PIF Licence
Besides the application form, an application for a PIF licence must be accompanied by other documentation which will in part vary according to the legal vehicle adopted. A draft version of the Offering Document/ Marketing Document must be provided irrespective of the legal vehicle chosen. Where the PIF is to be structured as an Investment Company, a draft version of the Memorandum and Articles of Association of the PIF, a Draft Board of Directors’ resolution and personal questionnaires of the proposed Director/s, founder shareholder/s, qualifying beneficial owners of proposed Corporate Founder Shareholder/s and of the service providers must be provided together with the applicable application fee. The audited financial statements of the proposed Corporate Founder Shareholder/s are also required if it is not regulated in a recognised jurisdiction.
In the case of a PIF structured as a Limited Partnership, a draft version of the Deed of Partnership as well as the relevant resolution of the General Partner/s have to be submitted, together with personal questionnaires (PQs) of the proposed General Partner/s or of the directors and beneficial owners of the proposed Corporate General Partner/s. The audited financial statements of the proposed Corporate General Partner/s are also required if it is not regulated in a recognised jurisdiction, together with PQs for the service providers and the relevant application fees.
In the case of a Unit Trust/ Common Contractual Fund, a draft version of the Trust Deed/ Fund Rules, a resolution of the proposed manager and details of the regulatory status of the proposed Trustee have to provided instead. Supplementary application documents in the form of PQs and Curriculum Vitae of the members of the Investment Committee/Portfolio Manager must be submitted in the case of a self-managed PIF, together with the terms of reference regulating the procedures of the Investment Committee and the relevant declarations from the Portfolio Manager/ Investment Committee. There are also particular supplementary documents which need to be submitted in the case of PIFs targeting extraordinary investors.
8. Advantages of Malta PIFs
PIFs targeting Qualifying and Extraordinary Investors are not subject to any investment restrictions, whilst PIFs targeting Experienced Investors are subject to some investment restrictions which mainly concern diversification. The use of leverage is not restricted in the case of Qualifying and Extraordinary Investor Funds, whilst Experienced Investor Funds are subject to a leverage capping of 100% of NAV.
Where a PIF has adequate resources and arrangements to safeguard the interests of investors, it is possible for it to be self-managed and self-administered without appointing external service providers, thus reducing costs. It is only in the case of a PIF targeting Experienced Investors that a third party custodian has to be appointed. Moreover, service providers appointed by a PIF need not be established in Malta, thus the promoters of a PIF set up in Malta may continue to make use of the services of foreign service providers whom they trust and have engaged in the past.
Regulatory costs are relatively cheap when compared to other jurisdictions, and PIFs may benefit from the favourable fiscal framework in force in Malta as well as the number of double tax treaties based on the OECD model which Malta has entered into with over sixty countries. The tax treatment of PIFs set up in Malta will vary depending on whether the PIF is classified as a prescribed or non-prescribed fund. A prescribed fund is one whose value of assets situated in Malta is at least 85% of the total value of its assets. No withholding tax applies in the case investment income received by non-prescribed funds, other than income from immovable property situated in Malta, whilst the local investment income derived by a prescribed fund will be subject to a final withholding tax ranging from 10% to 15%.
The distribution of dividends to, or the redemption of units in the PIF by, a non-resident investor is exempt from tax, and no Malta VAT is chargeable to investors on subscription to shares or units in the fund.
Finally, the Maltese regulator, MFSA, adopts a flexible approach to new business proposals and is keen to promote Malta as an attractive jurisdiction for new products in the industry by addressing the needs of promoters and investors in an appropriate and efficient manner.
9. Malta Professional Investor Fund Lawyers
Chetcuti Cauchi's expertise and familiarity with local regulatory processes and comprehensive licensing and compliance services required to set up and maintain a Malta Professional Investor Fund ensure it is well placed to act as a one-stop shop financial services solution provider in Malta.
Our Financial Services Advisory Practice Group enjoys a breadth of industry expertise, enabling our advisors to provide an array of services ranging from documentation, structuring, contact with the authorities and service providers, tax, accounting, and project management of the whole setting up for the client. Our professionals are members of respected professional associations including the Malta Institute of Taxation, the Council of the Institute of Financial Services Practitioners (IFSP), and various investment services subcommittees such as the Society for Trusts & Estates Practitioners, the Malta Institute of Accountants and the Chamber of Advocates.
