Professional Investor Funds (PIFs)
Professional Investor Funds in Malta (PIFs) are a special class of collective investment schemes which fall within the provisions of the Investment Services Act, 1994. These funds provide a “lighter” regulatory regime and more flexibility than UCITS, AIFs and other funds which are also licensed by the MFSA. PIFs are subject to minimal regulation compared to retail investment schemes. References to “PIFs”, “funds” and “schemes” below should be read and construed as interchangeable terms.
Professional Investor Funds have been extensively used for investment in non-traditional investments and/or specialist instruments including by way of example, private equity, derivatives, immovable property / real estate, and traded endowment plans.
THE PIF REGIME – INVESTOR PROFILES
The PIF regime is targeted at certain investors who must satisfy criteria which would render them eligible to invest in the fund. The said criteria are based on the participating investors’ wealth and experience, with the regulatory regime being relaxed proportionally to the minimum entry threshold required from each individual investor.
The minimum investment threshold for PIFs is EUR 100,000 or equivalent in any other currency. The total amount invested by each investor may not fall below this threshold at any time during the operation of the fund unless this is the result of a fall in the net asset value. The minimum investment threshold applies to each individual investor. In the case of an umbrella fund comprising a number of sub-funds the respective thresholds are applied applicable on a “per scheme” basis rather than on a “per sub-fund basis”, thereby enabling the investor to spread the investment requirement across the various sub-funds.
Before any fund may accept any investment from any investor, the fund is required to obtain a completed Declaration Form in which the investor confirms that he/she/it has read and understood the mandatory risk warnings and describes why he/she/it has satisfied the applicable requirements to be considered a qualifying investor.
Malta Professional Investor Funds are required to issue an offering document setting out the nature, structure, objectives, risks and functionaries of the fund must be submitted to the MFSA before being circulated to investors
Whilst the structuring of any fund will depend upon the promoters’ specific objectives and preferences, typical set-ups would involve the creation of “Voting Shares” issued to the fund’s promoters, providing them with the effective control over the structuring and general operation of the fund, whilst “non Voting Shares” are issued to investors in the fund. Any changes to the rights attaching to the Voting Shares, redemption of such shares, and/or issue of additional Voting Shares will require the prior approval of the MFSA in each case.
PIFs are exempt from any risk spreading and/or diversification requirements and is not subject to borrowing or leverage restrictions.
Insofar as the denomination of currencies is concerned, it is important to emphasise that each fund is denominated in one base currency for financial reporting purposes. In the case of umbrella funds, each sub-fund can have a different base currency to the other sub-funds.
COMPOSITION OF THE FUND’S BOARD OF DIRECTORS
The Board of Directors of the PIF must be composed of one or more directors independent from the Manager and the Custodian. In practice, however, it is typical for two or more directors having experience in the financial services industry to be appointed, in order to ensure dual control of the fund’s business. In the case of a self-managed fund, clearly this issue of independence between the fund manager and the fund does not exist since the fund will be managed by its own directors and investment committee (if appointed).
The Scheme is required to obtain the written consent of the MFSA before the appointment or replacement of a Director. Furthermore, no Corporate Director shall be appointed unless it is regulated in a reputable jurisdiction and the name/s of the person/s who will represent the Corporate Director on the Board of Directors of the PIF are disclosed to the MFSA. In approving prospective Directors of a PIF, the MFSA will, as a matter of procedure, consider:
- their collective expertise in matters relating to PIFs;
- prior experience of the prospective Directors on fund boards; and
- knowledge on matters relating to principles of good corporate governance and regulatory issues.
The management arrangements for a PIF may be structured in one of two ways:
- Managed by an external fund manager; or
- A self-managed fund.
Where an external manager is appointed, such 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.
In the event the PIF appoints an investment manager that is licensed as an Alternative Investment Fund Manager (AIFM), the PIF would be become subject to an additional layer of regulation to render it compliant with the Alternative Investment Fund Manager Directive (AIFMD). It is for this reason that the PIF regime is more suitable for de minimis investment managers, that is managers having AUM of less than Eur 100m (leveraged) or Eur 500m (unleveraged).
In the interests of simplifying the structure, it is also possible that the fund is established as a self-managed fund. Doing so would effectively vest responsibility for the discretionary management of the assets of the fund in the Board of Directors. In proposing this structure, the fund will need to satisfy the MFSA that the fund is capable of organising and controlling its affairs in a responsible manner and shall have adequate operational, administrative and financial procedures and controls to ensure compliance with all regulatory requirements and shall provide the MFSA with all the information it may require from time to time.
Where the fund is self-managed, the Board of Directors may consider appointing an Investment Committee which must be composed of at least 3 persons (who shall be expected to satisfy a full “fit and proper” probity check and competence assessment by the MFSA) and which committee shall be collectively responsible for the day-to-day investment management of the assets of the scheme according to the Terms of Reference established by the Board of Directors and approved by the MFSA. One member of the investment committee should be a resident of Malta. GVZH Advocates will be happy to assist you in identifying suitable candidates for this role.
If the self-managed fund route is followed, the initial, paid up share capital for the scheme should not be less than EUR 125,000, or the equivalent in any other currency and the NAV of the Scheme is expected to exceed this amount on an on-going basis.
If a self-managed fund exceeds the AUM thresholds of Eur 100m (leveraged) or Eur 500m (unleveraged) it would also be required to comply with specific provisions of the AIFMD.
OTHER SERVICE PROVIDERS
Both the administrator and the custodian appointed to service a PIF may be based outside Malta. Furthermore, PIFs are not required to appoint a custodian, although in such circumstances the fund would be expected to have adequate safekeeping arrangements in place, which must be satisfactory to the MFSA.
As an enhancement to the fund’s international profile, the PIF may be listed on the Malta Stock Exchange, which is currently the only recognised investment exchange in Malta. In doing so, the fund would be able to target certain institutional investors (such as pension funds) which are restricted to acquiring units in listed schemes. The advantages derived from having a PIF listed on the stock exchange would be increased transparency and increased liquidity.
GVZH Advocates offers a comprehensive service, assisting funds with obtaining a listing of their units on the Malta Stock Exchange.
For further information about how GVZH Advocates can help you with your investment services query, kindly contact us on firstname.lastname@example.org.