Cross-Investments between sub-funds of Malta-registered SICAVs

The flexibility attributed to investment companies with variable share capital (“SICAVs”) by the Companies Act (Investment Companies with Variable Share Capital) Regulations (the “Regulations”) is a factor which has  contributed to making SICAVs the vehicle of choice for the licencing of Collective Investment Schemes in Malta..

By virtue of the Regulations, SICAVs may, in terms of its memorandum and articles of association, be constituted as either  multi-class companies (“multi-class SICAVs) or  multi-fund companies (“multi-fund SICAVs”).

A Multi-fund SICAV, also known as an “umbrella” structure, each class or group of classes of shares may constitute a distinct sub-fund to which assets and liabilities are allocated which would be distinct from other assets and liabilities allocated to other sub-funds of the same SICAV.

Furthermore, by virtue of its memorandum of association, a multi-fund SICAV may elect to have the assets and liabilities of each sub-fund comprised in that multi-fund SICAV treated for all intents and purposes at law as a patrimony separate from the assets and liabilities of each other sub-fund of such multi-fund SICAV. Thus the liabilities incurred in respect of such a sub-fund of a multi-fund SICAV will be paid out of the assets forming part of the patrimony the said sub-fund and the creditors in respect thereof will have no claim or right of action against the other assets of the company (which are allocated to the other sub-funds of the SICAV).

Cross Investment

Until relatively recently the cross investment between sub-funds of the same multi-fund SICAV duly licenced as a Professional Investor Fund (“PIF”) was permitted on basis of it internal policies. However, following a consultation process, the MFSA has now introduced specific rules with respect to cross investments between sub-funds.

By virtue of the said rules, sub-funds of multi-fund SICAVs which are licenced as Alternative Investment Funds (“AIFs”) or Professional Investor Funds (“PIFs”) which target qualifying or extraordinary investors are permitted to invest in units of one or more sub-funds within the same AIF/PIF subject to inter alia the following parameters:

  1. the SICAV must, by virtue of its memorandum of association, elect to have a separate patrimony of assets and liabilities between its sub-funds;
  2. cross-investment must be permitted by the memorandum and articles of association and the offering documents of the PIF/AIF;
  3. the investing sub-fund will not be allowed to invest more than 50% of its assets into another sub-fund or sub-funds within the same SICAVPIF/AIF thus attempting to secure an element of diversification and resulting master-feeder structures within the same umbrella;
  4. the target sub-fund/s may not themselves invest in its investing sub-fund;
  5. to avoid duplication of fees, where the manager of the investing and target sub-funds is the same, only one set of management (excl. performance fees), subscription and/or redemption fees are to apply between the investing sub-fund and the target sub-fund;

Following various requests for clarifications, by means of an explanatory noted dated 06th February 2014, the MFSA has clarified that the said “50% limitation applies for an investment in any one other sub-fund of the same scheme, but not to the collectivity of investments by such sub-fund in all the other sub-funds of the same scheme.”

By virtue of the above it is now clear that a sub-fund could, theoretically, invest up to 50% of its assets in one sub-fund of the same umbrella structure and another 50% of its assets in another sub-fund of the same umbrella structure.

The Exclusions

The rules apply to sub-funds of multi-fund SICAVs which are licenced as AIFs and PIFs which target “qualifying investors” (minimum investment threshold of €75,000 or equivalent) or “extraordinary investors” (minimum investment threshold of € 750,000 or equivalent) thus excluding sub-funds of all retail funds such as UCITS schemes (although this is allowed in terms of Luxembourg law) and sub-funds of PIF targeting “experienced investors”. However, following the implementation of the rules, the MFSA had noted that it will investigate the possibility of introducing a similar rules for the said licences of collective investment schemes

By way of completeness it is to be noted that limited partnerships and contractual funds may also be constituted as multi-fund collective investment schemes and elect to have separate patrimony between their sub-funds. Despite this common characteristic with the SICAV vehicle, from the wording of the rules it is inferred that the cross investment rules are only applicable to collective investment schemes constituted as multi-fund SICAVs. It is to be noted here that the provisions relating to limited partnerships are currently being revised and as such the possibility of applying the rules to such regime is under review. We do not see any reason at law why the rules on cross investment should not also apply to limited partnerships and contractual funds.

Required Amendment to the Law

Due to the lack of separate legal personality between the sub-funds, any purchase of units by the investing sub-fund in target sub-fund would be tantamount to a purchase by the SICAV of its own shares. Article 84(6) of the Companies Act provides that any own shares purchased by the SICAV “shall be cancelled”.

The above quoted article would have had the effect of impeding the cross investment between sub-funds. Therefore amendments have been made to the Regulations whereby Article 84(6) of the Companies Act has been disapplied with respect to the cross investment between sub-funds of the same SICAV.

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