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Across the European Union, regulators base the licensing of funds on two main rulebooks: the Undertakings for Collective Investment in Transferable Securities (UCITS) and the Alternative Investment Fund Managers Directive (AIFMD). Together they effectively create a level playing field, so there is not much difference in terms of what you can do as a fund in, say, Malta compared to what you can do in Luxembourg or London.
And yet there are still some notable differences. For example, Luxembourg and Dublin have come to dominate the UCITS market, which is focused on retail investors. While other centres still attract some of these funds, these two main hubs account for more than half of the €10.1tn assets tied up in UCITS funds, according to the European Fund and Asset Management Association (Efama), with Luxembourg in the lead with €3.7tn, followed by Dublin with just over €2tn.
This is an important part of the market. According to the European Securities and Markets Authority, there are more than 29,000 UCITS funds in the EU today. The European Commission says such funds account for around 75 per cent of all collective investments by small investors in Europe.
The market is more competitive for funds covered by the AIFMD, which include hedge funds, private equity funds and real estate funds. This is not as large as the UCITS market but is still substantial, with some €6.4tn in assets at the end of June 2019, according to Efama. Within the AIFMD there is also provision for de minimis funds, which are smaller in size and subject to a lighter regulatory touch, providing more scope for financial centres to differentiate themselves.
So just what are the considerations that funds need to bear in mind when considering where to seek a licence? Much depends on the nature of the fund itself, but some factors are fairly clear-cut, such as cost differences – as a general rule the larger, more established centres tend to be more expensive.
A fund with AUM of, say, $50m will struggle to attract interest in Luxembourg but will fit in well in the likes of Cyprus and Malta.
There are also considerations such as the approachability or responsiveness of the regulator and the quality of support and the depth of expertise on offer from local professional services firms and other parts of the financial industry. The lifestyle on offer may also be important to some managers, as will language issues. The prevalence of English is advantageous for Malta, where it is the main language of the financial services sector – and so is the warm weather.
Size also matters. While a fund with assets under management of, say, $50m will struggle to attract interest in Luxembourg, it will fit in well in the likes of Cyprus and Malta. On the other hand, a fund with assets of more than $500m could find itself too big for the latter jurisdictions.
And, as already noted, although there are common regulations across the EU, there is still scope for some local differences. For example, Malta has developed the notified alternative investment fund (NAIF), while Luxembourg has the reserved alternative investment fund.
Malta’s NAIF allows for a fund to be set up within ten days, and it is notably less expensive than Luxembourg’s equivalent. The cost differences will vary depending on the fund structures involved, but it often costs 30–40 per cent less to run and administer a fund in Malta than in Luxembourg.
The approach to de minimis regulations aimed at funds with less than €100m in assets also varies from place to place. In Malta, they are covered by the professional investor fund (PIF) regime. The key advantage is that rules for these funds are less burdensome in terms of the set-up and the running of the fund. There are trade-offs though, and a de minims fund will not benefit from an automatic passport to operate across the EU.
There is still the opportunity for smaller fund centres to carve out a profitable niche.
While there is little chance of another jurisdiction usurping Luxembourg and Dublin’s place at the heart of the funds industry, there is still the opportunity for smaller centres to carve out a profitable niche.
As of June 2019, there were 553 funds domiciled in Malta, and a further 191 funds administered from the island. Collectively they managed assets of some €18.5bn, according to the Malta Financial Services Authority. They included 166 PIF schemes and 34 UCITS funds. And in a sign of where part of the industry is heading, the nascent category of NAIFs has also been showing steady expansion, growing in number to 19 funds by mid-2019. All this is an important part of the wider financial services sector which these days accounts for close to 12 per cent of the total gross-value-add of the Maltese economy.
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