03 August. 2020
What are Alternative Investment Funds, and why are they becoming increasingly popular?
Alternative Investment Funds (AIF) are collective investment vehicles, which raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors that do not meet the definitions of UCITS.
Unlike UCITS which can invest only in liquid transferable securities, AIFs can invest in any type of investment assets including transferable securities, real estate, private equity, precious metals, antiques and art. Additionally, the AIF structure allows investments in all types of financial assets such as commodities, distressed securities, hedge funds, managed futures, and other financial derivatives as they are mainly addressed to ‘Professional’ and ‘Well-Informed’ investors.
The AIF legislation allows greater flexibility in terms of investment mandate and structure. More specifically, an AIF can be both open or closed ended, it can utilise leverage, and can invest in any asset type including unlisted assets such as property, private equity and venture capital. AIFs can be set-up as umbrella funds with multiple compartments and can be listed on recognised EU stock exchanges, provided that the number of investors is not limited.
The structure of AIFs provides a clear distinction between ownership and the management and control of the underlying investments. This is due to the management not being performed by the owners (unitholders) but by fund managers who are subject to specific rules and supervision. This makes it appropriate for High Net Worth Individuals seeking to achieve asset protection and tax optimization by replacing their traditional holding companies with a more sophisticated and professionally managed and regulated vehicle, as well as Family Offices who want to manage the family wealth in a more flexible and transparent way with specific risk and investment characteristics.
The EU Passport introduced by the AIFM Directive enables the shares of AIFs to be distributed to professional or well-informed investors across the EU, subject only to approval by the local regulatory authorities.
AIFs, depending on their investment objectives and deployed strategies, can act as cost-effective means of diversification and help mitigate volatility of investor’s portfolio through investments in non-publicly traded assets.
Alternative Investment Funds have become increasingly popular for investors, with Net subscriptions exceeding 200 billion in 2019. The wide range of asset types and strategies that can be deployed, combined with the flexible structures available in the EU, provide investors access to portfolios offering diversification and potential tax benefits.
Popular AIF structures in EU
Luxemburg RAIF (Reserved Alternative Investment Fund)
Luxembourg is the biggest and best known domicile for investment funds in Europe and the second most preferred location for investment funds globally after the US. The Luxembourg fund industry counts some 15,000 funds with AUM reaching 4.6 trillion dollars. The Luxembourg financial authority, the Commission de Surveillance du Secteur Financier (CSSF) is one of the major regulators in Europe and recognised internationally for a pioneering and flexible regulatory framework.
The Reserved Alternative Investment Fund (RAIF) is an investment fund that can invest in all types of assets. It qualifies as alternative investment fund (AIF) and is not itself subject to CSSF approval. RAIFs are limited to institutional, well-informed and professional investors. This specific structure enjoys low subscription tax of 0.01% of the NAV.
RAIFs can be incorporated and launched with a simplified process (usually 4-6 weeks), since they are not approved nor supervised by the CSSF. RAIFs are subject to the provisions of the AIFMD and supervised by an authorized EU Alternative Investment Fund Manager (AIFM) and enjoy the benefits from marketing across the EU using the European Passport legislation.
The RAIF structure appears to be a very popular choice for newly incorporated Funds. RAIF registrations have extended to almost 1000 by the end of 2019, achieving an increase of 120% in just 18 months.
Luxembourg Specialised Investment Fund (SIF)
SIFs are regulated and tax efficient multipurpose investment fund vehicles dedicated to all types of investments including plain vanilla, alternative, real estate and private equity investment strategies as well as innovative strategies in infrastructure, renewable energy, collectible assets, etc. A SIF is formed either in contractual form and consequently as an Investment Fund represented by a Managing Company (fonds commun de placement, FCP) or in the form of a company, namely as an Investment Company whose capital is variable (SICAV) or fixed (SICAR).
SIFs enjoy several tax advantages including exemption from capital gains tax for investors, annual subscription tax is as low as 0.01% of NAV (certain exceptions apply), the capital duty on incorporation is waived, and investor holdings are not subject to net worth tax. This specific fund structure accounts for nearly 40% of the Collective investments industry in Luxemburg as at the end of 2019 and was the most popular AIF structure until the introduction of the RAIF.
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Irish Qualifying Investor Alternative Investment Fund (QIAIF)
For almost 25 years, Ireland has been one of the world’s leading alternative investment fund domiciles, with its original qualifying investor fund (“QIF”) product internationally recognised as a very flexible alternative fund offering which could be launched quickly and within a regulated framework.
Ireland offers a significant Fund authorised service provider infrastructure, with 47 administrators and 18 depositories and QIAIFs benefit from exclusion from Irish tax on income or gains and no Irish withholding taxes on redemption payments or dividends, provided certain straightforward conditions are adhered to. The Irish legislative framework allows for the migration of offshore funds from a number of domiciles to Ireland as QIAIFs, via a reasonably efficient process, avoiding any asset realisation. The Irish Investment Funds industry has grown to approximately 15,000 funds with Assets under Management well above 4 trillion euro by the end of 2019.
QIAIFs can be established as single, stand-alone funds or as umbrella funds with one or more sub-funds and do not require authorisation pursuant to article 9 of the Open Ended Undertakings for Collective Investment Law or pursuant to the legislation of another Member State which harmonises article 5 of Directive 009/65/EC. QIAIFs benefit from fast-track regulatory approval process. Irish authorities are bound to response to new applications within 24 hours. The QIAIF is a regulated investment fund suitable for well-informed and professional investors.
QIAIFs are available in 5 different legal structures; the two corporate structures (the ICAV and the VCC), unit trusts, investment limited partnerships (ILPs) and common contractual funds (CCFs) for which very few investment restrictions apply; the principal ones being those imposed by AIFMD on certain private equity type strategies and on investments in securitisations and certain Central Bank of Ireland imposed restrictions.
Several regulatory features make QIAIFs attractive and flexible. Specifically, investment and borrowing limits apply at sub-fund level as each sub-fund is treated from a regulatory perspective as a separate QIAIF and no leverage restrictions apply. Also, QIAIFs can be either self-managed or deploy an external AIFM.
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Cyprus Registered Alternative Investment Fund (RAIF)
RAIFs are a new and innovative fund vehicle launched in July 2018 and one of several AIF structures available in Cyprus. They are geared to professional and well informed investors only and offer a quick and cost efficient fund launch of only one month from the date of filling a notification pack to the regulator. RAIFs can be either closed-ended or open-ended and are excluded from any minimum capital requirements as well as investment restrictions.
The Cyprus Registered AIF is able to market to investors across the EU and should be managed by a full scope Cyprus or EU Alternative Investment Fund Manager (AIFM). Although the RAIF is not “authorized”, it is indirectly subject to regulatory oversight through its AIFM. In addition to the full scope AIFM, a sub-threshold AIFM which is subject to prudential regulation, a MiFID Investment Firm in Cyprus or any EU member country may also manage a RAIF, provided it is a closed ended limited partnership and invests more than 70 percent in illiquid assets.
Moreover RAIFs are not subject to regulation by CySEC, however AIFMs intending to manage a RAIF will be required to submit a notification to CySEC for the inclusion of the RAIF on CySEC RAIF registry prior to distributing RAIF units to possible investors.
Cyprus RAIFs enjoy an extensive network of double tax treaties allowing tax efficient structuring of investments and are flexible in structure. Particularly, a RAIF can take various structures (Variable Capital Investment Company-VCIC, Fixed Capital Investment Company-FCIC, Common Fund-CF and Limited Partnership-LP. Additionally, units of RAIFs can be listed in any EU exchange.
Cyprus AIFs are subject to Corporation tax of 12.5% on the resulting net profits without any imposition of taxes on the net assets of the Fund while dividend income as well as any profit generated from the trading of securities are exempt from taxation in Cyprus. Additionally, there are no withholding taxes on dividend payment to foreign investors irrespective of the percentage of the participation in the Fund and no taxation applies on the redemption of units of an AIF.
The AIF structure, following the adoption of AIFMD regulatory framework in 2013, has dominated the Collective Investments industry. According to quarterly statistics report issued by CySEC with reference date 31st of December 2019, AUM by all types of AIFs amounted to almost 8 billion euros representing more than 90% of the market.
The recently introduced RAIF structure seems to be the preferred choice for newly incorporated Funds. Despite its recent introduction, RAIFs already gained ground and currently extend to approximately 20% of the Funds incorporated in Cyprus.
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How can we help?
Oneworld Plus Management is an EU licensed third party Alternative Investment Fund Manager (AIFM) and has the expertise and resources to support in the development of an alternative investment fund, whilst meeting the requirements of AIFMD through its integrated and independent third-party AIFM services. Oneworld Plus Management is a fully compliant and licensed entity and is offering its services to fund initiators, promoters and fund managers of private equity, real estate, infrastructure, debt, fund of funds, transferable securities as well as other alternative asset classes. Its services include portfolio management, risk management and oversight functions required under AIFMD regulation.
In addition to the teams expertise, partnerships with depositaries, central administrators and leading auditors in different jurisdictions are utilised and bring their experience in fund set up and administration., Oneworld Plus Management apart from offering its AIFM services to standalone funds, also offers fund-launching platforms in Ireland, Cyprus and Luxembourg plus in other European jurisdictions upon request.