The Cypriot AIF: legal forms, types and requirements
The Central Bank of Cyprus has released its latest Investment Funds statistics report indicating that during the second quarter of 2019; the Assets Under Management (AUM) and the reporting entities amounted to almost 5.5 billion EUR and 160 respectively. These numbers indicate the kind of growth the fund sector in Cyprus is experiencing with the reporting entities doubling within 3 years and AUM within 1.5 years.
In our previous article, we discussed how the upgraded AIF framework included a major advancement by introducing the Registered Alternative Investment Funds (RAIFs) – its details and its advantages. One of the major advantages of the RAIFs is the time and costs that can be saved by the fact that they are registered and externally managed by a fund manager and not directly authorized and supervised by CySEC. Therefore, RAIFs automatically gain a European substance for the fund, and the whole procedure for the establishment takes only few weeks’ time – usually at most a month.
It is evident that the provision for RAIFs in the latest legal framework update allowed Cyprus to appear as a more attractive and flexible jurisdiction for funds. For simplicity, in this commentary we are discussing the different Alternative Investment Funds (AIFs) legal forms, the available types and their peculiarities.
What is an Alternative Investment Fund (AIF) and who can invest in the fund?
An alternative investment is an investment on non-traditional assets, with traditional assets being stocks, bonds or cash. Alternative investments can include private equity, hedge funds, commodities, real estate, infrastructure, as well as art. The goal of any Alternative Investment Fund is to raise capital from professional or well-informed investors and to invest the raised capital according to an investment strategy, clearly defined in the Investment Mandate, for the benefit of the investors in the fund. In some cases, AIFs can be made available to retail investors as well.
A professional investor is a person who meets at least two of the below criteria:
- Has carried out transactions of significant size and of an average frequency of 10 per quarter, during the previous four quarters,
- The size of client’s portfolio exceeds 500,000 EUR, either in cash or in financial instruments,
- Works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged.
A well-informed investor is a person who invests in the fund at least 125,000 EUR or is already classified as well-informed investor by a credit institution, a UCITS management company or an Investment Firm (IF). It is further considered necessary for the investor to have the appropriate experience and knowledge to evaluate the appropriateness of the investments of the fund. Thus, the investor shall confirm in writing being aware of all risks in the proposed investment.
The available legal forms for the establishment of an AIF
- Common fund is a pool of assets expressed in units. The unitholders are co-owners of each of the assets of the portfolio and they are liable up to the amount of their contribution. The common fund does not have legal personality as the unitholders are represented by an external manager who exercise portfolio management among other duties.
- Limited liability partnership which has as its sole purpose the investment of its own portfolio by the general partner (who acts as a fund manager) and for the benefit of its partners.
- Investment company with fixed or variable capital is a limited liability company with shares, with sole purpose the investment of the company’s portfolio for the benefit of its shareholders and with registered office in the Republic. In case of a company with variable capital, the procedure of increase or decrease of the capital shall be specified in the instruments of incorporation. The portfolio can be managed by an internal manager or by the appointment of an external manager.
AIFs have the flexibility to operate under;
- a Single Scheme with one investment compartment (fund), or
- an Umbrella Scheme, which can be structured in such way to have under its single legal entity multiple investment compartments (sub-funds) and each compartment acts as a separate fund with the below benefits;
- each sub-fund can issue units correspond to its own assets and the value of the units may vary only to those assets,
- each sub-fund is liable only for its own obligations and as per its own investment policy,
- CySEC may revoke the authorisation of one sub-fund without revoking the authorisation of the rest sub-funds,
- each sub-fund is being dissolved and/or liquidated separately from other sub-funds,
- a sub-fund is able to invest in another sub-fund of the same fund ‘target compartment’, following the below conditions
- invest up to 35% of its assets in another sub-fund of the same fund,
- the target sub-fund shall not invest in units of this sub-fund,
- voting rights shall be suspended during the period of mutual participation,
- the value of units is not included twice in the calculation of the net asset value of the fund,
- there are no additional charges of management fees, redemption or repurchase fees, marketing expenses or any remuneration related to the investment of a fund’s compartment to another of the same fund.
Type of AIFs and their key features
The below table summarizes the differences of each AIF type and their requirements for;
- AIFs with an unlimited number of persons (AIF)
- AIFs with a limited number of persons (AIFLNP) *max 50 persons
- registered AIFs (RAIF)
| AIF | AIFLNP | RAIF | |
| Legal Form | – Common fund, – Investment company, – Partnership. |
– Investment company, – Partnership. |
– Common fund, – Investment company, – Partnership. |
| Eligible Investors | – Professional, – Well-informed, – Retail. |
– Professional, – Well-informed. |
– Professional, – Well-informed. |
| Number of Investors | Unlimited | Up to 50 investors (applies for all compartments) |
Unlimited |
| Min AUM within the first 12 months | EUR 500,000 | EUR 250,000 | EUR 500,000 |
| Fund Management | – Self-managed (in the case of an investment company or a limited partnership with separate legal personality), – Externally Managed by a fund manager. |
– Self-managed (in the case of an investment company or a limited partnership with separate legal personality), – Externally Managed by a fund manager. |
Always externally managed |
| Min Capital requirement | If externally managed: EUR 125,000
If self-managed: EUR 300,000 |
If self-managed: EUR 50,000 | Not subject to minimum capital requirements. |
| Assets Under Management | – No restriction if AIFM is appointed. – If AIFM is not appointed then: AIF can hold assets under the threshold of; 1. EUR 100 Million including assets acquired through leverage, or 2. EUR 500 Million where no leverage is employed and the unitholders have no redemption rights for 5 years |
– No restriction if AIFM is appointed. – If AIFM is not appointed then: AIF can hold assets under the threshold of; 1. EUR 100 Million including assets acquired through leverage, or 2. EUR 500 Million where no leverage is employed and the unitholders have no redemption rights for 5 years |
No restrictions |
| Depositary | Mandatory appointment | Mandatory appointment (An exception not to appoint a depositary is permitted upon certain conditions.) |
Mandatory appointment |
The responsibilities of the depositary and the requirements for the depositary appointment for the different alternative investment funds are extensively discussed in an earlier article with the title ‘Depositary role and requirements for AIFs & RAIFs’.
We remain at your disposal if you require further information. We will be glad to support you in finding a solution appropriate to your business plans, either through an AIF, an investment firm or any other structure that suits your objective. Contact us at info@salvusfunds.com.
The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.
