Establishing an Alternative Investment Fund in 2022 in Cyprus
An Alternative Investment Fund (AIF) consists of collective investment undertakings, including investment compartments, raising capital from investors and investing it according to a specific investment mandate for the investors’ benefit. Any AIF established in Cyprus requires the prior authorisation of the Cyprus Securities and Exchange Commission (CySEC).
Following the Investment Fund Statistics update by the Central Bank of Cyprus (CBC), published in August 2022, it is worth noting the all-time high recorded in the number of investment funds authorised and regulated by CySEC, which increased from 254 to 274 during the first semester of the year, contributing to the existing growth pattern.
In this commentary the SALVUS Investment Funds Licensing team provides necessary information concerning Alternative Investment Funds under CySEC, in the following way:
1. Legal framework
2. Types of Alternative Investment Funds (AIF)
3. Alternative Investment Fund Managers (AIFM)
4. AIF Organisation and Operation
5. How SALVUS can support your AIF authorisation
We regularly share bite-sized insights on LinkedIn such as those found in this article
1. Legal framework
The legal framework governing the authorisation and operation of AIF regulated entities in Cyprus is primarily expressed by the Alternative Investment Funds Law as it was introduced in July 2018. It is considered a significant enhancement of the AIF Law of 2014 stipulating:
- advanced authorisation rules,
- transparency requirements and supervision,
- ongoing operations,
- investment structuring possibilities,
- enhanced duties and responsibilities for directors, external managers and depositaries.
Most importantly, the enacted AIF Law following the market demands, introduced a new model of investment funds, the Registered Alternative Investment Fund (RAIF), to eliminate the costly and time-consuming authorisation procedures of CySEC.
2. Types of Alternative Investment Funds (AIF)
In the table below we provide the key features of an AIF, indicating the different requirements for each of the following AIF types:
- AIF with an unlimited number of persons (AIF)
- AIF with a limited number of persons (AIFLNP)
- Registered AIF (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 self-managed: EUR 125,000 | 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 |
| Authorisation timeframe | 6 months | 6 months | 1 month |
3. Alternative Investment Fund Managers (AIFM)
An AIF unless internally managed, must have an appointed Alternative Investment Fund Manager manage the investment fund externally. The AIFM can be in two forms:
- An external AIF Manager, appointed by the AIF and is responsible for its overall management, or
- Internally managed, with the AIF acting as an AIFM, assuming that
- its legal form is that of a Variable Capital Investment Company (VCIC), and
- it holds assets less than €100,000,000 in case they were acquired through leverage or less than €500,000,000 in case no leverage was employed, and the unitholders maintain no redemption rights for at least 5 years. If the AIF exceeds the required thresholds, then it shall become AIFM as per the AIFM Law.
It is obligatory for the AIFM when managing an AIF to at least engage in the core investment functions of portfolio management and risk management. More information about the role of the AIF Manager can be found in an earlier authored article.
4. AIF Organisation and Operation
Irrespective of the AIF type or being externally or internally managed, the applicable legislation prescribes common provisions regarding the organisation and operation of an AIF. More specifically:
- The retention of minimum assets
- raising a minimum amount of capital from investors within the first 12 months,
- excluding any capital commitments,
- applies to each investment compartment in the case of an umbrella AIF (an AIF established and operating with more than one investment compartment).
- The formation of an investment policy specifying any investment restrictions relating to the nature of assets and the investors to whom they are offered.
- The establishment of a risk management function for
- implementing adequate risk management systems in identifying, measuring, managing, and monitoring all risks relevant to the AIF’s investment strategy,
- maintaining a documented and regularly updated due diligence procedure in performing according to the investment policy, as well as the AIF’s objectives and risk profile,
- ensuring that the risks associated with each investment position and their overall effect on the AIF’s portfolio can be properly measured and managed by employing stress testing procedures,
- ensuring that the AIF’s risk profile corresponds to its size, portfolio structure, investment strategies and objectives as these are communicated to its investors,
- setting the maximum level of leverage that the AIF may employ and the extent of the right to reuse it as collateral.
- The identification, prevention, and management of conflicts of interest from adversely affecting the interests of the AIF and its investors by
- maintaining and operating effective organisational and administrative arrangements,
- segregating tasks and responsibilities which may be regarded as incompatible with each other,
- assessing whether the AIF’s operating conditions may involve any material conflicts of interest and disclose them to its investors.
- The management of liquidity by employing a liquidity management system and adopting procedures for monitoring AIF’s liquidity risk to ensure that its liquidity profile coincides with its investment and redemption policies.
- The implementation of remuneration policies which promote sound and effective risk management and do not encourage risk-taking that is inconsistent with the AIF’s risk profile and fund rules.
- The proper and independent valuation of assets and calculation of net asset value per AIF unit, as determined by the applicable legislation or the fund rules.
- The management and conduct of business by persons who are of sufficiently good repute and possess adequate knowledge and experience in performing their duties.
- The execution of transactions entered by persons involved with the AIF, including:
- its external managers,
- persons who effectively direct the business,
- its depositary,
- its investment advisor,
- its unitholders,
- or persons related by close links to any of the above persons, to the extent that this is permitted by the AIF’s fund rules or instruments of incorporation.
5. How SALVUS can support your AIF authorisation
SALVUS has a dedicated Investment Funds Licensing team with specialised expertise in the authorisation and registration of Investment Funds. We support you in selecting the most appropriate type and structure of investment fund based on your business needs and objectives.
We work in coordination with your team in collecting all the required information and preparing the necessary documentation for submitting a complete application to the regulator. Furthermore, we guide you in fulfilling your post-authorisation regulatory obligations.
If you have additional questions regarding AIF authorisation, feel free to contact us at info@salvusfunds.com to discuss your investment fund needs.
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The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.