Establishing an Alternative Investment Fund in Cyprus in 2024
An Alternative Investment Fund (AIF) consists of collective investment undertakings, including investment compartments, raising capital from investors and investing it in accordance with a defined investment policy for the benefit of investors. Any AIF established in Cyprus requires the prior authorisation of the Cyprus Securities and Exchange Commission (CySEC), the independent public supervisory authority of the Republic.
As reported by CySEC’s quarterly statistical bulletin, the recorded number of investment funds authorised and regulated by CySEC increased from 206 to 211, comparing the 4th quarter of 2022 and 2023, respectively. Cyprus continues to grow and continues to be on an upward trajectory regarding AIF regulated entities. Especially, after the introduction of the cost-effective solution, the Registered Alternative Investment Fund (RAIF).
In this article the SALVUS Investment Funds Licensing team, shares valuable insights on Alternative Investment Funds under CySEC, by discussing:
1. Legal framework
2. Which are the AIF types and features?
3. Alternative Investment Fund Managers (AIFM)
4. AIF Organisation and Operation Regulatory Requirements
5. How SALVUS can support your AIF authorisation
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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.
Essentially, the enacted AIF Law, which responds to market demands, introduced a new model of investment fund called the Registered Alternative Investment Fund (RAIF). This model aims to eliminate the expensive and lengthy authorisation procedures required by CySEC.
2. Which are the AIF types and their features?
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 administering 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.
Imperative is the fact that the AIFM engages in the core investment functions of portfolio and risk management when managing an AIF.
4. AIF Organisation and Operation Regulatory Requirements
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:
- Minimum asset retention; raising a minimum capital within the first 12 months, excluding capital commitments, applicable for each compartment in an umbrella AIF.
- Investment policy; establishing a policy, detailing investment restrictions on asset types and investor categories.
- Risk Management; implementing risk identification and monitoring systems, maintaining due diligence procedures, setting maximum leverage levels and reuse rights.
- Conflicts of interest; applying arrangements to prevent and manage conflicts.
- Liquidity management; using a system to monitor and ensure the AIF’s liquidity aligns with its investment and redemption policies.
- Remuneration policies; promoting risk management and discouraging risk-taking inconsistent with the AIF’s profile.
- Asset valuation; ensuring independent asset valuation and net asset value calculation as per legislation or fund rules.
- Qualified management; assuring that business conduct is managed by reputable and experienced individuals.
- Transaction execution; transactions by related parties (external managers, directors, depositaries, advisors, unitholders, or closely linked individuals) must comply with fund rules or incorporation instruments.
5. How SALVUS can support your AIF authorisation
The SALVUS industry-leading Investment Funds Licensing team with specialised expertise in the authorisation and registration of Investment Funds stands ready to support you in selecting the most appropriate type and structure of investment fund based on your business needs and objectives.
Due to our sophisticated project management approach, we work in coordination with your team in collecting and preparing the necessary documentation for submitting a complete application to the regulator, ensuring prompt correspondence. Furthermore, we provide guidance and assistance in order to fulfill 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.