Cyprus: A growing European fund hive
ME PoV Fall 2019 issue
While the genesis of the Cyprus funds industry dates back to 1997—with the introduction of the International Collective Investment Schemes (ICIS)—the industry experienced its real growth over the last 5 years with the adoption of the latest European Regulatory Frameworks (UCITS Directive, AIFMD and MiFID II) and the development of an ecosystem that can support a truly modern European fund hive.
The Cyprus fund ecosystem, comprising an approachable regulator (the Cyprus Securities and Exchange Commission), international-caliber professional service providers and administrators, distinguished law firms and UCITSD/AIFMD-compliant depositaries, makes for a solid foundation on which the industry can grow and create an attractive environment for the establishment of funds, fund management and servicing companies. At end Q2 2019, the level of assets under management stood at around €6.8 billion, representing an astonishing 134 percent growth relative to 2016.
Aside from the advanced level of infrastructure and the skilled and experienced human resource talent pool, there are several other compelling features about Cyprus:
- Its very competitive cost for establishing and running a fund vehicle and/or management company;
- Its Common Law-based legal system; and
- Its very efficient, transparent and effective tax system, both at the level of the fund/management company and the individual level (employees and investors).
In periods of prolonged low interest rates and volatile markets, cost optimization is key for fund managers who are looking to deliver performance to their clients. Cyprus’s geographic location places it at the crossroads of Europe, Africa and Asia with regular flight connections, multicultural business etiquette and a stable political regime.
The Cyprus funds framework is able to accommodate a complete suite of fund types and legal forms that enable it to cater to different asset classes, different types of investors and different investment objectives and strategies. From UCITS (Undertaking in Collective Investments for Transferrable Securities), the very liquid retail-investor-oriented financial instrument funds, to highly illiquid AIFs (Alternative Investment Funds) tailored to specific well-informed and/or professional investors and everything in between, all investor needs can be met. Investment opportunities in real estate, shipping, infrastructure, NPLs, oil and gas, renewable energy sources, hedge funds, start-ups and private equity can all be accommodated through the right fund vehicle, to market the product and raise capital in an EU-compliant manner.
The legal forms of Common Fund (contractual arrangement), Limited Partnership and Investment Company (with Fixed or Variable Capital) allow interested parties to tailor a fund structure to suit their precise needs and tax status. Depending on the legal form and the level of assets under management (AUMs) as well as on the use of leverage and/or having a lock-up period, a fund vehicle can be set up as self-managed or with an external authorized manager. The broad types of EU-authorized external fund managers are the UCITS Management Companies (UCITS ManCos), the Alternative Investment Fund Managers (AIFMs) and the MiFID Firms (CIFs).
In the case of a smaller set of investors (up to 50 people) and AUMs up to €100m or equivalent including the use of leverage or €500m without using leverage and having a minimum 5-year lock-up period, the national legislation permits the establishment of a more flexible vehicle, known as the Alternative Investment Fund for Limited Number of Persons (AIFLNP), which does not have any investment restrictions or borrowing constraints and in certain cases permits not having to appoint a Depositary. Lastly, the latest amendment of the AIF law in July 2018 introduced the Registered AIF (RAIF) which enables a very quick setup as it does not have to go through an authorization process by the regulator but does require the appointment of an eligible authorized external manager.
The emphasis on strong corporate governance, and the required qualifications for the persons holding key functions or performing certain duties provides for the required level of investor protection. It also ensures the foundations for investor confidence in subscribing to their desired investment strategy and manager with more contained operational risks. At the same time, the ability to use the latest technological advancements means that one can optimize the operating environment of investment management firms through the use of Artificial Intelligence (AI) and Cognitive methods, Machine Learning and Robotic Process Automation (RPA) to automate repetitive processes, reduce costs and minimize the risk of human error on those specific tasks, while focusing on generating alpha using a combination of experienced managers and intelligent robo-advisors.
Over the last three years Cyprus has managed to create an enviable fund ecosystem that has enabled it to put itself on the map of European and global fund jurisdictions. What makes it an attractive option to consider as a credible fund domicile stems from a combination of benefits and advantages that include a fully harmonized EU legal framework, a modernized tax framework with a low corporate income tax rate and more than 65 double tax treaties. In addition, there are numerous existing fully authorized fund hosting platforms, experienced asset and other service providers with a significant track record in serving international clients, and an efficient regulator. With its competitive pricing relative to other prominent fund jurisdictions, it is poised to become a future hive for many funds.
by Panikos Teklos, Partner, Risk Advisory & Wealth Advisory Services Leader, Deloitte Cyprus