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Alternative investment funds (AIFs) are an important source of finance for companies in EU Member States: there were 30,357 AIFs in the EU as of 2018, and, as measured by Net Asset Value (NAV), amounted to €5.8 trillion or nearly 40 per cent of the total EU fund industry, according to a report by the European Securities and Markets Authority (ESMA).
Cyprus now has a legal structure that supports the AlF industry, according to Dimitris Papoutsis, legal consultant with Elias Neocleous LLC in Limassol.
“Cyprus’ new law on alternative investment funds, Law 124(I)/2018, entered into effect in August 2018, following its publication in the official gazette. The new law repeals and replaces Law 131(I)/2014. Cyprus is also bound by Regulation (EU) 2019/1156 which also addresses AIF issues, but parts of which will not come into effect before August 2021.”
“Upon full application of this legislation (EU) 2019/1156), those marketing or premarketing these funds in or from Cyprus will find it easier to do so across the EU, as the purpose of this legislation is to facilitate these cross-border activities,” Papoutsis explains.
According to Papoutsis, this legislation introduces a new form of alternative investment fund, known as the registered AIF, or RAIF, with the aim of reducing the time and cost involved in establishing an AIF in Cyprus.
“RAIFs which are externally managed by an AIF Manager (AIFM) established in an EU Member State do not require authorisation by the Cyprus Securities and Exchange Commission (CySEC) in order to operate in Cyprus; they are merely required to notify CySEC, which will maintain a register of RAIFs. However RAIFs may not be marketed to retail investors, but only to professional or well-informed investors.”
The RAIF structure offers great flexibility, Papoutsis continues. RAIFs will be required to appoint a local depository but supervision will be only at the level of the AIFM: there is no minimum capital requirement. RAIFs may be open- or closed-ended and stand-alone or with an umbrella structure. They may take the form of a mutual fund, an investment company with fixed or variable capital, or a limited partnership, and the new law introduces the concept of limited partnerships with separate legal personality.
With an up-to-date legal structure in place, one would expect some major funds to consider moving to Cyprus. The largest part of the industry is based in London, and many funds have already stated that they will move to Luxemburg or Dublin to maintain their access to the EU market.
“The major risk is that the UK gets to the point of exiting the EU and there are no co-operation agreements in place with the countries that matter the most to us – Ireland and Luxembourg,” says Adam Jacobs-Dean, head of markets regulation at the London-based Alternative Investment Management Association.
“Cyprus would, in fact, offer advantages to Luxemburg and Dublin as an access point from the Middle East,” Papoutsis notes. “But Cyprus has one major disadvantage: There is a kind of reputation hangover left from many years ago. This still puts off some investors.”
Another disadvantage is that the largest international banks, like Credit Suisse or BNP-Paribas, do not have branches on the island yet.
Some large funds will only work with the largest banks.
But Cyprus has effectively changed its reputation, and its importance as a financial centre is growing. The effect of this could make the island a significant choice for funds in the future.