A Professional Investor Fund (PIF) is a special class of a collective investment scheme (CIS) which is subject to a much lighter and more flexible regime than UCITS, AIFs and other retail funds.
Following amendments introduced during 2016, PIFS may be promoted to a qualifying investor who is defined as an investor that invests a minimum of €100,000 in the PIF and which may not, at any time, be reduced below this minimum amount by way of a partial redemption.
A qualifying investor may be one of the following:
- is a body corporate which has net assets of more than €750,000 or which is part of a group which has net assets of more than €750,000 or, in each case, the equivalent thereof;
- is an unincorporated body of persons or association which has net assets of more than €750,000 or equivalent;
- is a trust where the net value of the trust’s assets is more than €750,000 or equivalent;
- is an individual whose net worth or joint net worth with that of the person’s spouse, exceeds €750,000 or equivalent; or
- is a senior employee or director of a service provider to the PIF.
The fund is required to obtain a Declaration Form in which the qualifying investor confirms that he/she/it has read and understood the mandatory risk warnings and describes why he/she/it has satisfied the applicable requirements to be considered a qualifying investor.
It should be noted that the total amount invested may not fall below the established threshold of €100,000 unless this is the result of a fall in the NAV. Furthermore, provided that the minimum threshold is satisfied, additional investments of any size may be made. The minimum investment applies to each investor. However, in the case of an umbrella fund comprising several sub-funds, the respective thresholds are applicable on a per scheme basis rather than on a per sub-fund basis, thereby enabling the investor to spread the investment requirement across the various sub-funds.
A PIF is exempt from risk spreading and/or diversification requirements and is not subject to borrowing or leverage restrictions other than those which may be specified in the offering document. A PIF is required to issue an offering document setting out the nature, structure, objectives, risks and functionaries of the fund. The offering document must be submitted to the MFSA before being circulated to the investors.
Whilst the structuring of any fund will depend upon the promoters’ specific objectives and preferences, typical set-ups would involve the creation of voting shares issued to the fund’s promoters, providing them with the effective control over the structuring and general operation of the fund, whilst non-voting shares are issued to investors in the fund. Any changes to the rights attaching to the voting shares, redemption of such shares, and/or issue of additional voting shares will always require the prior approval of the MFSA.
A PIF may be set up as an investment company with variable share capital (“SICAV”), an investment company with fixed share capital (“INVCO”), a limited partnership, a unit trust or a common contractual fund. Usually, clients opt for the corporate form (SICAV) for various reasons, including operational flexibility.
A CIS may be structured as a multi-fund (umbrella) scheme, with a number of sub-funds thereunder, constituted by one or more different classes of shares (which may be denominated in different currencies). The assets and liabilities of each sub-fund are considered to constitute a separate patrimony distinct from the assets and liabilities of (and ring-fenced from the creditors of) the other sub-funds.
Furthermore, it is possible for a CIS in the form of a SICAV to be constituted as an incorporated cell company (“ICC”). The ICC may establish one or more funds as incorporated cells, each cell being a limited liability company (SICAV or INVCO) with separate legal personality (unlike the sub-funds of a multi-fund SICAV, which may have their assets and liabilities treated as a separate patrimony but do not have legal personality separate from that of the SICAV) and requiring a CIS licence independently from the ICC. It is also possible to set up a Recognised Incorporated Cell Company (“RICC”). The RICC is constituted as a limited liability company, which may establish incorporated cells in the form of SICAVs or INVCOs, and which purports to provide such incorporated cells with administrative services. The RICC is required to obtain recognition from the MFSA for the provision of administrative services, while each incorporated cell must obtain a CIS licence. The rules on ICCs and RICCs are designed particularly to accommodate fund platforms.
Board of Directors
The Board of Directors of a PIF must be composed of one or more directors independent from the Manager and the Custodian. In practice, however, it is typical for two or more directors having experience in the financial services industry to be appointed, in order to ensure dual control of the fund’s business. In the case of a self-managed fund, this issue of independence between the fund manager and the fund does not exist since the fund will be managed by its own directors and investment committee, if appointed.
The Scheme is required to obtain the written consent of the MFSA before the appointment or replacement of a Director. Furthermore, no Corporate Director shall be appointed unless it is regulated in a reputable jurisdiction and the name/s of the person/s who will represent the Corporate Director on the Board of Directors of the PIF are disclosed to the MFSA. In approving prospective Directors of a PIF, the MFSA will, as a matter of procedure, consider:
- their collective expertise in matters relating to PIFs;
- prior experience of the prospective Directors on fund boards; and
- knowledge on matters relating to principles of good corporate governance and regulatory issues.
The management arrangements for a PIF may be structured in one of two ways:
- Managed by an external fund manager; or
- A self-managed fund.
Where an external manager is appointed, such manager may be established in Malta or outside Malta. If established in Malta, the proposed manager should be in possession of a Category 2 Investment Services Licence and be duly licensed and authorised by the MFSA to provide investment management services to collective investment schemes. On the other hand, if the manager is established outside Malta, the MFSA will conduct its “fit and proper” test in respect of the manager to ascertain whether it possesses the business organisation, systems, experience and expertise deemed necessary by the MFSA for it to act as Manager.
In the event the PIF appoints an investment manager that is licensed as an Alternative Investment Fund Manager (AIFM), the PIF would be become subject to an additional layer of regulation to render it compliant with the Alternative Investment Fund Manager Directive (AIFMD). It is for this reason that the PIF regime is more suitable for managers having assets under management (AUM) of less than €100 million (leveraged) or €500 million (unleveraged).
In the interests of simplifying the structure, it is also possible that the fund is established as a self-managed fund. Doing so would effectively vest responsibility for the discretionary management of the assets of the fund in the Board of Directors. In proposing this structure, the fund will need to satisfy the MFSA that the fund is capable of organising and controlling its affairs in a responsible manner and shall have adequate operational, administrative and financial procedures and controls to ensure compliance with all regulatory requirements and shall provide the MFSA with all the information it may require from time to time.
Where the fund is self-managed, the Board of Directors may consider appointing an Investment Committee which must be composed of at least 3 persons (who shall be expected to satisfy a full “fit and proper” probity check and competence assessment by the MFSA) and which committee shall be collectively responsible for the day-to-day investment management of the assets of the scheme according to the Terms of Reference established by the Board of Directors and approved by the MFSA. One member of the investment committee should be a resident of Malta.
If the self-managed fund route is followed, the initial, paid up share capital for the scheme should be at least €125,000, or the equivalent in any other currency and the NAV of the Scheme is expected to exceed this amount on an on-going basis.
If a self-managed fund exceeds the AUM thresholds of €100 million (leveraged) or €500 million (unleveraged) it would also be required to comply with specific provisions of the AIFMD.
Other Service Providers
Both the administrator and the custodian appointed to service a PIF may be based outside Malta. PIFs are not required to appoint a custodian, although in such circumstances the fund would be expected to have adequate safekeeping arrangements in place, which must be satisfactory to the MFSA.
The following foreign services providers, appointed in respect of a PIF licensed by the MFSA, are exempt from the requirement to hold a licence or recognition certificate issued by the MFSA under the Investment Services Act:
- a person resident outside Malta acting as trustee or custodian;
- a person resident outside Malta providing the services of management of investments and, or investment advice;
- a person resident outside Malta providing administrative services.
The above-mentioned exemptions are not automatically operative but their applicability is subject to a determination in writing by the MFSA.
PIFs are required to appoint a Compliance Officer, a Money Laundering Reporting Officer and a local auditor approved by the MFSA.
If a PIF effects its investments through one or more SPVs owned or controlled via a majority shareholding of the voting shares either directly or indirectly by the PIF, the SPV(s) must be established in Malta or in a jurisdiction which is not an FATF blacklisted country. In principle, the PIF must through its directors or general partner(s) at all times maintain the majority directorship of any SPV.
PIFs are permitted to use side pockets in order deal with situations where certain assets within the fund’s portfolio become illiquid or comparatively hard to value, subject to certain conditions.
The use of side letters is allowed, but these must be circulated and approved by the Board of Directors / General Partner / Manager prior to issue, and must be kept in Malta at the registered office and be made available to MFSA for inspection.
Drawdown arrangements, whereby investors commit themselves to subscribe for a maximum amount of units in the fund which may be issued at a discount, are also permitted subject to certain disclosure requirements and other conditions.
Application process and fees payable to MFSA
The application for a licence to operate a PIF must be made to the MFSA. The MFSA may only license a PIF if it is satisfied that the PIF will comply in all respects with the relevant legislation, regulations and rules and that its directors and officers, or in the case of a unit trust or limited partnership, its trustee(s) or general partner(s) respectively, are fit and proper persons to carry out the functions required of them in connection with the scheme.
Upon submission of all documentation relative to the licence application in draft form (to the satisfaction of MFSA) and payment of the application fee, it is usually a matter of weeks for the MFSA to issue an in-principle approval in respect of the Fund. This is then followed by a submission of all documents duly signed in original, after which the MFSA issues a licence accordingly.
The PIF may appoint any service provider (e.g. investment manager, adviser, administrator, custodian or prime broker) it deems necessary. Where all service providers are based outside Malta and the PIF has not appointed a local resident director (in the case of a scheme set up as an investment company), a local general partner (in the case of a scheme set up as a limited partnership); or a local trustee (in the case of a scheme set up as a unit trust / common contractual fund), the PIF has to appoint a Local Representative.
The fee structure for fees payable to the MFSA by PIFs and AIFs is as follows: