Answer ... The alternative investment funds (AIFs) generally established in Pakistan include the following:

• mutual funds;
• private funds;
• Modaraba funds;
• REIT schemes; and
• pension funds.

Answer ... In terms of the AIF regulatory framework, AIFs (other than Modaraba funds) must be constituted in the form of a unit trust under the Trusts Act and registered under the Registration Act. However, under the NBFC Regulations a closed-end mutual fund may also be established as a public limited investment company. And under the Private Fund Regulations (as recently amended), a private fund may also be incorporated as a company under the Companies Act, as a limited liability partnership under the Limited Liability Partnership Act, 2017 or any other legal structure approved by the SECP.

Answer ... The key advantage of establishing an AIF as a trust under the Trusts Act, which is the structure mandatorily used in Pakistan to establish most AIFs, is the overall administrative convenience under the Trusts Act in terms of:

• ease of establishment and registration;
• macro-management by regulators;
• minimal reporting and statutory compliance obligations; and
• relative administrative ease of winding up.

From a legal perspective, there are no notable disadvantages of using the trust structure for establishment of AIFs in Pakistan.

Answer ... According to a report of the SECP of March 2020 summarising the NBFC, notified entity and Modaraba sector, mutual funds dominate the AIF landscape with a 53.53% share of the total assets of the industry; whereas private funds, real estate investment trust (REIT) schemes, Modaraba funds and pension funds account for 0.53%, 3.82%, 4.09% and 2.16% of the total assets, respectively. Discretionary and non-discretionary portfolios represent 17.3% of the total assets.

Answer ... Up until 2015, Pakistan had no specific regime for the creation of hedge funds. The Private Fund Regulations, promulgated in 2015, expressly recognize (through recent amendments) establishment of hedge funds. This category presumably covers hedge funds. Thus far, no hedge funds have been established in Pakistan. Establishment of private debt/credit funds is also not a prevalent practice in Pakistan.

However, the AIF regulatory framework contemplates the creation of various AIF structures with an element of private offering, including (without limitation) private funds (private equity and venture capital), mutual funds that invest in debt instruments, funds of funds and theme-based/industry-specific mutual funds.

Answer ... AIFs are managed and administered by AIF managing entities. The structure, registration and licensing requirements in relation to such AIF managing entities are discussed in question 4.

Answer ... The NBFC regulatory framework requires a banking company, a subsidiary trust company of such banking company or a central depository company with a prescribed credit rating approved by the SECP to act as the custodian and/or trustee (as applicable) of all assets owned or held by an asset management company or a closed-end mutual fund in the form of an investment company.

PFMCs must appoint trustees/custodians for private funds under the Private Funds Regulations. The trustees/custodians are under an obligation, among other things, to:

• take under their control all property of the private fund and hold it on trust for the unit holders;
• ensure that all transactions in respect of the private fund are implemented in accordance with the constitutive documents;
• carry out the instructions of the PFMCs; and
• issue reports regarding the compliance of the PFMCs with the applicable laws and the constitutive documents of the private fund.

Since Modarabas also invest in mutual funds, which are structured as trusts and employ trustees and/or custodians to safeguard investor interests, the benefit of such custodial role extends to investors in Modarabas.

REIT schemes and pension funds are similarly required to appoint trustees under their respective regulatory frameworks, to protect the interests of subscribers to such schemes and funds, among other things. REIT schemes must also have a custodian, to hold and safeguard the REIT assets and ensure that the REIT scheme is managed according to the applicable laws, rules, regulations and constitutional documents.

Answer ... Foreign investors wishing to establish a presence in Pakistan as AIF managing entities may incorporate a wholly owned subsidiary in Pakistan on a repatriable basis. The AIF regulatory framework and the tax laws of Pakistan contemplate foreign ownership of AIF managing entities. Such frameworks do not stipulate specific onerous conditions applicable to AIF managing entities with foreign ownership. Generally, there is a level playing field for foreign and local investors in terms of the conditions for registration, licensing and management of AIF managing entities and AIFs under the AIF regulatory framework.