An Alternative Investment Fund (AIF) is collective investment undertaking that raises funds from a number of investors for the purpose of investing them in accordance with a defined investment policy for the benefit of those investors. Their creation and operation is governed by The Law on Alternative Investment Funds of 2018 (124 (I) / 2018) and their regulatory body responsible for their licensing and supervision is the Cyprus Security and Exchange Commission (CySEC).
An AIF can be set-up in one of the below legal forms:
- Common Funds: The fund is structured as a contract between investors and is manager by an external manager. Each partner is accountable up to the amount of the payment they made to the fund.
- Limited Partnership (LP): This form of fund allows high flexibility in regards to the rights of the partners.
- Fixed Capital Investment Company (FCIC): A limited liability company with a fixed capital.
- Variable Capital Investment Company (VCIC): A limited liability company with a variable capital.
Types of Cyprus AIFs:
- An AIF with Unlimited number of persons (AIF).
- An AIF with Limited number of persons (AIFLNP).
- A Registered AIF (RAIF).
The new Cyprus RAIF can take the form of:
- a common fund; or
- an investment company with variable or fixed capital; or
- as a limited partnership.
Cyprus offers the option of an unlicensed fund called Registered Alternative Investment Fund (RAIF), which does not need to be licensed by CySec. Even though RAIF is not subject a licensing approval it still needs to be registered in the RAIF registry maintained by CySec within a month from its set up. Application to CySec is submitted by its manager for registration in the registry and in the case of a common fund, accompanied with the following non-exhaustive information:
- Certificate of incorporation.
- Information regarding the investment strategy, the External Manager's policy regarding the risk and leverage, and other characteristics of the RAIF in question.
- RAIFs instruments of incorporation.
- Depositary information.
- External Auditor's and Legal Advisor's confirmations.
- External Manager's license.
CySec examines the received package concerning the RAIF and once CySec confirms that the concerned RAIF has been included in the special register, the RAIF may start its operations.
Key Features and characteristics of a RAIF
- No licensing required – RAIFs do not need to be licensed by CySec and thus they do not fall under the direct supervision of CySec. However, the establishment of a RAIF will need to be notified to CySec and be included in their register.
- RAIFs will be supervised by a licensed Alternative Investment Fund Manager ("AIFM"), which supervises the RAIF and provides certain mandatory services (risk management, compliance, internal compliance audit etc.).
- No initial capital requirements – There are no minimum initial capital requirements for a RAIF, but minimum assets under management of at least EUR 500,000 or currency equivalent to be reached within the first 12 months of receiving authorization (may be extended to 24 months).
- No investment restrictions – There are no investment restrictions for a RAIF, with the exception that RAIFs cannot set up as Fund of Funds, Money Market Funds or Loan Origination Funds.
- A RAIF can take all available legal forms and is allowed to invest in non-financial assets.
- Unlimited number of Investors – A RAIF has no maximum number of investors. May only be addressed to professional/well-informed investors.
- Possibility for creation of multiple compartments– RAIFs may be set up as umbrella funds which have separate compartments treated as a separate legal entity. Thus, there is an option for umbrella structure with multiple investment compartments ('sub-funds'), provided that this is mentioned in the RAIF's regulatory documents.
- Units of RAIFs may be listed.
- Requirement to appoint local depositary.
- "Pass-porting" rights for fund distribution within the EU Appointment of local depository.
Benefits of a RAIF
2.May be used until converted to AIF.
3.No minimum capital requirement, but minimum investment is required.
4.May be open-ended or close-ended.
5.RAIFs can be set-up as umbrella funds with multiple compartments, allowing the management of different pool of assets.
6.No Investment Restrictions (except setting up as funds of funds, money market funds or Loan Origination Funds).
7.RAIF can have an unlimited number of investors.
8.No limitation for the assets managed.
9.No taxation of capital gains.
10.Passporting Rights for fund distribution within the EU.
11.Supervision at the level of the AIFM managing the RAIF(s).
Furthermore investment in a RAIF offers the following incentives:
- Collective Investment: A single investor is not burdened with the full amount that would be required for the purchase of investments/assets if he was acting on his own.
- Diversification: Investors become the owners of units in the RAIF. The RAIF pools the money invested by many Investors and uses this large mass to buy several investments so that concentration risk is limited.
- Protection: All the activities required to manage the investments are performed by the professionals responsible for the RAIF (administrator, auditor). What is more, the funds are regulated by a competent authority and property management is performed by licensed professionals.
- Transparency: Investors will be updated for the value of investments and the policies of the RAIF through the periodic reports that are prepared and circulated to them based on regulatory requirements
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.