1 Introduction

1.1 The funds sector in Cyprus has in recent years steadily become an important and dynamic sector of the Cyprus services and finance industry, helped also by the introduction of new types of funds available for interested investors and fund managers. In addition, regulatory and government bodies have been engaging in a promotional drive of the funds industry, leading Cyprus to become an attractive destination of funds setup, with growing numbers of funds being established and maintained in Cyprus in recent years.

1.2 In addition, Cyprus being a full EU member, benefits from harmonisation of EU financial services regulations and is able to act as connecting platform of access to Europe, Middle East and Africa, utilising its geographical position, but also the high-quality of corporate and financial services and its now recently modernised legal framework in relation to funds.

1.3 The steady growth of the funds is depicted in the value of assets under management which have more than doubled from €2.1 billion in 2012 to €4.8 billion in March 2018. The number of funds is also growing and currently stands at over 130.

1.4 Also, with the recent enactment of the Alternative Investment Fund Managers Law (81(I)/2020) in line with the AIFM Directive, Cyprus is now providing a modernised, lighter regulatory regime which provides for the introduction of Mini Managers licensed by CySEC in cases where the cumulative AIFs under management fall below certain thresholds. 

1.5 This publication focuses on and aims to outline the key features of Cyprus alternative investment funds ("AIFs"), their key strengths and benefits and how investors can utilise this versatile vehicles within the Cypriot legal framework and regulations.

2 AIFs at a glance

2.1 The Alternative Investment Funds Law was enacted in Cyprus in 2014 and aligned the Cyprus legal and regulatory framework with relevant EU directives. Continuous developments of the funds industry have led to new funds legislation in July 2018, replacing the 2014 regime, and in effect introducing upgraded rules on authorisation, operation and supervision, along with the introduction of a new type of AIF – namely the Registered Alternative Investment Fund ("RAIF").

2.2 Therefore, there are now three types of AIF:

2.2.1 AIFs with limited number of persons (limit of 50 investors);

2.2.2 AIFs with unlimited number of persons; and

2.2.3 RAIFs.

2.3 The key features, forms and requirements of the above three types of AIFs are set out below:

 

AIF with Limited Number of Persons (AIFLNP)

AIF with Unlimited Number of Persons (AIFUNP)

Registered AIF (RAIF)

Regulatory Authority

CySEC

CySEC

CySEC

Limitation on number of investors

50

N/A

N/A

Type of investors

Professional investors1 and/or well-informed investors2

May be marketed to any type of investors, including retail investors3, professional investors and/or well-informed investors.

Professional investors and/or well-informed investors

Available structures

Variable Capital Investment Company

Fixed Capital Investment Company

Limited Partnership

Variable Capital Investment Company

Fixed Capital Investment Company

Common Fund

Limited Partnership

Variable Capital Investment Company

Fixed Capital Investment Company

Common Fund

Limited Partnership

Umbrella Funds

Possible for all structures

Possible for all structures

Possible for all structures

Minimum Share Capital

Self-managed funds only = €50.000

Self-managed funds only = €125.000

No minimum share capital required



AIF with Limited Number of Persons (AIFLNP)

AIF with Unlimited Number of Persons (AIFUNP)

Registered AIF (RAIF)

External Manager Licencing Requirement

No, can be self-managed

No, can be self-managed

Can be self-managed (when it is established as an Investment Company) or managed externally by a portfolio manager (if otherwise).

Yes, always externally managed

Mini-Manager allowed to manage?

Yes, subject to conditions

Yes, subject to conditions

Only if it takes the form of limited partnership

Director Requirements

Fit and Proper

Fit and Proper

Fit and Proper

Depositary Requirements

Based in Cyprus, EU or third country that has cooperation agreement with Cyprus; exception in specific circumstances

Based in Cyprus, EU or third country that has cooperation agreement with Cyprus; exception in specific circumstances

Always based in Cyprus, except for Limited Partnerships managed by a MiFiD entity.

Reporting

Audited annual reports and half-yearly unaudited report to be submitted to CySEC and made available to unitholders

Audited annual reports and half-yearly unaudited report to be submitted to CySEC and made available to unitholders

Audited annual reports and half-yearly unaudited report to be submitted to CySEC and made available to unitholders



3 RAIFs

3.1 The RAIF (available since July 2018) has substantially changed the funds industry in Cyprus in the way it can be established and the ongoing supervision process it will have to adhere to. Instead of requiring CySEC authorisation for its registration (as is the case of AIFLNP and AIFUNP), a RAIF does not require CySEC authorisation or subsequent monitoring (as it is being regulated through its licensed fund manager) and therefore offers a cost-effective, quick and efficient solution for fund establishment in Cyprus. In essence, CySEC relies on the regulated status of the AIFM, to ensure compliance and indirect supervision of applicable laws and appropriate standards by the RAIF.

3.2 The following criteria must be met for RAIFs:

3.2.1 the fund manager must qualify as a (i) full-scope Cyprus or EU Alternative Investment Fund Manager (AIFM) or (2) Mini Manager (recently introduced by the enactment of the relevant legislation) for RAIFs which have taken the form of a limited partnership with (subject to the pending amendment of the Cyprus Partnership Law) or without separate legal personality. Third country AIFMs and Mini Managers will be able to submit a request for registration of an RAIF, once the country where these have been established has granted passporting rights pursuant to the AIFMD; and

3.2.2 the fund must be targeted to professional investors and/or well-informed investors.

3.3 Other key benefits of RAIF are that (i) the RAIF can make use of the EU marketing passport via its AIFM or Mini Manager (ii) it can take a wide range of forms such as variable or fixed capital investment company, common fund or limited partnership (for RAIF to be managed by Mini Manager must be in the form of a limited partnership only) (iii) can be organised with multiple compartments; and (iv) has no limit on its strategy or class or type of investable assets. Other key operational features, such as the issue and redemption of units, are similar to the regulated AIF regime.

Footnotes

1 Note: 'Professional Investors' are considered those investors that possess the experience, knowledge and expertise to make their own investment decisions and who are able to properly assess related risks.

2 Note: 'Well-informed Investors' are investors who are not 'professional investors' but have confirmed in writing that they are aware of the nature of their investment operations and assume the appropriate risks. In addition, they shall invest at least €125,000 in an AIF or be successfully assessed by a bank, investment firm or UCIT management company as a well-informed investor with the required level of expertise and knowledge.

3 Note: A 'retail' investor is an investor who does not fall within the category of a 'professional investor' or a 'well-informed investor'.

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.