Professional Investor Fund (PIF)
Professional Investor Funds (PIFs) are a special class of collective investment schemes which fall within the provisions of the Investment Services Act, 1994. These funds provide a “lighter” regulatory regime and more flexibility than UCITS and other retail funds which are also licensed by the MFSA. PIFs are subject to minimal regulation compared to regular investment schemes provided that their only activity is operating as a PIF and, accordingly, does not itself carry out any investment services licensable activity. References to “PIFs”, “funds” and “schemes” below should be read and construed as interchangeable terms.
Professional Investor Funds have been extensively used for investment in non-traditional investments and/or specialist instruments including by way of example, private equity, derivatives, immovable property / real estate, and traded endowment plans.
The PIF Regime - Investor Profiles
The PIF regime is divided into three broad categories, based on the participating investors’ wealth and experience, with the regulatory regime being relaxed proportionally to the minimum entry threshold required from each individual investor.
The categories break down as follows:
- PIFs promoted to Experienced Investors - minimum investment threshold of EUR 10,000 or equivalent in any other currency;
- PIFs promoted to Qualifying Investors- minimum investment threshold of EUR 75,000 or equivalent in any other currency; and
- PIFs promoted to Extraordinary Investors- minimum investment threshold of EUR 750,000 or equivalent in any other currency.
The total amount invested by each investor may not fall below this threshold at any time during the operation of the fund unless this is the result of a fall in the net asset value. The minimum investment threshold applies to each individual investor. In the case of an umbrella fund comprising a number of sub-funds the respective thresholds are applied 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.
Before any fund may accept any investment from any investor holding himself/herself/itself out to fall into any of the three categories, the fund is required to obtain a completed Declaration Form in which the 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 of the particular category, thereby excluding retail investors.
The class of investors targeted by the fund will have a direct bearing on the licence conditions to which the fund will be subject and the extent of on-going regulatory obligations and conditions that must be satisfied throughout the fund’s existence. Thus, for example, PIFs promoted to Experienced Investors are subject to investment or borrowing (leverage) restrictions, unlike the other two categories of PIF which are not subject to such restrictions.
Although Professional Investor Funds are not required to issue a full prospectus, an offering document setting out the nature, structure, objectives, risks and functionaries of the fund must be submitted to the MFSA before being circulated to investors.
Shareholding Structure
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 require the prior approval of the MFSA in each case.
Investment Objectives
Since Collective Investment Schemes are based on the principle of risk-spreading, it is imperative that the PIF is shown to have a spreading or diversification of investments and that therefore the fund’s investment portfolio must be sufficiently varied to demonstrate the reflection of this principle. Besides, it is also important that the fund holds near-cash investments for the dual purposes and benefit of (i) diversifying the PIF’s portfolio and (ii) addressing the liquidity concerns that may arise as and when investors take the opportunity to cash in their holdings at any time when they are permitted to do so in accordance with the Offering Document.
Insofar as the denomination of currencies is concerned, it is important to emphasise that each fund is denominated in one base currency for financial reporting purposes. In the case of umbrella funds, each sub-fund can have a different base currency to the other sub-funds.
Composition of the Fund’s Board of Directors
The Board of Directors of the 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, clearly 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.
Fund Management
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.
External Manager
Where an external manager is appointed, such manager may be established in Malta or outside Malta. If established in Malta, the proposed should be in possession of a Category 2 Investment Services Licence and be duly licensed and authorised by the MFSA to provide management services to collective investment schemes. If the manager, on the other hand, 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.
If the fund is externally managed, the initial, paid up share capital for the scheme should not be less than EUR 50,000, or the equivalent in any other currency and the NAV of the Scheme is expected to exceed this amount on an on-going basis.
Self-Managed Fund
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 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.
If the self-managed fund route is followed, the initial, paid up share capital for the scheme should not be less than EUR 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.
In cases where the fund is self-managed, the fund must have at least one Director who is an individual resident in Malta and have experience in the field of financial services. Zammit & Associates- Advocates will be happy to assist you in identifying suitable candidates for this role.
Licensing Process
The MFSA has committed itself to process applications for the authorisation of PIFs within seven working days, provided all relevant documentation has been provided and that all functionaries appointed for the PIF are based and regulated in Malta, the EU, the EEA and other OECD jurisdictions.
If any of the external service-providers to be appointed operate from a country that is not a Recognised Country, it is recommended that at an early stage, applicants request an approval “in principle” on the appropriate application form.
Listing a PIF on the Malta Stock Exchange
As an enhancement to the fund’s international profile, the PIF may be listed on the Malta Stock Exchange, which is currently the only recognised investment exchange in Malta In doing so, the fund would be able to target certain institutional investors (such as pension funds) which are restricted to acquiring units in listed schemes. The advantages derived from having a PIF listed on the stock exchange would be increased transparency and increased liquidity.
Zammit & Associates- Advocates offers a comprehensive service, assisting funds with obtaining a listing of their units on the Malta Stock Exchange.
For further information about how Zammit & Associates – Advocates can help you with your financial services requirements kindly contact us on finance [at] zammit-law [dot] com
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