Alternative Investment Funds, or AIFs, are one of the EU's major industries. According to the latest report of the European Securities and Markets Authority (ESMA) from 10 January 2020, there were 30,357 AIFs in the EU toward the end of 2018. In the same report, ESMA estimated that the size of the EU AIF industry had reached ?5.8 trillion in net asset value (NAV). That amounted to nearly 40 percent of the entire EU fund industry.
Given the growing importance of the field for the EU economy, it is no wonder that the Cypriot government has taken steps to make the island nation more welcoming to AIFs. Two critical pieces of legislation in this respect are Law 124(I)/2018 and Regulation (EU) 2019/1156.
The country recently enacted Law 124(I)/2018 on AIFs and other related matters, which entered into force in August 2018 and repealed the previous Law 131(I)/2014. The new legislation paved the way for a type of AIF known as Registered AIF or RAIF, which significantly reduces both the time and cost associated with setting up AIFs in Cyprus.
As per the new regulations, RAIFs that are managed by an AIF Manager (AIFM) based in another EU Member State do not require formal authorization by the Cyprus Securities and Exchange Commission (CySEC) to operate in the country. Instead, they only need to notify CySEC, which will include them in a special RAIF register.
While RAIFs have to appoint a local depository, supervision only takes place at the level of the AIFM. What's more, there is no minimum capital requirement. As far as the fund structure is concerned, there are a number of options open to investors. RAIFs may be either:
- With an umbrella structure
RAIFs can also take the form of:
- A mutual fund
- An investment company with variable or fixed capital
- A limited partnership with or without a separate legal personality
Evidently, the RAIF structure combines great convenience and flexibility and has the potential to bring about a real boost in Cyprus's AIF industry. Perhaps the only downside is that RAIFs can only be marketed to professional and well-informed investors but not to retail investors.
Regulation (EU) 2019/115
Cyprus is bound by Regulation (EU) 2019/1156, which is due to come into full effect in August 2021. The Regulation aims to facilitate the cross-border distribution of collective investment undertakings. Among other things, this legislation will make it easier to market and premarket RAIFs in or from Cyprus across the EU.
While the bulk of Europe's AIFs are based in London, many have or will soon migrate to Dublin or Luxembourg. That comes as no surprise: their continued access to the EU market post-Brexit is uncertain. There are still no cooperation agreements with Ireland, Luxembourg, and other countries that are key to the industry.
In light of Cyprus's newly streamlined legal framework, industry observers expect that a number of major funds will instead choose to relocate to the island. The country's geopolitical, cultural, and financial ties to the Middle East are another major selling point that is likely to attract European investors and fund managers.
However, Cyprus still has to confront and clean its less-than-perfect reputation in the world of international finance. Otherwise, it risks putting off certain investors. There is also another drawback to attracting foreign capital. The largest global banks, such as BNP-Paribas and Credit Suisse, have yet to set up branches on the island. Many of the big funds choose to only work with these banks.
Nevertheless, Cyprus has done a lot over the past decade to reform its legislation and restructure the local financial sector. That has had a tremendously positive effect on the country's reputation as a budding international financial center. If the Cypriot authorities continue in this spirit, the island could become a major hub of the global financial industry.
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