By James Williams – "One cultural attraction that I recommend people to visit is St John's Co-Cathedral where they can view Carravagio's 'The Beheading of St John the Baptist' and 'St Jerome Writing'," comments Joseph Zammit Tabona, Special Envoy to the Malta's Prime Minister, Dr Joseph Muscat. "A bit of culture is important to understand where Malta is coming from."
With a barely negligible crime rate, a growing AIFM community, some 3,000 hours of sunshine a year, an English-speaking business community and an approachable regulator, Malta is fast becoming an attractive option for fund managers wishing to enjoy a more Mediterranean, and cultured, island lifestyle.
Currently, Malta's well-diversified financial services industry contributes approximately 15 per cent, although the aim, says Zammit Tabona, is to see that rise to 25 per cent. Zammit Tabona spends a lot of time in London, meeting with managers and arranging 36-hour business trips to the island. In his role as Special Envoy for Investment Promotion, and having previously been the Chairman of the Malta Stock Exchange – among many other high profile positions – Zammit Tabona is well placed to get prospective managers in front of Malta's key service providers.
"I help organise a detailed itinerary with the MFSA, the law firms, banks and accounting firms, sometimes the Prime Minister and the Governor of the Central Bank of Malta (Professor Josef Bonnici) to help them make a decision on whether to start a fund in Malta, or indeed relocate.
"One manager who visited recently is now looking to set up a head office in Malta – we are seeing more operations teams and senior management coming to Malta; the number of AIFMs is growing," confirms Zammit Tabona.
This is helped by the fact that Malta's service provider infrastructure continues to expand. The rapid growth in the number of funds domiciled in Malta has led to a proportionate growth in the number of service providers servicing such funds over the years. "About 35 per cent of funds (including sub-funds) domiciled in Malta are now managed by Malta-based fund managers and approximately 75 per cent of such funds now use local fund administrators," confirms Kevin Valenzia, Territory Senior Partner, PwC. "Furthermore, there are approximately 50 legal firms established in Malta and all the major audit and accounting firms (including the 'big four') are all present and active in the sector."
Malta's upbeat and dynamic environment is proving ever more attractive to fund managers, and as the trend to move onshore into well-regulated jurisdictions accelerates, Valenzia says that "many in the industry expect Malta's rapid pace of expansion will continue to accelerate".
Indeed, PwC has created an international Asset Management industry network to share business ideas and cross border industry developments. This network is one of PwC's most distinguishing features–spanning 157 countries and including more than 500 partners worldwide, including Malta.
"In PwC Malta, the Asset Management practice is led by a dedicated team of professionals in Audit, Tax, Regulatory and Business Advisory Services. We are able to help and assist fund promoters across the whole value-chain of their business proposition," confirms Valenzia.
In addition to seeing more investment managers setting up their own management companies in Malta, some existing management companies have upgraded their capabilities and licences to function as AIFMs under the AIFMD.
"Under AIFMD, AIFs will be required to appoint a local custodian by July 2017. This is both a significant challenge and an opportunity for a maturing jurisdiction like Malta," comments Joseph Camilleri, Chief Officer, Bank of Valletta Fund Services, one of Malta's most established fund administrators.
This is something that the MFSA is aware of. Last December, it published A Guide to the Establishment of Custody Operations (Depositaries) in Malta, providing practical steps and considerations. "The custody issue is a challenge for Malta, but the MFSA document shows that it is high on the agenda. It is one area that we will be touching upon when FinanceMalta hosts an event in London on 5th November 2015," says Kenneth Farrugia, Chairman of FinanceMalta.
It is nevertheless worth noting that roughly 70 per cent of Malta's funds are de minimis with less than EUR100 million and as such do not exactly offer an enticing business opportunity for tier one custodians. For Malta to attract bigger custodians, it needs bigger funds.
"Banks are under fire at the moment and are retrenching to some extent," says Derek Adler, a director and founder member of International Financial Administration Group ('ifina'). "But we do need more banks in Malta. In many respects, it is a chicken and egg situation because you need sufficient business volume (i.e. large funds) to justify setting up in these jurisdictions, yet at the same time, without having enough custodians it's hard to attract big fund managers."
Professor Joseph Bannister, Chairman of the MFSA, confirms that the situation is being dealt with and on the way to being resolved.
"We have two Swiss banks coming to the island – Swissquote and REYL Bank – besides Sparkasse Bank, which has been here for some time, and we are currently in discussion with another two banks. In view of the fact that we might start seeing more larger funds in Malta, we are looking at big custodians to deliver the necessary services in Malta. Once we start to see the number of large funds increase, then we will see more tier one custodians coming with them," says Bannister.
Without doubt, the introduction of a depositary passport under the AIFMD at the EU level is something that could change Malta's fortunes; the idea here being that a custodian registered in one EU Member State should, like an AIFM, be free to provide their services across the rest of the EU.
"Failure to do so could hamstring Malta's ability to attract AIF business as there are only a handful of depositaries onshore. The local PIF industry may also be negatively affected as de minimis managers contemplating conversion to AIF status in the future may be less inclined to set up PIFs in Malta," adds Dr Louis de Gabriele of law firm Camilleri Preziosi.
Any fund jurisdiction must always look for ways to improve, of course. Speaking with Hedgeweek, Andrew Gebhardt, Managing Partner of London-based Finex LLP, believes that further improvements are needed to support UCITS funds.
The Finex Navigator UCITS SICAV is the only UCITS-compliant Managed Futures strategy that is domiciled in Malta, thereby giving Gebhardt a unique perspective on things.
"As we run a SICAV, we sometimes get asked by other managers whether we can host their fund, and what we notice is that a large number of these funds actually never end up going live," says Gebhardt.
"This could be for numerous reasons but the problem is Malta tends to overpromise on its capabilities. With respect to UCITS funds, for example, there is a lack of standardised custody agreements, which needs to be addressed. We have had problems with our existing custodian and have decided to move to Swissquote; they've opened recently in Malta but they sub-contract all their operations to the Swiss entity. The number of custodians for UCITS is becoming smaller with two notable names stopping this service. This leaves an important commercial opportunity."
Gebhardt is particularly concerned, at the EU level, with current UCITS regulation and the ability for all European jurisdictions, not just Malta, to attract US managers running CTAs. With respect to government bond futures, Article 54 of the UCITS IV Directive relates to Single Issuer Concentration Risk. It states that securities from "any single issue shall not account for more than 30 per cent of its total assets".
"There is a serious gap in UCITS IV regulation in relation to single issuer concentration. ESMA defines all Exchange Listed futures as free of counterparty risk, and whilst equity indices are not subject to concentration risk parameters, for bond futures they want managers to apply the full commitment rules, irrespective of their licensed risk model. This means that because the implied leverage of bond futures is so high, you struggle to run a balanced portfolio of government bond futures in a UCITS fund; and by struggle I mean it's nearly impossible. The alternatives (certificates and swaps) can cost an active fund 2 to 3 per cent in performance per year," states Gebhardt. "This is a very important issue in my view because it will block any active US Managed Futures funds from coming to Europe and establishing UCITS. It is the single biggest impediment to any US-based CTA that wants to trade bond futures in a balanced UCITS programme."
It's an important point, as some US managers prefer the more established UCITS wrapper to the AIF wrapper. Malta has already seen a good number of UCITS funds structured throughout the first half of 2015. If and when these regulatory kinks are ironed out by ESMA, Malta could see UCITS fund numbers rise further.
That aside, one important area of momentum – in response to AIFMD – is that of the AIFMD fund platforms being established to provide a turnkey solution for those managers wishing to establish an AIF. One of the most recent firms to acquire its AIFM license to provide both third party management company services to existing standalone funds, as well as offer a fully hosted AIFM and fund platform solution to newly established funds, is Portcullis Asset Management.
"We received our AIFM authorisation in November 2014 and we are planning to launch our first client sub-fund at the start of October," confirms David Barry, CEO of Portcullis Asset Management. "It's a sizeable allocation so we are excited about that."
He adds: "Our business model is two-pronged. First, to provide the fund infrastructure where Portcullis will be the AIFM and sub-delegate the portfolio management back to each regulated investment manager, who will have a dedicated sub-fund on our platform. Second, we will provide all the management company services on a standalone basis for managers of existing funds. The key advantage to these models is it allows managers to focus on their core activity of portfolio management. We have recently added an experienced Chief Risk Officer to the management team. The beauty of AIFMD is that we can passport our services into any EU member state. It allows us to be jurisdiction agnostic. We are in discussion with managers whose funds are domiciled in Cayman, Malta, Ireland, and Luxembourg."
PwC's Valenzia believes that using a hosted AIFM solution could be particularly beneficial "for non-EU managers wishing to establish a presence in the EU".
European-based managers have to decide whether to become an AIFM themselves, and beef up their operational infrastructure, or decide to partner with an outsourced provider and benefit from their own internal resources; there is also a clear scale benefit to doing this, as the third party AIFM is able to draw upon its experience of supporting a range of different funds.
One firm that offers a slightly different option is Cordium, a leading compliance specialist, who recently established the Cordium Total AIFM Solution ('CTAS') in Malta. Where CTAS differs is that the manager retains full ownership of the Malta AIFM, whilst Cordium takes care of all the operational and compliance demands.
"This is relatively new but it's generating a lot of interest. Our MiFID hosting solution run by Mirabella Financial Services has been working well for 10 years; while AIFMD required a necessary evolution of that business line which is why we created CTAS. It's still early days but we're optimistic," says Bobby Johal, Managing Consultant at Cordium.
The idea of the Malta platform as a hosted solution would be to support people looking to launch funds in Europe, including non-EU managers who currently are unable to avail of the fund passport, but which could become available in the next year or two; though this remains a politically charged issue.
"The premise of CTAS is that the client owns the AIFM and we operate it. CTAS is not a fund platform solution on which managers can launch sub-funds. We don't get involved in the distribution side of things at all; that's the front-office responsibility of the manager," adds Johal.
Barry believes that there will be a wide range of strategies joining its fund platform – known as Mdina SICAV – to reduce the time to market and to have access to greater distribution channels via the EU marketing passport and those who simply opt to use Portcullis Asset Management to handle the operational heavy lifting to comply with the Directive. Our vision is to build a multi-asset platform that we can market to all types of investors.
"I think the issue that managers sometimes have with platforms is control. Who has the voting shares? Some managers like to have their own fund structure in order to be able to appoint their own service providers and directors. Both business models we offer are attractive to different sub-sets of managers. Ultimately, it will depend whether the manager is comfortable with the platform infrastructure, the service providers and directors being used, and the control element," concludes Barry.
