As an EU-regulated, flexible and cost-effective jurisdiction, Cyprus has clear advantages as an up-and-coming fund centre. With preferential access to CIS countries and the Middle East, Cyprus is creating a new regional market for investment funds.
After more than a decade of working in the financial centres of Luxembourg and London, Greek-born fund management expert Ioannis Gaiganis came to Cyprus in 2009 attracted by the potential of building the country’s investment fund sector. Managing Director of Forticap and the Vice-Chairman of the Cyprus Investment Fund Association (CIFA), Gaiganis has worked closely with Cyprus’ private and public sectors to develop and improve the industry. He introduced the concept of CIFA in 2009 for the association to finally become a reality in 2013, shortly before managing Cyprus’ approval in the EFAMA as a national member. Responsible for bringing many fund management professionals to Cyprus, including the first authorised UCITS management company, Gaiganis set the momentum for the start of the fund industry in 2012 and with a new fund framework approved he sees exciting times ahead for an industry in the making.
You recently set up Forticap, could you tell us a little bit about your company?
Forticap is an EU-regulated dual-licence investment manager, which gives us the right to manage UCITS and AIFs in any EU jurisdiction. In addition to our own products, we offer third-party asset managers or wealth owners the opportunity to establish and manage their own regulated funds under our umbrella funds and services. The fact that we are domiciled in Cyprus gives us substantial advantages, which translate into benefits for our clients as well. One significant advantage is that Cyprus is cost-effective, which means that while we offer pan-European solutions, our operational costs are significantly lower than in most EU fund centres. The smaller scale of the industry in Cyprus also gives us better access to the regulator, the Cyprus Securities and Exchange Commission (CySEC), which enables us to be faster and more flexible, while keeping costs down. Although Cyprus has suffered damage to its reputation and many still see setting up a fund here as a risk due to the challenging economic climate, there are in fact minimal risks in this regard. We are not linked to the type of local banking risks that may be detrimental to Cyprus’ perception at this stage, we are subject to EU laws and regulations and we are able to deliver investment fund structures across the EU.
Although still at the beginning stages of building a fund industry, what are Cyprus’ key advantages and which markets should it target?
The most significant advantages of Cyprus are its cost-effectiveness, geographical location and its access to untapped markets. The ability to operate at a competitive cost for high-quality services is a clear advantage over many other fund centres. It is of paramount importance, especially to asset managers that are too small to access viable solutions in mature fund centres, where cost becomes a prohibitive factor. Cyprus is ideally placed to cater to these niche target groups. Another asset is the geographical location and the historical ties Cyprus enjoys with specific markets. For example, Cyprus’ relationship with the CIS, the MENA region and Asia is unique and after decades of fostering that connection, Cyprus continues to be a preferred location for many financial structures with ties to these regions. To this day the majority of business continues to come from these countries. This preferential access and expertise has established Cyprus as a launch pad into those markets. The historical relationships and the proximity of Cyprus with the Middle East and the Gulf also offer many opportunities. There are increasing numbers of asset managers in that region looking for EU structures and not only is Cyprus more cost-effective than most, but it is closer geographically and culturally, providing great prospects to capitalise on opportunities.
Cyprus is yet to be firmly placed on the map as a fund jurisdiction, but we are rapidly moving in that direction. So far we have had International Collective Investment Schemes (ICIS), but under the new fund framework, which introduces numerous forms of EU regulated Alternative Investment Funds (AIFs), we are on the same playing field as other major fund jurisdictions. Now we must focus on raising awareness about the benefits of Cyprus in terms of both Undertakings for Collective Investment in Transferable Securities (UCITS) and AIFs.
What types of funds do you see as potentially being the most successful in Cyprus and why?
Because the local expertise is traditionally linked to ICIS, which are predominately alternative asset classes, I see this as an area where we could advance faster than with UCITS. In particular, all types of real estate, shipping and energy related alternative funds have great prospects and could be very successful in Cyprus. If we look at funds set up based on local or regional investment opportunities, Cyprus has a lot of valuable assets that may fall under alternative asset classes and many of these assets have distressed values, which also represent opportunity.
Cyprus is battling its way out of recession and is projected to return to growth in 2015. How could investment funds help speed up economic recovery?
Funds could be the ideal solution to speed up recovery and bring more liquidity to the market. Cyprus is currently trying to attract foreign direct investment into various large-scale projects, however if these investment opportunities were incorporated into regulated funds, such as for example a Cyprus Real Estate Opportunities Fund or a Cyprus Leisure Fund jointly managed with an international fund manager of relevant expertise, I think we would have a better chance of attracting investment. Investors are more confident when these types of projects and investments are designed into regulated structures rather than direct ownership or a holding company, as it offers better security and risk management through the rigorous processes of asset management and applicable regulation. When we try to attract investment, most often we target international, sovereign or regional funds. We must question why they use funds to structure their investments and replicate successful models. Creating regulated funds for these types of projects, would make them more accessible internationally and easier to invest in. Restoring confidence is crucial for Cyprus at this juncture and this strategy could be the ideal way to facilitate investment. Why bundle up our real estate and other assets and sell them to international funds, who will sell them to their own investors, when we can create these funds ourselves?
Cyprus is facing very immediate needs with its international lenders and creating funds that use the country’s assets to attract foreign investment could be seen favourably. Cyprus could capitalise on the fact that global managers and investors are looking to allocate part of their portfolios in growth potential assets in Southern Europe, but we need to create the right regulated products worth investing in. The private sector is gearing up to harness this potential, but to gain real momentum we need the political will and the state to cooperate. One important reason for this is that considerable wealth is in the hands of the state or in state-related entities, as well as the Church of Cyprus. We should look at creating semi-state sovereign funds with specific sector sub-funds. This could be a joint venture with the state and the private sector to offer a combination of state-controlled and private assets, with a team of top international experts to help develop and manage them. This could boost the burgeoning fund industry and be an ideal solution to the economic challenges, as it would transform many isolated projects and investments into marketable financial products. It could also be a way to attract international custodian banks to set up on the island.
What key opportunities do you see in Cyprus for foreign investors in terms of funds?
From an investor perspective, fund centres are either administration centres, management centres or fund distribution centres or sometimes a combination of the three. In terms of investor reach, Cyprus is ideally positioned thanks to its access to the substantial markets of the CIS, the Middle East, the Gulf and Asia, which are not easily accessed by the majority of EU-regulated financial products. Cyprus is a location where you can effectively manage wealth in a cost-effective EU-regulated jurisdiction, and draw investment in or through Cyprus from these markets. To attract investment you need strong service providers and administrators as well as solid custodian banks. Cyprus has a great base of service providers with a high level of expertise and reputable fund administrators with global experience. As for custodian banks, it is no secret that currently this is a challenge linked to reputation following the banking crisis, despite the possibility for AIFs to appoint foreign EU custodians until 2017. Once all three of these crucial factors are in place I see great prospects for both the industry and investors.
Banking has been the hardest hit sector in the wake of Cyprus’ bailout. How could Cyprus attract major international custodian banks?
At this point it would be very difficult to convince a global bank to come to Cyprus for the sole reason of becoming a custodian for the fund industry, because this new sector is still in its infancy compared to major EU fund custody centres. However, we have strong interactions with major international banks on other fronts, such as the financing of our energy resource projects, and it would not be far-fetched to suggest that in addition to a banks’ other activities they could also set up a small custodian operation in Cyprus and thus support the growth of the fund industry. Another possibility is if the Cyprus problem is solved, which would boost opportunities in many economic sectors and could attract bigger banking institutions to set up on the island.
What is Forticap’s current strategy and how do you see the fund industry developing in the next five years?
As a company our strategy is to offer solutions to the private sector, to foreign asset managers, to high-net-worth individuals and to off-shore funds looking to re-domicile in the EU. As a Cyprus-domiciled company, another important aspect for Forticap is to develop products and services that will have a positive impact on Cyprus’ fund industry and attract foreign investment. As for the future, Cyprus needs to further develop its expertise, but there are great prospects in the fund industry and we need to look at the long-term benefits of building an industry that will be a pillar of the economy tomorrow. If an investor wants access to EU-regulated financial solutions in a location with quality services, preferential market access and a sophisticated infrastructure – but at a fraction of the cost compared to mature fund centres – Cyprus is the place to be. The next five years will be interesting as we are creating a new regional market for investment funds.
A professional expert in fund management and securities services, Ioannis Gaiganis is the Vice-Chairman of the Cyprus Investment Funds Association (CIFA), member of the Alternative Investments Fund Managers Directive Committee and holds Directorships for several Cyprus investment companies. He is a Senior Advisor to the Board of BDO Fund Services and MD of Forticap. Previously, Gaiganis was Director for the Fund Manager Beneficentia Ltd and its funds and managed the Investment Fund Services of Deloitte and KPMG in Cyprus. He started his financial career in Luxembourg where, from 1998 to 2009, he occupied senior commercial and operational positions at JP Morgan Fleming Asset Management, Fidelity Investments and Societe Generale Bank & Trust.