Cyprus’ investment funds industry has recorded impressive growth over the past years. Although the future is a little less certain due to COVID-19, the arrival of more medium-sized funds is seen as an important step towards attracting an even greater number of international service providers.
How has Cyprus’ investment funds sector performed during the past year?
The investment funds industry has experienced tremendous growth over recent years. According to the European Fund and Asset Management Association (EFAMA), Cyprus experienced the highest Net Asset Value (NAV) growth rate at a pan-European level in all categories during the fourth quarter of 2019, including total Undertakings for Collective Investments (UCIs), Alternative Investment Funds (AIFs) and Undertakings for Collective Investment in Transferable Securities (UCITS).
Domestic statistics are also favourable. At the end of 2019, the Cyprus Securities and Exchange Commission (CySEC) supervised 210 management companies and UCIs. The total number of management companies included 30 AIFMs, 67 sub-threshold AIFMs and 4 UCITS management companies. Based on the statistics published by CySEC for the fourth quarter of 2019, the total Assets Under Management (AUM) reached €8.3 billion, recording an 8% increase compared to the third quarter of 2019. The total NAV of the UCIs managed by Cyprus-based management companies was €6.4 billion.
What impact do you expect the global coronavirus outbreak will have on the sector in Cyprus but also internationally?
The economic cost of the lock-down will arguably be very significant. Studies carried out by top-tier professional services firms have found that Cyprus’ GDP in real terms is expected to be significantly lower in 2020 compared to 2019, with the contraction being between 7.5% and 13.5%. From 2021, expectations vary and will largely depend on whether a second lock-down scenario is mandated.
A report by PwC Cyprus highlights that the sectors likely to experience the greatest economic impact in 2020 are hospitality, trade, construction and real estate. Hospitality is particularly affected due to the reliance on tourism from countries hit by COVID-19, such as the UK and Russia. Other sectors like manufacturing, transport and utilities experience limited direct impacts but are affected through indirect shocks from other sectors. The same applies to sectors such as education, as well as financial services and professional services.
Globally, the economic damage has started to become evident and represents the largest economic shock the world has experienced in decades. Investors are increasingly reconsidering their investment risk tolerance, and fund managers are starting to reshape their investment strategies to protect their investors’ money.
As we have seen in other economic crises, it is those with the resources who will be able benefit from these opportunities, such as providing refinancing options to heavily borrowed businesses and acquiring mortgaged assets cheaply, as well as taking part in mergers and acquisitions deals. I am convinced that the funds industry will give investors a viable route towards pulling their resources in order to take advantage of such opportunities and, equally, helping to boost the economy.
How would you define Cyprus’ role within the global and European investment funds community and how does Cyprus’ offering differ from that of other fund centres?
The Cyprus fund industry is an excellent example of high achievement when corporate and governmental bodies actively work together for the development of an industry. Of course, this is evidenced from the significant growth in the number of funds as already mentioned.
Indeed, Cyprus is steadily evolving into an internationally trusted destination for the establishment and management of investment funds, offering a significant choice of flexible and advantageous solutions. Cyprus provides low set-up costs compared to other EU jurisdictions, with simplified procedures in relation to the set-up, relocation and ongoing operation of investment funds. In addition, the country offers a legal stable environment, a strong network of financial and professional service providers, a competitive legislative and regulatory regime, and a favourable tax regime.
How would you describe the depth and breadth of the country’s service providers?
The country prides itself as a well-established services jurisdiction, with a highly specialised multinational and multilingual workforce. Cyprus hosts a number of recognised fund service providers, ranging from global names to local independent operators. Today, fund administrators, custodians, lawyers and auditors are increasingly serving funds and fund managers domiciled in Cyprus with a demonstrated commitment to add even more value to the domestic asset management industry.
What type of funds are being launched from Cyprus and what is their average size?
Cyprus offers retail investment funds, such as Undertakings for Collective Investments in Transferable Securities (UCITS), but also provides funds structured for investments in the alternative asset classes, namely the Alternative Investment Funds (AIFs). Cyprus offers three different structures for AIFs: Alternative Investment Funds (AIFs), which can be addressed to the public or to professional and/or well-informed investors; Alternative Investment Funds with Limited Number of Persons (AIFLNPs), which is a type of ‘private’ fund with limitations on the maximum number of investors; and Registered AIFs (RAIFs), which are not authorised but registered with CySEC and provide for quick set-up and access to the market.
As the industry is still growing to its full potential, the sizes of Cyprus’ funds vary significantly, and no average can be considered as a representative of the market. In particular, the fund sizes may expand from €10 million to €1 billion, however more and more funds of significant sizes are being established, justifying the high growth rates captured.
What activities and functions are being performed in Cyprus?
Cyprus is a place where one can experience the entire spectrum of the servicing circle: front, middle and back office. The fund ecosystem is composed of investment and risk advisors, analysts, distributors, brokerage houses and middle office providers who can facilitate reporting obligations to the authorities as well as back office administrators who can undertake a supportive role and perform the administrative work.
Why should the island be on the agenda of global investors, fund managers and service providers and what is Cyprus’ unique selling point as a location for fund professionals and as a fund domicile?
I strongly believe that Cyprus has all the ingredients in place to be considered as a reputable EU fund domicile and become the location of choice for international fund managers and investors seeking secure and advantageous fund solutions. The country’s strategic location at the crossroads of three continents, Europe, Asia and Africa, provides a unique competitive advantage in terms of easy access to high-growth markets.
Opportunities are reinforced by the national framework, which offers flexible structuring opportunities to funds and fund managers and is designed to accommodate market realities and conditions, while at the same time is fully aligned with the European Union regulatory framework.
With the adoption of the AIFMD and UCITS V Directive, we can offer unequalled solutions to fund managers that would choose to operate from Cyprus regardless of the domicile of the funds they manage.
Furthermore, as an EU member state, Cyprus is a trusted destination providing sterling reputability to its EU-compliant funds, as well as the appropriate financial infrastructure for fund managers wishing to domicile in Cyprus. Emphasising on investor protection, fund vehicles are subject to efficient transparency mechanisms encompassing reporting and risk management requirements, as well as the necessary control functions.
Other benefits of domiciling in Cyprus include low set-up and operational costs compared to other fund centres, as well as the country’s stable political environment and strong legal framework based on UK Common Law. Cyprus’ positive outlook is supplemented by its favourable tax regime both at fund and fund manager as well as at investor level.
As the market size continues to grow with the entrance of medium-size funds, we expect that Cyprus will start attracting more and more international service providers, including custodians, fund administrators, distributors and the like.
What segments of the Cypriot investment funds industry offer the greatest opportunity for growth and what could be done to strengthen the sector further?
Cyprus investment funds have been a platform for investments, attracting FDI in all sectors of the economy. For example, there are equity funds with a focus on shipping, such as Cyprus-flagged vessels and tankers, renewable energy, including setting-up photovoltaic solar parks, hospitality, telecommunications and large-scale projects. Real estate funds, with residential, student accommodation or commercial portfolio, are another important area that offers a great opportunity for growth. Of course, there have been venture capital funds in start-ups, research and innovation as well as mutual/hedge funds such as equity, bonds and other financial instruments.
Most agree that the sector has not even begun to show its true potential. It is expected that the introduction of tax and redomiciliation incentives for funds and fund managers, the modernisation of procedures and the further reduction of bureaucracy will aid in boosting the fund sector to even higher growth rates. In addition, the empowerment of the fund ecosystem with the entrance of additional international players in the fund management and custody space will give a vote of confidence and will ratify the industry’s capabilities.
Cyprus is often described as a very flexible jurisdiction. However, given the high levels of integration and homogeneity in the European investment funds market, can you provide a few concrete examples of Cyprus’ operating advantages?
It is the legal system in Cyprus that drives the flexibility. While common law does rely on some scattered statutes, which are legislative decisions, it is largely based on precedent, meaning judicial decisions that have already been made in similar cases.
Cyprus' comprehensive and robust legal and regulatory framework is widely recognised as a business-friendly and effective system that ensures transparency and reliability in business practices. Particularly, the Cyprus contract law allows the contracting parties the freedom to select the law, which is to govern the contract and to adjudicate any conflict serving from the terms of a contract. Moreover, the applicable laws provide for clear procedures for dissolution and redomiciliation procedures.
What trends are influencing the sector at the moment and how is the country responding to them?
Significant efforts have been made by the Cypriot government to attract collective investment organisations, mainly from Asia, particularly India and China, Israel, Africa and the Middle East, taking advantage of Cyprus' strategic position as a gateway to the European Union and easy, fast and economical access to these countries or regions. We have seen an increasing trend from Asian fund managers to establish funds or fund management companies in Cyprus as their gateway to the EU. At the same time, we have noticed a growing interest from UK fund managers who wish to retain their access to the EU market after Brexit, considering Cyprus as a jurisdiction of choice.
The government is creating incentives for professionals residing in these jurisdictions to consider Cyprus as a fund jurisdiction. In particular, the government is entering into new double tax treaties and renegotiating existing ones. For example, in the case of the UK, the goal is to attract fund managers and create additional incentives for investors to place their money in a Cyprus fund.
Is Cyprus planning any regulatory changes that the international asset management community should be aware of?
Cyprus offers a comprehensive and modern regulatory framework. In July 2018, we passed a new law to replace the old legal framework in order to keep the jurisdiction at the forefront of fund managers’ and investors’ minds.
Cyprus also just adopted a new law on Small Alternative Investment Fund Managers, the so-called Mini Managers. Mini Managers are allowed to manage AIFs whose assets do not exceed the threshold of €100 million, with the use of leverage, or €500 million when unleveraged with a lock up of five years.
In addition, new legislation is being drafted that will provide for effective supervision of all local fund administrators. The enactment of a fund administration law is a significant development which will surely add comfort to fund managers and investors alike.
What are the greatest challenges of operating out of Cyprus?
One of the greatest challenges for the local industry is the fact that Cyprus is considered to be a ‘newcomer’ in the international funds arena, meaning that prospective investors may be reluctant to rely on the Cyprus industry due to ‘lack of experience’ or the absence of a tested environment. From our end, we firmly believe that Cyprus is in a position to compete with reputable jurisdictions such as Luxembourg and Ireland.
Looking to the future, how do you expect the industry to develop in Cyprus in the next three to five years?
Considering the high volume of funds and assets under management recorded over the last years, which have more than tripled from 2012 until today, we are expecting that AuM could reach €12 billion in the next five years, if current growth rates are sustained and excluding the events of the pandemic.
Despite the challenges posed by COVID-19, we are confident that the local funds industry is going to develop and expand further, becoming one of the major pillars of our financial industry in the coming years and positioning Cyprus as an ideal funds jurisdiction.