With the number of funds and assets under management growing steadily, Cyprus is strengthening its status as an efficient international investment funds hub for sophisticated structures and fund managers alike.
Today, Cyprus hosts a vibrant investment fund cluster with an ever-increasing number of funds and managers locating to the island. The strides the country has made in recent years has certainly helped to heighten its image in the global investment funds scene. The Cyprus Securities and Exchange Commission (CySEC) now supervises well over 300 companies, including collective investment schemes and fund managers, with a steady flow of fresh business in the pipeline filing new applications for various fund structures. Cyprus has succeeded in attracting Alternative Investment Fund Managers (AIFMs) and UCITS Management Companies – although the majority of funds operate in the alternative space – while fund hosting has become one of the fastest growing and most active segments of the industry.
As one of the first EU member states to transpose the Alternative Investment Fund Managers Directive into national legislation, Cyprus offers an effective legislative framework for all types of investment funds. In addition to its geostrategic location and excellent market access, a key advantage that Cyprus has over competing jurisdictions is its cost-effective and comprehensive package of investment fund services, ranging from licensing to ongoing administration. In addition, the seamless collaboration between the competent authorities and service providers allows for fast execution with procedures designed to speed up time to market.
The refined fund framework and the momentum gained by Cyprus’ investment fund sector has also been recognised by major market players. This, coupled with growing client demand, sparked international fund platforms, such as Clearstream, Refinitiv and Bloomberg, to start listing Cyprus funds, providing an added boost in visibility and accessibility to global asset managers and fund professionals.
Cyprus is strategically positioning itself as a home for specialised alternative funds and investment boutiques, with many of them primarily dealing with private equity and investment in areas such as banking, real estate, hospitality, and, most prominently, in maritime and energy – two sectors in which Cyprus has an outsized influence on the European economy. For the shipping industry, Cyprus is a major European flag state and hosts the EU’s largest shipmanagement centre. In the energy sector, Cyprus attracted a serious attention following the natural gas discoveries in its Exclusive Economic Zone (EEZ) in recent years. Today, multinational energy giants have significant operations on the island and are investing at an exceptional scale in the Eastern Mediterranean.
Resilient and Poised for Growth
Even during the most unstable of times following the pandemic, soaring inflation and the wide-ranging effects of the Ukraine war, the investment funds sector in Cyprus has shown remarkable resilience and has continued to develop across the board. Traditionally, Europe’s cross-border fund market has been firmly dominated by Luxembourg and Ireland, but other domiciles within the European region are also successfully competing for business, including Malta, Gibraltar, the Isle of Man and increasingly Cyprus. In fact, Cyprus is one the fastest growing European fund jurisdiction by Net Asset Value (NAV) for UCIs, AIFs and UCITS. In the first quarter of 2023, Cyprus' NAV reached €9.7 billion. The increase in investor confidence is linked to rising asset valuations and the strong performance of retail investor instruments.
The steady growth in both assets and in the number of fund structures licensed and active in Cyprus have underlined the strength and appeal of the domicile. Assets under Management (AuM) have increased substantially from €2.7 billion in 2016 to €10.7 billion in the first quarter of 2023, proving that the sector’s rapid growth has captivated the global asset management and investor community. To date, funds’ investments in the Cypriot economy have exceeded €2.5 billion and are spread across various sectors, such as in shipping and maritime ventures, renewable energy projects, the education and health sectors, technology, and the real estate market.
Strong AIF Appeal
Cyprus offers both EU-regulated Undertakings of Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs). Although Cyprus has secured some UCITS business – including ones promoted by international heavyweight institutions such as JP Morgan, Schroder, Pictet and Julius Baer – its focus has been to specialise in the structuring of alternative assets in sectors where it already has a strong global presence such as shipping, energy, real estate and wealth management. A major coup for the industry came recently, with organisations like MUFG Investor Services and Global Maritime Fund (GMF), which aims to become the world’s largest maritime fund, chose to base in Cyprus. Industry experts have also noted a growing interest from Indian, Israeli, and Japanese fund managers to establish a structure in Cyprus.
The number of AIFs has seen consistent growth and will continue to dominate the Cypriot investment funds scene in the years to come. Following the modernisation of Cyprus’ fund framework there are now three types of AIFs that can be set up in Cyprus. In addition to the Alternative Investment Fund of Unlimited Number of Investors (AIFUNP), investments can be structured in the form of an Alternative Investment Fund of Limited Number of Investors (AIFLNP), which is promoted to family offices and high-net-worth individuals as an alternative to a group holding company.
Then there is the Registered Alternative Investment Fund (RAIF), which has become a success story of its own. RAIFs, Cyprus’ version of Luxembourg’s popular Reserved Alternative Investment Fund, have truly taken off since the innovative vehicle’s launch in 2018. RAIFs do not require a licence from the industry regulator CySEC but need to be registered with the regulator by an already authorised Alternative Investment Fund Manager. The first RAIFs were launched in 2019, and the number has rocketed since from 26 RAIFs in 2020, to 124 RAIFs operating out of Cyprus by the first quarter of 2023.
Thus far fund sizes vary significantly ranging from around €10 million to €1 billion, which goes to show the diversity of fund business in Cyprus. Currently Cyprus is ideal for regional players, start-up funds, alternative funds, as well as larger entities looking to diversify into new asset classes with minimum risk and cost. However, fund professionals report that they are seeing more medium-sized funds moving into Cyprus, and they believe the sector has significant scope to grow. Currently around 65% of fund managers established in Cyprus belong to this category.
In attracting new fund professionals to the island, Cyprus has set its sights on new markets, including Asia, particularly India and China, Israel, Africa and the Middle East, and the marketing initiatives of recent years have ensured a steady pipeline of new business. Asian fund managers are increasingly establishing funds or fund management companies in Cyprus in order to access the EU market. At the same time, the island registered solid interest from UK fund managers who set up in Cyprus to retain their access to the EU market post Brexit.
Cyprus is also home to a number of third-party management companies offering foreign fund promoters plug-and-play solutions and easy access to the European market. These fund platforms provide investment managers with a fully compliant UCITS/AIFM entity and thus a European passport to market their funds within the EU, without the need to establish their own fund and/or management company substance in an EU Member State. Platform solutions are traditionally structured as umbrella funds, and managers can benefit from the efficiencies provided by the pre-existing structure of the platform in terms of sharing costs, existing middle and back office operating models, tried and tested systems and speed to market.
Although Cyprus has significantly enhanced its regulatory framework for the sector, the global asset management community can look forward to additional changes aimed at further elevating the domicile. The island is currently working on new legislation that will provide for effective supervision of all local fund administrators. The introduction of a fund administration law is seen as a significant development, which will add more ease to fund managers and investors alike.
In addition, Cyprus finalised a regime dubbed the Mini Manager in June 2020, which governs a new type of fund manager and allows for the provision of fund management services to funds under the AIFMD thresholds. 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. Expectations are that this regime will appeal to fund managers who need a cost-effective vehicle that will undertake limited investment or to those fund managers who may wish to use it as a first step before committing to a more complex set up.
Cyprus currently enjoys a positive market perception, which has been a key driver of new business. The country has significantly strengthened its regulatory infrastructure and supervisory capabilities, instilling investor confidence in the process.
The Cyprus Securities and Exchange Commission (CySEC), the regulator, has invested significant resources, including investment in additional staff, to ensure the application process is as efficient as possible. Technology and new tools are constantly being deployed, and CySEC is committed to maintaining an open channel of communication with industry professionals to address any obstacles to the smooth operation of the funds industry without limiting its supervisory capability.
Cost effectiveness also plays an important role in attracting new fund business. The set-up costs of a Cyprus fund are significantly lower than in the more mature fund centres – approximately one third of a similar set up in Luxembourg and Ireland.
In addition, Cyprus offers one of the most attractive fund tax regimes in Europe – for the fund manager, investor and the fund. While the island’s advantageous tax regime, with double tax treaties currently covering 67 countries, has long been an important element in investor attraction, Cyprus introduced new provisions to further enhance the regime for fund managers in 2018. One of the provisions is a taxation of carried interest or performance fee for AIF and UCITS fund managers. This essentially means that executives of investment fund management companies or internally managed investment funds may opt for a new mode of personal taxation. In 2022, further amendments were made to existing tax legislation to provide investors with more incentives to make Cyprus their domicile of choice. Additional benefits of setting up in Cyprus also include the country’s stable political environment and strong legal framework based on UK Common Law, which provides flexibility, transparency and reliability in business practices.
One of Cyprus’ main pull factors is the ease of doing business and its extensive network of support companies and service providers. The country hosts a number of recognised fund service providers, ranging from global names to local independent operators servicing all types of funds at very competitive rates. Investment and risk advisors, analysts, distributors, brokerage houses and middle office providers all form part of Cyprus’ evolving fund ecosystem. In addition, the ‘Big Four’ accounting firms are well-established on the island, as are recognised fund administrators with global expertise.
A number of law offices have cooperation agreements with renowned international law firms, instilling confidence that the local industry can grow and create an attractive environment for the establishment of funds, fund management and servicing companies. Banking, custody and depositary services can be sourced locally as Cyprus-based banks have formed strategic relationships with renowned global custodians and international prime brokers in order to meet the needs of asset managers and funds.
The Cyprus Investment Funds Association (CIFA) is the collective voice of the funds industry and is taking the lead in raising the industry’s profile. CIFA is a member of the European Fund and Asset Management Association (EFAMA) and the International Capital Markets Association (ICMA). The status of the jurisdiction was further bolstered in 2019 when Cyprus was awarded full membership of the International Investment Funds Association (IIFA), underlining the fact that the country operates within a rigorous legal framework that promotes transparency and investor protection.
A Future of Growth
The Cyprus Investment Funds Association remains steadfast in reaching its targets to increase the industry’s AuM to €25 billion in the medium term and to attract more worldwide fund managers, custodians, and other participants to the market.
Industry experts in Cyprus are confident that the sector can achieve these goals and that the domicile will continue to portray strong resilience in the face of market turbulences and an evolving investment climate. Cyprus, with its solid legislative framework, relatively low operating cost, EU passporting capability, professional service providers and efficient tax regime certainly has all the elements in place to grow its status as a dynamic investment funds domicile with considerable growth potential.
In addition, the island is increasingly on the radar of digital finance companies and could be picking up more investment in this space. With increasing demand from start-up fintech companies, hedge funds and other financial services players, Cyprus is also making a name for itself in the blockchain arena. With a surge in the number of pioneering blockchain and crypto start-ups and a government supporting digital infrastructure development, the talent in this sector is positioning Cyprus as an ideal location for new initiatives in structuring tech-focused investment funds.
As the market and fund sizes continue to grow, Cyprus is well on its way of becoming more attractive to big name international service providers such as custodians, fund administrators and distributors. The introduction of tax and re-domiciliation incentives for funds and fund managers, the modernisation of procedures and the further reduction of bureaucracy are expected to help convince additional international players to join Cyprus’ flourishing funds industry.