Cyprus is rapidly evolving into a dynamic cross-border hub for investment funds, and with a growing number of funds and managers locating to the island, assets under management are expected to continue to grow exponentially.
Cyprus is geared up to compete for big fund business in the alternative investment space and to finally shed its newcomer status. The country’s flexible and upgraded legislation, cost-effectiveness, and its proximity to the Middle East and Africa, are some of the key reasons why market players have started turning to the island.
The steady growth in both Assets under Management and in the number of fund structures licenced and active in Cyprus have underlined the strength and appeal of the novice domicile. Assets under Management (AuM) have increased drastically from €2.7 billion in 2016 to €10.6 billion in the second quarter of 2022, proving that it is not the sector’s size but its rapid growth that 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 sector, technology, and the real estate market.
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. Although Cyprus has secured some UCITS business, 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 in September 2022, when the largest shipyard in the MENA region, International Maritime Industries (IMI), endorsed the newly launched Cyprus-based Global Maritime Fund (GMF), which aims to become the world’s largest maritime fund to provide innovative financing solutions that are globally competitive and scalable.
To understand the Cypriot funds industry, it is important to chart the last few years of the country’s evolution. Although the Cypriot investment funds sector dates back to the late 1990s, the country only saw substantial inflows in the past few years. Following the 2013 financial crisis, Cyprus sought to create new opportunities for investors by transforming a debt-driven economy into an investment-driven one – and the investment funds sector was identified as a key economic driver of the future.
Although Cyprus has been seen as somewhat of a rookie in the sector, it gained substantial ground after government and industry began an extensive global campaign to attract funds-related business. The country updated and modernised its regulatory framework to bring it on par with those of other European fund domiciles and brought in new procedures and products designed to speed up time to market.
Major market players quickly recognised Cyprus’ refined fund framework. As a result of growing client demand, international fund platforms, including Clearstream, Refinitiv and Bloomberg, began listing Cyprus funds in 2018 and 2019, which makes them visible and easily accessible to global asset managers and fund professionals.
European Growth Leader
Cyprus offers both EU-regulated Undertakings of Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs). On the international scene, Cyprus still has a comparatively small funds industry. 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 second quarter of 2022, Cyprus’ NAV reached €9.5 billion. The increase in investor confidence is linked to rising asset valuations and the strong performance of retail investor instruments.
Building a Strong Cluster
Cyprus’ investment fund sector today is a vibrant cluster. The Cyprus Securities and Exchange Commission (CySEC) supervises almost 300 companies, including collective investment schemes and fund managers. The island is also maintaining a steady pipeline of new business with CySEC continuously processing new applications for various fund structures, although the majority of funds operate in the alternative space. Most notably, Cyprus succeeded in attracting Alternative Investment Fund Managers (AIFMs) and UCITS Management Companies, while fund hosting represents one of Cyprus’ fastest growing and most active segments of the industry.
AIFs Dominate the Scene
Although Cyprus attracted some UCITS management companies, many industry professionals expect UCITS to remain more of a niche market for Cyprus. However, foreign UCITS are widely marketed in Cyprus, including ones promoted by international heavyweight institutions such as JP Morgan, Schroder, Pictet and Julius Baer.
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 soared since with 26 RAIFs operating out of Cyprus at the end of April 2020, and 110 RAIFs by the second quarter of 2022.
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 has become a major European flag state and hosts the EU’s largest shipmanagement centre. In the energy sector, Cyprus has attracted a lot of 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.
Focus on Diversity
Thus far fund sizes vary significantly ranging from €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.
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 growing 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 elevating the domicile even further. 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 comfort 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.
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 the regulator is committed to maintaining an open channel of communication with industry professionals and 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 and range from €20,000 to €30,000 – approximately one third of a similar set up in Luxembourg and Ireland. Cyprus also 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 with 67 countries, has long been an important element in investor attraction, Cyprus also introduced new provisions to further enhance the already competitive tax 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.
Top-Tier International Services
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 protects investors.
Hunting Big Business
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’ booming funds industry.
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 cryptocurrency and blockchain arena. With a surge in the number of pioneering blockchain and crypto start-ups and a government supporting digital currency and infrastructure, the talent in this sector is positioning Cyprus as an ideal location for new initiatives in structuring crypto and tech-focused investment funds.
Despite the current uncertainty in the global markets, Cyprus has impressed with its performance and resilience to overcome challenges and has continued to record a strong increase in the number of funds managed and funds registered. The Cyprus Investment Funds Association remains steadfast in reaching its targets to increase the industry’s Assets under Management 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 and attractive investment funds domicile with considerable growth potential.