An investment fund refers to a pool of capital made up of contributions provided by individual investors and used for investing in stocks, loans, tangible or intangible assets.As a rule, one person, as well as a group of people, who sign, acquire or sell shares, can register an investment fund.
One of the defining characteristics of a registered investment fund is the fact that it is most often managed by a fund manager, who, as a rule, is supervised by a national regulator. The latter is primarily responsible for managing funds or advising on fund-related issues.
You can register an investment fund in Luxembourg, as well as in other countries, for:
- income generation;
- non-profit goals (e.g. a charity foundation);
- risk sharing;
- asset and liability management with the aim of generating profit;
- attracting investors (e.g. a bank can establish an investment fund in the Czech Republic to place certain assets and then attract investors to obtain funds for managing the bank).
To date, there are many types of investment funds. You can order legal advice on the establishment of an investment fund, as well as receive legal assistance in the implementation of your business project.
Categories of funds depending on the objects of investment:
- direct investments;
- fixed income securities;
- a hedging;
- real estate market.
Categories of funds depending on the investor’s profit model:
Drawdown and Distribution
This model is mainly used to establish a private fund (or private equity funds). For example, registering a private equity investment fund enables its founders to attract investor money. Borrowing funds only if necessary, and not in advance, affects an increase in the internal rate of return of the fund (IRR), if it is measured in relation to the date of release or sale of a particular investment. The initial cost, as well as the profit or income from capital gains relating to each asset, is distributed among investors and is rarely reinvested. A registered private investment fund, as a rule, has a fixed period of existence; its primary goal is to invest and then return all capital and profit before its liquidation. As a result, the establishment of an investment fund also involves distribution of a share of profit between its managers.
Income from investments is usually distributed as they arise (e.g. income generated from the sale of real estate, income from renting property or income from capital gains with fixed income). A fund based on such a model is considered “closed”, and not “open”. This means that the number of investors and amount of investments are fixed and have a fixed validity period.
Market Model (Tradable Model)
The market model is mainly used for the registration of a securities’ investment fund in which a fund’s stocks or shares are traded on public markets. Capital is not distributed among investors, although regular and larger one-time dividends may be paid. Profit earned by a mutual fund should lead to an increase in the prices of its shares. However, funds that use such a model are subject to market costs, such as:
- illiquidity;
- sale of assets below face value;
- market, economic or investment indicators;
- Net Asset Model (NAV or redemption model).
An asset management fund repurchases shares owned by investors and upon repurchase (or within a specified time) pays investors any profits “tied” to these shares.
A share of profit is paid as a reward for the performance of a fund manager. Units are often redeemed at the net asset value (NAV) of this unit or are related to it. A unit NAV is a total amount of a fund’s gross assets excluding everage and liabilities, divided by the number of shares owned by a fund. Usually, NAV is calculated by fund managers. As a rule, for such a model, registration of an open investment fund means that the number of investors and amount of investments fluctuate because investors’ obligations are fulfilled and repaid; hence, they can exist for an indefinite period of time until a fund is liquidated.
Categories of funds (depending on the investment strategy):
- venture capital;
- repurchase of a controlling stake;
- short-term/long-term assets;
- capital gains;
- development capital;
- large-scale/target;
- debt and equity financing (Mezzanine strategy).
Categories of funds (depending on implementation tools):
- registering a limited partnership in the EU;
- establishment of a partnership;
- opening a company with optimal taxation;
- incorporation of a public company, or a company whose shares are listed on a stock exchange.
Registering an investment fund requires choosing an implementation tool. And that, in turn, requires paying attention to a number of factors, such as:
- it should be optimal in terms of taxation for investors and for the group of fund manager; choosing an implementation tool also requires taking into account a fund’s assets and their location;
- regulatory regime, which is the least burdensome and provides an appropriate level of confidence in a registered investment fund by taking into account the opinions of potential investors;
- any restrictions on target investors (internal or external) or their ability to invest in certain instruments;
- previous experience of potential investors and fund managers.
Those planning to set up an investment fund should keep in mind that alternative assets can also be divided into two other types: illiquid (e.g. private capital), venture capital and real estate; more liquid (e.g. listed securities, commodities and derivative financial instruments). This led to the development of two types of fund structure - open and closed.
|
Type of fund |
Liquidity/investments |
Assets |
|
Open Fund |
A vast majority of fund assets are sold within a relatively short period of time. An organized open fund can exist indefinitely. Investors can redeem (wholly or partially) or increase their interest during an open fund’s operation. |
Usually, this is a large number of small assets (for example, quoted stocks) or assets (e.g. derivatives) whose size can be easily adjusted . Registering an open fund makes it possible to acquire new assets with additional investments. It finances the withdrawal of funds by investors through a partial sale of the assets of the fund. |
|
Closed Fund |
Illiquid structure. A number of investors is usually fixed. As a rule, an investor, who wants to establish a closed investment fund in Cyprus cannot leave it during its operation, since it is not able to liquidate assets to finance the exit. Investments are only possible during the first half of the operation of a fund; that way enough time is provided for the release of assets. A larger asset means that up to a dozen funds can be invested in each fund. A fund operates for a limited period, ceasing to operate after all assets have been sold. |
Assets are kept for a minimum period of time (e,g. for the purpose of restructuring a portfolio company). Typically, fewer larger assets are held, such as portfolio companies or real estate. |
The process of registering an investment fund in Europe by registering a partnership in the EU includes the following steps:
- development of a fund concept, including an investment goal/strategy/profitability (e.g. the establishment of a private equity fund);
- searching for key investors to determine whether they are interested in a fund, clarifying a concept of a fund (e.g. registering a hedge fund or establishing a venture investment fund);
- identifying and appointing key consultants and key service providers (e.g. legal and tax consultants, administrators and auditors);
- development of a fund structure by taking into account relevant taxes and regulatory aspects (e.g. establishment of a closed investment fund);
- preparation of more detailed operating conditions for a fund. The key factors in determining the conditions will be a fund’s investment strategy (e.g. organization of an investment fund for development target capital), as well as negotiation positions of manager and investors.
- conducting initial negotiations with potential investors;
- comprehensive examination by investors;
- preparing legal documentation;
- reviewing and commenting on legal documentation by investors;
- negotiations between a fund’s manager and investors;
- signing agreements with investors;
- closing a transaction.
Registering an investment fund (as a partnership) usually requires the following documents:
Securities Offering Document (a Memorandum of Private Placement)
This document contains information about the fund, such as its investment objective and strategy, information about a fund’s management and their track record, as well as more detailed technical information such as risk factors, consequences of investing (in terms of taxation) and a detailed description of the restrictions related to the fund.
Agreement Between Partners
It is concluded between a general partner and each limited partner. An agreement between partners is the main document regulating partnerships and setting out in detail all information about a fund.
This agreement is between a fund and its manager. It provides for the appointment of a manager and circumstances under which an appointment of a manager may be terminated. A manager either receives remuneration (e.g. from an organized hedge fund) or receives remuneration from the profit of its general partner. In the latter case, an actual amount payable, as a rule, is not indicated in such an agreement.
Agreement with Investment Advisor
As a rule, this agreement is concluded between a fund’s manager and investment advisor. Its content is similar to the Investment Management Agreement and relates to the appointment, dismissal and remuneration of a consultant.
Stock Subscription Agreement
Each investor signs a stock subscription agreement, in accordance with which they agree to sign a related partnership agreement. If you would like to register an investment fund, then you should keep in mind that each investor must provide information about themselves, including guarantees in relation to themselves, as well as a right to invest in a registered investment fund.
Additional Agreements
During negotiations, a fund’s manager can discuss with investors certain issues that are subsequently included in a partnership agreement (e.g. specific reporting information required by investors). Such agreements are included in cover letters sent to investors.
Looking to register an investment fund in Luxembourg? Considering establishing an investment fund in Liechtenstein? Need to set up a fund in Cyprus? Why not contact YB Case?
