Cyprus offers plug-and-play solutions for US and Asian fund managers wishing to raise capital in Europe and is attracting attention as an outsourcing location for back and middle office services.
The rapid expansion of Cyprus’ investment funds sector has not only been driven by the registration of funds but has also been supported by the development of a strong asset management and asset servicing cluster.
Table of Contents
- What are the advantages of outsourcing fund work to Cyprus?
- Are fund administrators licensed in Cyprus?
- What are the key considerations when selecting an outsourcing provider?
Key Facts: Fund Hosting and Outsourcing
Cyprus offers a complete package of investment fund services ranging from fund formation and Management Companies to fund administration and depositaryservices. In particular, Cyprus’ service providers are praised for their expert knowledge and complete services that they offer at a relatively low cost without compromising service quality. Platform providers ensure that investment funds remain fully compliant at all times, in all jurisdictions the fund is investing in or marketed to, while fund administrators have invested heavily in technology and talent to provide the highest level of services and support the most complex of investment structures.
Management Companies and Platform Solutions
European Management Company
Cyprus’ fund sector is increasingly focusing on servicing the needs of non-EU fund managers targeting the EU market. One of the key issues constantly monitored and assessed by many non-EU fund managers is whether it makes sense to establish a European Management Company.
For large funds this is often the right choice as set up and operational costs can be compensated easily.
It has long been anticipated that the management of EU AIFs by non-EU AIFMs would be regulated under the AIFMD. However, it is not yet known if or when the AIFMD marketing passport will be extended to non-European fund managers, and the expectation is that in any case non-EU managers would need to fully comply with AIFMD requirements. Establishing a Management Company therefore is seen as an attractive solution as it also allows fund managers to overcome the current difficulties associated with utilising the private placement regimes.
Another solution is the use of Management Company platforms. For small and medium-sized funds, fund platforms are currently the most popular means of gaining entrance into Europe. This trend is on an upward trajectory with the number of platform providers growing in Cyprus and across the rest of Europe. This model is mainly targeted at those EU and non-EU asset managers wanting a Cyprus-based fund, but who are not yet ready to create their own local oversight structure.
The platform solution provides investment managers with a fully compliant UCITS/AIFM entity (the host) and thus the ability to market their funds within the EU, without the need to establish their own fund umbrella and/or management company substance in an EU Member State.
The host usually maintains the risk management function as well as all the other control functions and middle and back-office support services. Portfolio management may be offered or outsourced in accordance with the prescribed regulatory conditions. Consequently, the host maintains the ultimate responsibility for the structure and managers or entrepreneurs benefit from the efficiencies provided by the host’s 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.
The third-party Management Company focuses on the fund’s governance, risk, compliance, administration and reporting, and the investment manager on the fund’s investment performance. Third-party platforms are often accompanied by umbrella fund structures, which allow investment managers or promoters to join their umbrella by creating their sub-compartment(s), which are dedicated to their own investment strategies.
External Fund Management Services
The use of fund platforms offers further advantages from a fund management perspective. A non-EU based manager can appoint a person within the third-party Management Company to manage their compartment or participate in the Investment Committee established for their compartment. They can even enter into a sub-advisory/management relationship when joining a platform where the Management Company delegates the portfolio management function back to the manager – assuming that the manager is authorised for the purpose of asset management and subject to the supervision of the competent authorities of its home country; or where the delegation is to third country undertaking, a cooperation agreement is in place between the Cyprus Securities and Exchange Commission (CySEC) and the competent authority of the third country.
This way non-EU managers can have their fund marketed in the EU in full knowledge that all the regulatory and compliance requirements are taken care of by the external manager, so that they may focus on running their strategy successfully.
Fund Administration Services
Cyprus’ recent success is about more than just setting up AIFs and UCITS, it is also about a growing community of outsourcing providers who have the knowledge and experience to support a diverse range of fund strategies. Cyprus is home to a strong network of fund administrators ready to service funds in Cyprus and abroad.
The administration of a fund includes all operational functions in the broadest sense of the term. Services fund administrators usually provide include NAV calculation, reconciliations, pricing of the investment portfolio, payment of bills, transfer agency services, preparation of financial statements and fund accounting, performance and compliance reporting as well as preparation of contract notes. The complexity of fund administration increases depending on the asset class and on the jurisdiction of investors and investments.
Cyprus’ fund administrators are able to provide all services required to administer various fund structures – from the set-up phase to liquidation.
Key Benefits of Fund Hosting and Outsourcing in Cyprus
- As an EU Member State, Cyprus offers non-EU managers an ideal entry point to realise their Europe-focused investment strategies
- Fund platforms allow non-EU managers to access European consumers without establishing a stand-alone management company
- Outsourcing back and middle office services allows managers to focus on their core competencies of investing and generating returns for investors
- Dynamic, customisable solutions to support various investment strategies can be sourced in Cyprus
- Costs for fund management and fund administration services are lower than in the more established fund centres
Questions and Answers: Cyprus Fund Hosting and Outsourcing
What are the advantages of outsourcing fund work to Cyprus?
There are multiple advantages to outsourcing fund-related tasks. Outsourcing administrative work allows investment managers to focus on their core activities: creating fund structures, attracting and servicing investors, and investing in and managing investments on behalf of their investors. Outsourcing also enables fund managers to gain access to innovative technology. The cost of buying and building in-house tech solutions can be expensive – outsourcing the administration of the fund allows the manager to leverage the technology investment the fund administrator has made. Lastly, there are cost benefits of outsourcing work to Cyprus as the island is one of only a few sophisticated international business centres with a competitive cost base.
Are fund administrators licensed in Cyprus?
For the time being, fund administrators do not require a specific licence in Cyprus. However, preparations are underway to establish a dedicated regulatory framework for fund administration to further bolster the sector’s reputation. Fund administrators will then fall under the supervision of the Cyprus Securities and Exchange Commission (CySEC).
What are the key considerations when selecting an outsourcing provider?
As a first step, managers should compare the service offering of the outsourcing provider with their needs. Some fund administrators for example are part of global networks and can therefore offer a wide range of solutions spanning multiple jurisdictions. It’s also useful to consider both the fund type with which the administrator has experience and the investment type.
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