In recent months there has been a significant increase in the interest of potential capital investors in the structure of the Alternative Investment Fund using Alternative Investment Companies.
Investors wishing to make new investments have figured out the possibilities offered by an ASI-based structure and increasingly consider it the most optimal to carry out their business ventures.
Attention should also be paid to the growing awareness of investors of the obligation to create an ASI structure if the characteristics of an AIF collective investment undertaking are met.
Given current investment trends, investors most often face the choice of using an ASI-based structure managed by an externally managing ASI, operating on the basis of an entry in the ASI management register and an AIF structure based on a private closed investment fund.
In the current state of the law, ASI is the easiest way to carry out capital investment based on capital raised from investors
When choosing the appropriate form of mutual investment institutions, investors mainly pay attention to: costs of carrying out investment activities, reporting obligations, complexity of regulations and tax consequences of using a given investment vehicle. The following will be presented the basic differences between the Non-public Closed Investment Funds and Alternative Investment Companies.
Minimum investment share
For non-public FIS The legislator, citing the protection of capital market participants, limited the possibility for retail clients to acquire them by setting a financial bar of 40,000 EUR minimum recording size.
Under the Fund Act, natural persons may acquire investment certificates of an FIS private investment certificate if the value of the investment certificate first the issue of this fund will not be less than the equivalent in the gold amount 40,000 EUR.
Where non-public FIS participants are natural persons, the issue price second or subsequent issue of investment certificates shall not be less than the net asset value of the fund per investment certificate at the net asset valuation of the fund per 7 the days before the date of entry into the next issue certificates.
This fund cannot assign investment certificates to a natural person second or subsequent issues for payment to the fund for investment certificates of that issue of less than the equivalent in the amount of 40,000 EUR.
In the case of ASI, investors may acquire ASI units without being bound by any requirements.
Managing entity
Non-public Closed Investment Fund may be created only by the Investment Fund Society, which becomes the body responsible for managing and representing the Fund in relations with persons third. In the event of the use of the form of the Closed Investment Fund, it is therefore necessary to create an expensive structure of the Investment Funds Society as a manager or to connect to existing TFIs, which increases the operating costs of the entire structure.
The management form involves a very important aspect of the specialised requirements for the composition of the board and the supervisory board.
Namely, in the case of ASI, only an indication of the personal data of the members of the management board or supervisory board of the ASI is required, as well as of other persons who are responsible for or direct the activities performed by the applicant, together with copies of the information from the National Criminal Registry for each of those persons.
In the case of FIZ, the managing body is the Investment Funds Society, so the requirements are much more stringent.
Participation rights
In the case of the structure of an Alternative Investment Fund based on ASI, the rights of participation are dependent on the legal form in which the ASI carries out its activities – participation in the company and the share. In the case of a limited partnership, the participation in the company shall mean the incorporation in general of the rights and obligations of the partner in the company.
Investment certificates are the right to participate in FIZ. It should be remembered that natural persons may acquire investment certificates of non-public FIZ if they make a single entry on certificates of value not less than the equivalent in 40,000 EUR.
Agreement with the depositary
ASI, whose management is only subject to entry in the ASI management register, is not required to have a depositary that would be responsible for storing ASI's assets and keeping a register of all its assets and, in addition, acting as a controller of activities carried out by an alternative investment company and an ASI manager to ensure that they carry out regulated activities in accordance with ASI's law and internal regulations.
The situation of the FIZs is completely different in the context of the additional inspection carried out by the depositary. For the Fund Act introduces an obligation for TFIs to establish one the depositary for each investment fund.
The Depositary is currently an additional institution controlling the activities of the Closed Investment Funds, which primarily includes raising capital in the form of emissions and investments in individual assets.
The imposition of this obligation on the TFI is no doubt one for the main reasons of increasing the cost of operating funds and thus seeking new investment solutions by investors such as ASI.
Obligation to make valuations
The Fund shall make costly valuations of its assets, determine the value of the assets and the net asset value of the investment certificate.
The statutes of the fund must specify the frequency of the valuation of assets, the determination of the net asset value of the fund and the net asset value of the investment certificate as well as the methods and principles for the valuation of assets. Valuation should be performed at least once per day.
3 months and 7 days prior to the start of entry into subsequent issuance certificates.
For ASI operating on the basis of an entry in the register The legislator has excluded the application of the provision Article 70h(1) requiring the valuation of ASI assets to be carried out at least once a year. The ASI’s manager was required to monitor the total value of the assets included in the ASI investment portfolios it manages and calculate at least once per year. 12 months.
Internal control systems
The management of the ASI acting on the basis of an entry in the register, unlike the TFI managing the Closed Investment Fund, is not obliged to adopt an internal control system and does not need to apply a number of internal regulations on how to perform activities related to the management of alternative investment companies, in particular concerning conflicts of interest, protection of confidential or professional information, remuneration policy, risk management and liquidity management, valuation of assets of managed alternative investment companies, entrusting activities to other entities, information, publication and reporting obligations.
Information obligations
ASI managers have been burdened with minimum information obligations. In accordance with the Fund Act, ASI managers shall prepare and report periodically to the NFA on:
- 1) investment activities carried out on behalf of managed ASI,
- 2) the liquidity and risk management of managed ASIs,
- 3) the use of AIF leverage in managed ASIs that use AIF leverage.
The interim report of the ASI manager operating on the basis of an entry in the ASI management register for the financial year in question should be transmitted by the date of the 31 January the following year. The fulfilment of the reporting obligation is to send a teletransmission via ESPI in electronic form (XML file) of the ASI management report and a report for each ASI managed.
In the case of FIZs, however, the legislator has taken the issue of information obligations much more stringent. Operating with FIZs is currently associated with numerous information obligations to KNF. Currently, virtually every significant aspect of FIZ’s activities is covered by the reporting obligation, which entails a further burden in the form of formulating periodically and regularly available information to investors investing in the funds concerned and risk management procedures.
Check details in the training:
Alternative Investment Companies (ASI) in practice – investment management and capital raising. Practical workshops
The imposition on FIZs of a wide catalogue of information obligations, with which excessive reporting frequency is associated, has made it difficult to manage the funds in question and the risk of a lack of rapid investment response so important in the capital market.
The increase in reporting and self-control procedural requirements also has a significant impact on the cost of servicing the fund. Many players currently operating on the market will be forced to change the form of action to an alternative investment fund based on ASI as a result of increased operating costs.
Summary
According to the generally available KNF statistics, closed private investment funds constitute the largest group of funds in the Polish capital market.
Taking into account the above-mentioned differences in the operation of ASI and TFI managers of closed investment funds, significant changes in the investment fund market in the form of a dynamic increase in the number of structures based on Alternative Investment Companies are expected.
In the current state of the law, ASI is the easiest way to carry out capital investment based on capital raised from investors.
The changes introduced by the amendments to the Investment Funds Act were mainly intended to increase investor protection, thus encouraging new sources of capital to invest in the capital market.
As a result of the regulations introduced, a system of careful monitoring of activities managing alternative investment funds has been created, which generates additional costs for the operation of funds. The burden of FIZs of the Investment Funds Society will directly affect the increase in investment costs for investors themselves.
Investment in private closed investment funds has become more costly and thus unprofitable with many planned investment projects. Without doubt, the differences between the alternative investment company-based fund and the closed investment fund will definitely affect the trends in the capital market, in favour of these first.
Author: Maciej Tuszyński
Legal Manager in the Legal Department. Lawyer, member of the District Bar Council in Warsaw, graduate of the Faculty of Law and Administration of the University of Warsaw. He specializes in commercial and civil law law. He has professional experience, which includes litigation and comprehensive legal advice on the day-to-day service of economic operators, in particular commercial law companies. As part of his work at the law firm, his practice focuses on corporate, civil and economic matters.