Thinking of founding an AIFM (Management company of Alternative Investment Funds) in Serbia? If your answer is yes, you’re at the right place. Read on to learn more about how and where to begin, starting with registration and licensing at the Securities Commission. Also, get to know the pros and cons of alternative investment fund management companies. We have gathered all the necessary information so you can make an informed decision.
1. How is a Management company of Alternative Investment Funds (AIFM) established?
The management company of Alternative Investment Funds has the task of managing one or more AIFs. In doing so, it must manage its assets, as well as make investment decisions in accordance with the goals and strategies of those funds.
The role of this company is to achieve the best possible results for AIF investors. This involves investing in different types of stocks, bonds, real estate, and others. The practice depends on the investment policy of each particular AIF.
First of all, it is important to establish that AIFM is a legal entity registered in Serbia. You can establish it as a limited liability company (LLC) or a joint stock company (JSC).
The Management Company of Alternative Investment Funds performs its activities based on a permit issued by the Securities Commission of Serbia. The first step in the establishment of AIFM is to prepare documents and submit a request for a permit.
In the request, you should provide information about AIFM, its management and organizational structure (i.e. information on additional activities). Requirements for qualified personnel to manage the fund should also be met.
In addition to the request, it is necessary to submit fairly extensive documentation, which, among other things, refers to:
- The size of the Management Company of Alternative Investment Funds
- Additional activities
- Articles of incorporation
- Data on capital and founders
- Program of activities
- List of shareholders/members
- Financial projections
- And many other documents...
For more information about an Alternative Investment Fund Management Company, it is best to contact an investment law attorney.
Now, let's take a look at what types of AIFM exist in Serbia, as well as their advantages and disadvantages:
2. Types, advantages, and disadvantages of Management company of Alternative Investment Funds
As already stated, the Management company of Alternative Investment Funds (AIFM) can be established as an LLC or as a JSC.
There are two types of Management companies of alternative investment funds: Large and small.
So let's see what is the difference between these two types and what are their pros and cons:
1. A large Management company of Alternative Investment Funds
A large Management company of Alternative Investment Funds manages AIFs whose total assets exceed a certain threshold.
That threshold is:
- EUR 25 million, if financial leverage is used to acquire assets in AIFs
- EUR 75 million, if the AIFs managed by AIFM do not use financial leverage. Cumulatively, investors do not have the right to redeem shares in those AIFs for five years from the date of the initial investment.
Note: In the context of investing, financial leverage is often used to increase the potential return on investment. However, this can also increase risk for investors. Hence, regulatory agencies often place restrictions on the use of financial leverage.
1. Advantages and disadvantages of a large Management company of Alternative Investment Funds
Advantages and disadvantages largely depend on the specific circumstances and strategy of the Management company of Alternative Investment Funds, but also on the investment preferences and goals of investors.
Generally speaking, the pros of a large Management company of Alternative Investment Funds are:
- The possibility of investing in a larger number of different investments and AIFs. This can help in better diversifying the portfolio and reducing risk.
- Greater capacity to manage liquidity. Investors can more easily redeem their holdings, especially in open-ended AIFs.
- Greater financial and operational resources, which can contribute to better investment decision-making.
- Access to more complex investment strategies
- Better i.e. stricter regulatory protection and supervision. This regulatory protection can increase the level of security for investors.
Disadvantages of a large Management company of Alternative Investment Funds are:
- Higher operating costs, which may reduce the total net income of the investor.
- Less adaptability when it comes to changing strategy or investments. This is due to its large size and number of investors.
- Potentially higher minimum amount for investment. This could make access more difficult for small or individual investors.
2. A small Management company of Alternative Investment Funds
A small Management company of Alternative Investment Funds (AIFM) is a legal entity that manages alternative investment funds (AIFs) and has some specific characteristics and limitations compared to larger AIF management companies.
A few AIFMs intend to offer their shares in AIFs only to professional and/or semi-professional investors.
Also, a small alternative investment fund management company manages AIFs whose total assets do not exceed the already mentioned threshold.
Some regulatory requirements do not apply to small AIFMs. This is the case with capital requirements, minimum number of board members, and compliance monitoring. Moreover, it pertains to internal audit, risk management, liquidity management, remuneration policy, etc.
As an exception, a small company for the management of alternative investment funds can perform other activities that do not require prior permission from the regulator. The condition is that these activities are not predominant. Moreover, there must be no conflict of interest with the main activity it performs.
1. Advantages and disadvantages of a small Management company of Alternative Investment Funds
Advantages of a small Management company of Alternative Investment Funds:
- A small AIFM is usually more flexible in managing its assets.
- A small AIFM often focuses on specific markets, sectors, or investment strategies that larger funds might not explore.
- Operating costs are often lower compared to larger funds.
- Smaller funds often have greater potential for high returns. The reason is that they are more nimble and can take advantage of market opportunities.
- A small AIFM is much easier to establish, i.e. legal burdens are significantly lower
Disadvantages of a small Management company of Alternative Investment Funds:
- Less capacity for diversification, which increases risk.
- Less liquidity, in some cases, which can make it difficult to quickly sell or buy back shares.
- Limited access to institutional investors, usually due to its size.
- Higher volatility and risk of closure due to financial difficulties or poor performance.
- Limited resources.
3. Large or small AIFM: What to establish?
Unfortunately or fortunately, there is no universal and correct answer to this question.
The choice between establishing a large or a small AIFM depends on various factors and parameters. This includes your goals, capacity, resources, and the risks you are willing to take.
Here are some factors to consider when making your decision:
- Available capital and resources. Large AIFMs usually require more capital and resources to start and maintain.
- Investment strategy. If you intend to focus on a specific industry, sector, or market, it may be better to opt for a smaller fund.
- Diversification. Large funds can often diversify their portfolio more effectively.
- Regulation. A small AIFM has several exemptions from certain regulatory requirements. For example, capital requirements, and a minimum number of board members. Also, compliance monitoring, internal audit, risk management, liquidity management, and remuneration policy is simpler.
- Objectives and timeline: Large AIFMs usually require more time to establish and develop.
Attorney for alternative investment funds in Serbia
However, your decision on the establishment and type of AIFM will depend on your goals, capacity, resources, and risk tolerance.
While large AIFMs provide greater diversification opportunities and access to more complex strategies, they come with higher operating costs. On the other hand, small AIFMs offer greater flexibility, and lower operating costs, but possibly more limited diversification opportunities.
In any case, consulting with experts, especially alternative investment fund attorneys, plays a key role in making an informed decision.