In the late 1980s and early 1990s, the funds industry in Cyprus enjoyed a mini-boom that showed there was demand for a modern financial services sector. The island’s strategic location on the doorstep of three continents and its well-educated, English speaking workforce continue to attract firms and business.
In recent years, there has been renewed focus on building a strong financial sector in Cyprus. Regulation is being continually updated and improved, while institutions like the Central Bank of Cyprus, the Cyprus Securities and Exchange Commission (CySEC) and the Cyprus Stock Exchange (CSE) have engaged in a long-term development effort to grow the funds sector. Also contributing to this is the fact that the Cyprus Company Law derives to a large extent form the UK Company Law and a strong banking sector that avoided the perils which caught up numerous banks in Europe and the United States in recent years.
This is the backdrop to the continued growth in the Cypriot investment management sector. Currently 21 investment management firms1 have applications for licences before CySEC to join the 70 or so firms already established. Perhaps the most significant of the new applicants is a member of the Gazprom Group, the Russian energy giant and among Europe’s biggest companies by market capitalisation, which is planning to set up a Cypriot investment services arm. “After the financial crisis, a lot of big corporations seem more comfortable setting up their own investment services arms to deal with the needs of the group as well as offer services to others,” says Liana Ioannidou, a senior officer with CySEC, commenting on the trend in investment firm applications. “That is what we suspect is happening.”
CySEC shares regulatory powers with the Central Bank. It authorises and supervises investment managers whereas the Central Bank regulates alternative funds. Founded with the CSE in 1997, CySEC became a public body with more powers in 2001. It regulates the securities market and oversees compliance of investment firms with anti-money laundering measures as well as licensing and supervising investment firms. Proof of the determination in Cyprus to attain best practice is the country’s compliance with 28 of the 30 principles laid out by the International Organization of Securities Commissions. Also indicative of ongoing efforts to develop the right framework for fund managers, the CySEC council has commissioned a committee of experts to provide advice on setting up a comprehensive risk based system of supervision to be implemented in 2010. More recently, the regulator has signalled that ongoing deliberations about the legal framework for other investment schemes will take into account the European Commission’s Alternative Investment Fund Managers directive when it is eventually finalised and passed into law.
Private equity funds established
The funds sector regulated by the Central Bank is comprised of around 50 funds, mainly private equity in investment strategy, but with a dozen or so real estate funds. The majority of funds are from Europe, Russia, former CIS countries and the Middle East. Like its counterparts at CySEC, handling a surge in investment firm applications, Central Bank officials have 12 fund applications before them. “There is growing demand for funds,” says Spyros Stavrinakis, a Senior Director with the Central Bank. “As far as inquiries are concerned we assume that the level of activity means that there will be more applications. There is increasing interest due to the European membership and Cyprus can easily adapt to the European rules for non-UCITS funds because it has a long standing industry with experience.”
The island looks well placed competitively for the non-UCITS fund sector to develop. It could win funds market share from Luxembourg and elsewhere in the coming years as the sector develops further. It is the experienced investor designation that is the main focus of Cyprus’s fund development and of most interest to hedge funds. Fund legislation in Cyprus covers all investment schemes including unit trusts, limited partnerships, investment companies with fixed and variable capital with licences restricted to private funds and funds for professional investors.
There are long-term plans for CySEC to assume fund registration and regulation from the Central Bank. But the move isn’t imminent and the Central Bank expects to give substantial notice well ahead of the formal shift in responsibilities. CySEC is planning to train personnel to administer the funds regime and it is broadly acknowledged that funds already registered and compliant with the existing framework will be recognised in the new one when it arrives. “There is agreement that the Central Bank’s role in licensing and regulation will move to CySEC but it will remain with the Central Bank until CySEC has sufficient resources to discharge its mandate,” says Stavrinakis. “It is important for market participants to get sufficient notice. Funds already registered will be grandfathered, that is to say, they won’t have to apply for a new licence.”
The Central Bank had responsibility for promoting the funds sector until it was replaced by a specially mandated promotions agency in 2002. But Stavrinakis is matter of fact about detailing the advantages to funds of setting up in Cyprus and highlights an efficient and competitive financial sector with over 40 banks providing custody, administration and other services to funds. He also cites the island’s well established legal and accounting sectors as well as the legal and court system being based on English law. “These are factors which help with the establishment of new business in Cyprus,” he says.
Analysts note that the Cyprus regime offers some additional specific benefits to hedge funds. As an example the cost of legal fees for setting up a fund in Luxembourg is generally some €70,000 to €100,000, in Cyprus it is a fraction of that at around €15,000 to €20,000. The Cypriot regime also permits accountants with experience of the process to represent a fund to the regulator rather than requiring direct client presence with the regulator as in Luxembourg. Costs are also likely to be lower in Cyprus. In Luxembourg, for example, there is a 0.01% levy on fund assets under management but no such charge in Cyprus. Fund administration and custodial services are also cheaper than in other centres.
The Central Bank has discretionary oversight to respond to how a fund manager wants to set up a fund vehicle. It is interested in developing governance and transparency rules to help the funds sector achieve best practice and attract new business. Though Cypriot banks provide custody and administration services financing is still the reserve of international investment banks. But this looks to be changing as one of the applications before the Central Bank is from a local commercial bank which is looking to develop in this area of the market. More of this type of expansion is expected.
Leading the Cyprus market
Barclays, Banque Nationale de Paris and Société Générale are among the foreign banks active in Cyprus. But it is Cypriot group Hellenic Bank that leads in the custodial services segment of the market with an estimated 70% share overseeing assets of over €2 billion. Charalambos Phokas, manager of trust and custodian services says Russia, Greece and Europe are the key markets Cyprus must target to develop the alternative funds industry. “Demand is increasing,” he says. “There is considerable appetite for registering these funds. If the fund industry is promoted in the right way it could lead to huge demand as Cyprus has a very favourable tax regime.”
Hellenic Bank covers both local and international markets. It also offers to act as a trustee for a fund if it incorporates as a trust rather than as a private company. Phokas estimates his own business could double in size but allows that that will ultimately depend on how the funds industry as a whole progresses. “Our advantage is that we have an automated solution that uses a minimum of staff and depends instead on technology,” he says.
The man behind the plan to build the funds industry is Minister of Finance Charilaos Stavrakis, a senior ex-Bank of Cyprus executive and someone who has been very active in international business. Though Phokas acknowledges the Minister’s contribution, he is keen for both the Central Bank and the Ministry of Finance to contribute more to developing the Cypriot funds sector at a time when new business is up for grabs. “The Central Bank of Cyprus and the Minister of Finance need to be actively engaged in developing the funds industry and hedge funds,” he says. “But the Finance Ministry can have an active role in promoting the sector. They have the channels to promote this business just as they are promoting the international business of Cyprus as a financial centre.” Phokas hopes the authorities will do road shows like they do for CSE but extend this to include promoting the funds sector and work with local banks and administration service providers. In some ways, the financial crisis afflicting most countries offers Cyprus a competitive advantage. Strict rules apply to local banks which mean there was no exposure to any of the structures run by Lehman Bros. On short-term credits, for example, Cypriot banks are restricted to paper rated no lower than A-1. “The banking industry was not affected by the financial crisis,” says Phokas. “There were no liquidity problems. On the contrary, there was no issue with stability of Cypriot banks.” Hellenic Bank runs business outside of Cyprus and uses Citibank in Moscow where the Cypriot firm has significant operations. In turn, Hellenic Bank serves as sub-custodian for Citi in the Cyprus market. In other markets Hellenic Bank uses different local custodians. “Using different local custodians rather than the same global one gives better knowledge of a particular market,” says Phokas. “It is always better to know the local player.”
A developer’s market
The financial crisis hit activity in local real estate. British and Russian investment stopped expanding but it hasn’t contracted either. “Cyprus cannot go against the global economic trends,” says Theophanis Theophanous, partner for Investment and Wealth Advisory with Deloitte Cyprus. “We have been affected. But things haven’t stopped.” He adds that the tax treaty with Russia may not be as beneficial as earlier but argues that it is still the best one around and that this should put a floor under the market until it expires in 2012.
Though secondary residential property prices are gauged to have dipped around 15% over the past year, prime residential and commercial property values have held steady. Part of the reason for this resilience is the limited supply for so-called Grade A commercial space. Local developers are reluctant to build on spec, even though the few projects that do proceed on this basis are usually fully let well before project completion. As a result, many companies build their own offices. The latest example of this is IKOS, the global leading hedge fund (whose sub-investment manager activities are based in Limassol, Cyprus) which has just begun constructing its own multi-purpose development. “Demand for Grade A space has grown in recent years as companies like IKOS have come here or expanded,” says Antonis P. Loizou, senior partner of Nicosia-based property firm Antonis Loizou & Associates. “With more demand for Grade A office space commercial development will be more wide spread as developers become more comfortable with demand being sustained.” He adds that despite the financial crisis office rents have held up and there has been growing demand for large facilities with a 1,000 square metre footprint.
In the Cyprus market, Limassol (based on the south coast and the island’s second largest city) is the more cosmopolitan centre as it is the home of many shipping and international companies. In comparison, Nicosia is the administrative centre and hosts local companies and international companies, including major government and financial institutions. Loizou says Nicosia is about 30% cheaper than Limassol where Grade A seaside view office space is €20 per square metre per month while Grade B offices with no seaside view go for about €12. In Nicosia, in the central part of the island, the Grade A rate is about €15 and Grade B €10.
The prime residential market around Limassol has seen values remain steady. West of the city there are a variety of golf courses easily accessible from the estates to the north where 600 square metre villas complete with a swimming pool and seaviews can easily cost over €1 million. Foreigners who make a €300,000 investment in property get automatic residency status and a Cypriot passport after six years. For that price, a newcomer can get a three bedroom house with a pool and beach front either east or west of Limassol with prices decreasing as distance from the city increases.
Favourable tax regime
If Cypriot property prices look better value than Mayfair so, too, does the tax regime. Corporate tax is assessed at 10% but it can be reduced through allowances and domiciling companies outside the EU. For employees of asset management firms, a €100,000 income would attract total tax of about €22,000. For partners and others, the marginal tax rate on all income tops out at 30%.
From the development of its financial and banking sector, Cyprus has companies that offer a wide range of the business services most frequently needed by asset managers. Albourne Partners, the London-based alternative investment fund services provider, has developed a major presence in Cyprus since opening an office in 2001. It has 50 of its 180 worldwide staff in Cyprus working on due diligence, IT and operations support. Technology service providers are also well established and have substantial experience in financial services. “IT companies like IBM, Oracle and others offer the full range of products,” says Kyriacos Kokkinos, General Manager at IBM Cyprus which has 50 specialist IT staff. “And the ability of people to service this is there. It is a very competitive market.”
Kokkinos says the business perspective of a multi-national workforce is a valuable advantage for Cyprus. He and others like to actively recruit from overseas Cypriots and foreign nationals who are already involved in servicing financial firms abroad. “We believe this is an area that has the potential for growth – whether from Islamic funds, hedge funds or others,” he says. “We are trying to attract foreign direct involvement in other financial services products.”
Signet Athena, a fund of funds operator with $1.8 billion invested in seven portfolios, is a global firm with offices in Lausanne, London and Washington. It opened an office in Nicosia two years ago where it has two employees but expects to add more. “I think it makes sense for hedge funds to come here,” says Harris Tsangaris, a risk manager with Signet. “Cyprus is a good environment. There is a good skill set, good infrastructure and a good local workforce. I am hopeful we will be able to expand here.”
With Cyprus an EU member since 2004, there are growing hopes of a resolution of the 35 year dispute with Turkey that divides the island. Certainly it is inconceivable that Turkey will ever be admitted to the EU while still basing more than 30,000 troops on the island’s northern territory. Though the political differences are deep-seated, reconciliation is closer than at any time since the conflict ignited in 1974. Some observers believe that a solution to the division is likely over the next five to 10 years. “In the meantime,” says Deloitte’s Theophanous, “we are experiencing gestures of goodwill from both sides.”
One final point Cypriots and non-Cypriots both like to make is just how pleasant life can be on an island that is at the intersection of civilisation in the south-eastern Mediterranean. “We always leave the quality of life until last,” says Ioannis Gaiganis, senior manager of Investment Fund Services at KPMG Cyprus who abandoned grey, land-locked Luxembourg earlier this year to relocate his wife and four children to a beach-side home near Larnaka, the home of one of the island’s two main airports (the other one being Pafos), which is being re-opened in completely new facilities. “We don’t dwell on it, but we can’t not mention the lifestyle benefits that being here brings. It is a year around holiday location – whether it is the weather, the facilities or the tourism industry.”
In recent years, there has been renewed focus on building a strong financial sector in Cyprus. Regulation is being continually updated and improved, while institutions like the Central Bank of Cyprus, the Cyprus Securities and Exchange Commission (CySEC) and the Cyprus Stock Exchange (CSE) have engaged in a long-term development effort to grow the funds sector. Also contributing to this is the fact that the Cyprus Company Law derives to a large extent form the UK Company Law and a strong banking sector that avoided the perils which caught up numerous banks in Europe and the United States in recent years.
This is the backdrop to the continued growth in the Cypriot investment management sector. Currently 21 investment management firms1 have applications for licences before CySEC to join the 70 or so firms already established. Perhaps the most significant of the new applicants is a member of the Gazprom Group, the Russian energy giant and among Europe’s biggest companies by market capitalisation, which is planning to set up a Cypriot investment services arm. “After the financial crisis, a lot of big corporations seem more comfortable setting up their own investment services arms to deal with the needs of the group as well as offer services to others,” says Liana Ioannidou, a senior officer with CySEC, commenting on the trend in investment firm applications. “That is what we suspect is happening.”
CySEC shares regulatory powers with the Central Bank. It authorises and supervises investment managers whereas the Central Bank regulates alternative funds. Founded with the CSE in 1997, CySEC became a public body with more powers in 2001. It regulates the securities market and oversees compliance of investment firms with anti-money laundering measures as well as licensing and supervising investment firms. Proof of the determination in Cyprus to attain best practice is the country’s compliance with 28 of the 30 principles laid out by the International Organization of Securities Commissions. Also indicative of ongoing efforts to develop the right framework for fund managers, the CySEC council has commissioned a committee of experts to provide advice on setting up a comprehensive risk based system of supervision to be implemented in 2010. More recently, the regulator has signalled that ongoing deliberations about the legal framework for other investment schemes will take into account the European Commission’s Alternative Investment Fund Managers directive when it is eventually finalised and passed into law.
Private equity funds established
The funds sector regulated by the Central Bank is comprised of around 50 funds, mainly private equity in investment strategy, but with a dozen or so real estate funds. The majority of funds are from Europe, Russia, former CIS countries and the Middle East. Like its counterparts at CySEC, handling a surge in investment firm applications, Central Bank officials have 12 fund applications before them. “There is growing demand for funds,” says Spyros Stavrinakis, a Senior Director with the Central Bank. “As far as inquiries are concerned we assume that the level of activity means that there will be more applications. There is increasing interest due to the European membership and Cyprus can easily adapt to the European rules for non-UCITS funds because it has a long standing industry with experience.”
The island looks well placed competitively for the non-UCITS fund sector to develop. It could win funds market share from Luxembourg and elsewhere in the coming years as the sector develops further. It is the experienced investor designation that is the main focus of Cyprus’s fund development and of most interest to hedge funds. Fund legislation in Cyprus covers all investment schemes including unit trusts, limited partnerships, investment companies with fixed and variable capital with licences restricted to private funds and funds for professional investors.
There are long-term plans for CySEC to assume fund registration and regulation from the Central Bank. But the move isn’t imminent and the Central Bank expects to give substantial notice well ahead of the formal shift in responsibilities. CySEC is planning to train personnel to administer the funds regime and it is broadly acknowledged that funds already registered and compliant with the existing framework will be recognised in the new one when it arrives. “There is agreement that the Central Bank’s role in licensing and regulation will move to CySEC but it will remain with the Central Bank until CySEC has sufficient resources to discharge its mandate,” says Stavrinakis. “It is important for market participants to get sufficient notice. Funds already registered will be grandfathered, that is to say, they won’t have to apply for a new licence.”
The Central Bank had responsibility for promoting the funds sector until it was replaced by a specially mandated promotions agency in 2002. But Stavrinakis is matter of fact about detailing the advantages to funds of setting up in Cyprus and highlights an efficient and competitive financial sector with over 40 banks providing custody, administration and other services to funds. He also cites the island’s well established legal and accounting sectors as well as the legal and court system being based on English law. “These are factors which help with the establishment of new business in Cyprus,” he says.
Analysts note that the Cyprus regime offers some additional specific benefits to hedge funds. As an example the cost of legal fees for setting up a fund in Luxembourg is generally some €70,000 to €100,000, in Cyprus it is a fraction of that at around €15,000 to €20,000. The Cypriot regime also permits accountants with experience of the process to represent a fund to the regulator rather than requiring direct client presence with the regulator as in Luxembourg. Costs are also likely to be lower in Cyprus. In Luxembourg, for example, there is a 0.01% levy on fund assets under management but no such charge in Cyprus. Fund administration and custodial services are also cheaper than in other centres.
The Central Bank has discretionary oversight to respond to how a fund manager wants to set up a fund vehicle. It is interested in developing governance and transparency rules to help the funds sector achieve best practice and attract new business. Though Cypriot banks provide custody and administration services financing is still the reserve of international investment banks. But this looks to be changing as one of the applications before the Central Bank is from a local commercial bank which is looking to develop in this area of the market. More of this type of expansion is expected.
Leading the Cyprus market
Barclays, Banque Nationale de Paris and Société Générale are among the foreign banks active in Cyprus. But it is Cypriot group Hellenic Bank that leads in the custodial services segment of the market with an estimated 70% share overseeing assets of over €2 billion. Charalambos Phokas, manager of trust and custodian services says Russia, Greece and Europe are the key markets Cyprus must target to develop the alternative funds industry. “Demand is increasing,” he says. “There is considerable appetite for registering these funds. If the fund industry is promoted in the right way it could lead to huge demand as Cyprus has a very favourable tax regime.”
Hellenic Bank covers both local and international markets. It also offers to act as a trustee for a fund if it incorporates as a trust rather than as a private company. Phokas estimates his own business could double in size but allows that that will ultimately depend on how the funds industry as a whole progresses. “Our advantage is that we have an automated solution that uses a minimum of staff and depends instead on technology,” he says.
The man behind the plan to build the funds industry is Minister of Finance Charilaos Stavrakis, a senior ex-Bank of Cyprus executive and someone who has been very active in international business. Though Phokas acknowledges the Minister’s contribution, he is keen for both the Central Bank and the Ministry of Finance to contribute more to developing the Cypriot funds sector at a time when new business is up for grabs. “The Central Bank of Cyprus and the Minister of Finance need to be actively engaged in developing the funds industry and hedge funds,” he says. “But the Finance Ministry can have an active role in promoting the sector. They have the channels to promote this business just as they are promoting the international business of Cyprus as a financial centre.” Phokas hopes the authorities will do road shows like they do for CSE but extend this to include promoting the funds sector and work with local banks and administration service providers. In some ways, the financial crisis afflicting most countries offers Cyprus a competitive advantage. Strict rules apply to local banks which mean there was no exposure to any of the structures run by Lehman Bros. On short-term credits, for example, Cypriot banks are restricted to paper rated no lower than A-1. “The banking industry was not affected by the financial crisis,” says Phokas. “There were no liquidity problems. On the contrary, there was no issue with stability of Cypriot banks.” Hellenic Bank runs business outside of Cyprus and uses Citibank in Moscow where the Cypriot firm has significant operations. In turn, Hellenic Bank serves as sub-custodian for Citi in the Cyprus market. In other markets Hellenic Bank uses different local custodians. “Using different local custodians rather than the same global one gives better knowledge of a particular market,” says Phokas. “It is always better to know the local player.”
A developer’s market
The financial crisis hit activity in local real estate. British and Russian investment stopped expanding but it hasn’t contracted either. “Cyprus cannot go against the global economic trends,” says Theophanis Theophanous, partner for Investment and Wealth Advisory with Deloitte Cyprus. “We have been affected. But things haven’t stopped.” He adds that the tax treaty with Russia may not be as beneficial as earlier but argues that it is still the best one around and that this should put a floor under the market until it expires in 2012.
Though secondary residential property prices are gauged to have dipped around 15% over the past year, prime residential and commercial property values have held steady. Part of the reason for this resilience is the limited supply for so-called Grade A commercial space. Local developers are reluctant to build on spec, even though the few projects that do proceed on this basis are usually fully let well before project completion. As a result, many companies build their own offices. The latest example of this is IKOS, the global leading hedge fund (whose sub-investment manager activities are based in Limassol, Cyprus) which has just begun constructing its own multi-purpose development. “Demand for Grade A space has grown in recent years as companies like IKOS have come here or expanded,” says Antonis P. Loizou, senior partner of Nicosia-based property firm Antonis Loizou & Associates. “With more demand for Grade A office space commercial development will be more wide spread as developers become more comfortable with demand being sustained.” He adds that despite the financial crisis office rents have held up and there has been growing demand for large facilities with a 1,000 square metre footprint.
In the Cyprus market, Limassol (based on the south coast and the island’s second largest city) is the more cosmopolitan centre as it is the home of many shipping and international companies. In comparison, Nicosia is the administrative centre and hosts local companies and international companies, including major government and financial institutions. Loizou says Nicosia is about 30% cheaper than Limassol where Grade A seaside view office space is €20 per square metre per month while Grade B offices with no seaside view go for about €12. In Nicosia, in the central part of the island, the Grade A rate is about €15 and Grade B €10.
The prime residential market around Limassol has seen values remain steady. West of the city there are a variety of golf courses easily accessible from the estates to the north where 600 square metre villas complete with a swimming pool and seaviews can easily cost over €1 million. Foreigners who make a €300,000 investment in property get automatic residency status and a Cypriot passport after six years. For that price, a newcomer can get a three bedroom house with a pool and beach front either east or west of Limassol with prices decreasing as distance from the city increases.
Favourable tax regime
If Cypriot property prices look better value than Mayfair so, too, does the tax regime. Corporate tax is assessed at 10% but it can be reduced through allowances and domiciling companies outside the EU. For employees of asset management firms, a €100,000 income would attract total tax of about €22,000. For partners and others, the marginal tax rate on all income tops out at 30%.
From the development of its financial and banking sector, Cyprus has companies that offer a wide range of the business services most frequently needed by asset managers. Albourne Partners, the London-based alternative investment fund services provider, has developed a major presence in Cyprus since opening an office in 2001. It has 50 of its 180 worldwide staff in Cyprus working on due diligence, IT and operations support. Technology service providers are also well established and have substantial experience in financial services. “IT companies like IBM, Oracle and others offer the full range of products,” says Kyriacos Kokkinos, General Manager at IBM Cyprus which has 50 specialist IT staff. “And the ability of people to service this is there. It is a very competitive market.”
Kokkinos says the business perspective of a multi-national workforce is a valuable advantage for Cyprus. He and others like to actively recruit from overseas Cypriots and foreign nationals who are already involved in servicing financial firms abroad. “We believe this is an area that has the potential for growth – whether from Islamic funds, hedge funds or others,” he says. “We are trying to attract foreign direct involvement in other financial services products.”
Signet Athena, a fund of funds operator with $1.8 billion invested in seven portfolios, is a global firm with offices in Lausanne, London and Washington. It opened an office in Nicosia two years ago where it has two employees but expects to add more. “I think it makes sense for hedge funds to come here,” says Harris Tsangaris, a risk manager with Signet. “Cyprus is a good environment. There is a good skill set, good infrastructure and a good local workforce. I am hopeful we will be able to expand here.”
With Cyprus an EU member since 2004, there are growing hopes of a resolution of the 35 year dispute with Turkey that divides the island. Certainly it is inconceivable that Turkey will ever be admitted to the EU while still basing more than 30,000 troops on the island’s northern territory. Though the political differences are deep-seated, reconciliation is closer than at any time since the conflict ignited in 1974. Some observers believe that a solution to the division is likely over the next five to 10 years. “In the meantime,” says Deloitte’s Theophanous, “we are experiencing gestures of goodwill from both sides.”
One final point Cypriots and non-Cypriots both like to make is just how pleasant life can be on an island that is at the intersection of civilisation in the south-eastern Mediterranean. “We always leave the quality of life until last,” says Ioannis Gaiganis, senior manager of Investment Fund Services at KPMG Cyprus who abandoned grey, land-locked Luxembourg earlier this year to relocate his wife and four children to a beach-side home near Larnaka, the home of one of the island’s two main airports (the other one being Pafos), which is being re-opened in completely new facilities. “We don’t dwell on it, but we can’t not mention the lifestyle benefits that being here brings. It is a year around holiday location – whether it is the weather, the facilities or the tourism industry.”
