Investment funds are generally considered a complex, collective, highly specialised form of investment. However, an amendment that came into force from January this year, will allow a much wider range of participants to set up investment funds and fund management companies. And these funds can present very favourable opportunities, whether for acquisition purposes or for holding private assets.
For several years, an EU directive has allowed for simplified regulation with regard to ‘below-threshold’ venture capital fund management firms and the investment funds they manage. Taking this opportunity, since January, the Hungarian legislators have relaxed the operating rules applicable to fund management firms that manage funds with a net asset value not exceeding the EUR 100 million threshold. At the same time, so-called intra-group fund managers – i.e. those whose owners and the investors in the funds they manage belong to the same group – are now subject to more relaxed rules too. In this latter case, the reasoning is that there is no possibility of harming the interests of external investors and systemic risk is also low.
How will this make things easier and cheaper?
The main point of the more relaxed regulation is that both ‘below-threshold’ fund managers and intra-group fund managers will be removed from the supervision of the National Bank of Hungary. This significantly reduces the administrative burden on these fund managers and the funds they manage.
Last but not least, ‘below-threshold’ and intra-group fund managers are now also exempt from having to pay the related supervisory fee. And maintaining these funds has not been cheap so far, as the supervisory fee, which is based on the net asset value of the fund's portfolio, sometimes resulted in a cost in the nine digits (in HUF) for these funds.
But what is it good for?
Apart from pursuing the main activity that they’re designed for, which is investing assets in a diversified form, setting up investment funds can serve many other purposes. On the one hand, funds are exempt from corporation tax and can therefore be used for many tax purposes. For example, since an investment fund can provide loans to portfolio companies within certain limits, investment funds can serve group-financing objectives in a tax-efficient manner.
It’s also worth noting that in terms of the application of several statutory regulations, holding investment fund units does not create an indirect ownership relationship between the holder of the units and the fund’s investments, which provides an opportunity when it comes to planning intra-group transactions. And not least, the ownership structure of an average company can be easily traced from the business register, while, for example, the identity of the owners of private equity funds is not revealed; in fact, investment unit holders do not feature in the beneficial owners’ registry under the latest money laundering rules, either.
It’s not all a bed of roses
However, the fact that some investment fund managers have been removed from the circle of entities subject to external supervision does not mean that the establishment of these fund management firms no longer has to comply with the strict material and personnel requirements stipulated by the law. Establishing a fund management firm continues to be subject to a regulatory procedure. In addition, many details are still unclear in the new regulation. Thus, although these funds are no longer subject to MNB supervision, it is unclear to what extent and how the supervisory authority will be able to intervene in the event of possible mismanagement by the fund manager.
By Akos Barati, Attorney, Jalsovszky