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IN116 - Isle of Man Experienced Investor Mutual Funds - Case Study for a Property Fund
Isle of Man experienced investor funds are now the most popular type of mutual fund in the Isle of Man, mainly due to the number of features that give such funds a competitive edge over vehicles in other jurisdictions.
They are particularly useful for investment situations where there are a number of investors. The scheme particulars provide a pre-agreed framework prescribing the nature of the investment and the relationship between the parties, as well as important safeguards for investors.
This in turn makes it easier to raise funds for a number of purposes, varying from venture capital funds through to property funds.
The example detailed below illustrates a situation involving a property fund, but it could equally apply to a venture capital fund or an equity investment fund:
Example
In this example the client dealt with a number of successful property schemes on an informal basis. The client purchased distressed properties and refurbished them, using his project management company, and then sold the properties, hopefully having made a profit.
The client normally raised private funding for each project from wealthy individuals who had experience investing in such schemes.
The client therefore wanted a formal arrangement for future activity, which would demonstrate the following characteristics:
- A mechanism to govern the relationship between investors.
- A structure in a well regulated jurisdiction, thereby giving confidence to investors.
- The ultimate holding entity should be an enduring entity so as to build up a track record which could be demonstrated to future investors.
- The proposed structure should be tax efficient.
- The structure needed to be one that bankers would be happy to lend to.
Recommendation
In these circumstances the use of an Isle of Man experienced investor fund could provide the most effective and efficient structure. A diagram is attached showing how this might work. The reasons why the experienced investor fund meets the client’s requirements are:
Ability to Promote
An experienced investor fund has only limited Isle of Man restrictions on its promotion, provided that investors are experienced investors.
Relationship between the Parties
The fund will have an offering document which will set out the nature of the investment and the relationship between the parties. There are prescriptive rules on the contents of the offering document, with the purpose being to enable a prospective investor to make an informed investment decision.
Regulation
The fund itself is not regulated. There are no regulatory restrictions on asset classes, borrowings, hedging or investment objectives, policies or techniques.
The fund, however, must have an Isle of Man licensed manager/fund administrator. This provides reassurance to investors as the fund administrator will help ensure that the fund is run in accordance with the scheme particulars and that the assets are held by an appropriate custodian. Dixcart Global Fund Managers Limited is a licensed fund administrator in the Isle of Man.
An Enduring Entity
In this situation we would recommend an umbrella fund made up of a number of sub-funds. Each fund would be closed ended and invest into separate properties or projects. This could be organised through the use of a protected cell company (PCC). There is no upper limit to the number of cells that a PCC can create.
When a project is completed, that particular sub-fund would be closed but the umbrella fund would continue, thereby ensuring that the umbrella fund could build up a track record.
Investors could pick and choose between sub-funds, thereby getting a spread of risk, rather than exposure to one project.
Tax Efficiency
Experienced investor funds are exempt from Isle of Man income tax.
With regard to the EU Savings Directive, the fund can be set up and operated in such a way that it falls outside the scope of the Directive.
There is an exemption from VAT with regard to Isle of Man administration and management fees charged to the fund, as well as any investment management fees charged by Isle of Man investment managers. This increases the cost-competitiveness of experienced investor funds.
The Proposed Structure should be one to which Banks are willing to lend
In this example, each sub-fund may direct its investment through an underlying company. The Isle of Man Companies Registry has a Register of Charges, and the ability of banks to register charges can make it easier to borrow money.
Summary
An Isle of Man experienced investor fund is a flexible, tax-efficient and economic vehicle for investment.
Investors should be confident to invest via such a structure, given the stable political and economic environment of the Isle of Man and the experienced professional infrastructure available on the island.
If you require further information on Isle of Man experienced investor funds please contact Simon Kelly in our Isle of Man office or your usual Dixcart contact.