One to watch

Will 2023 see the addition of a new fund vehicle to the range of unauthorised structures available in the UK market? A draft amendment to the Financial Services and Markets Bill (“FSMB”) suggests that one may soon be on the way – the unauthorised co-ownership AIF.

The UK has struggled in recent years to compete with offshore funds jurisdictions for the formation of institutional-targeted alternative fund vehicles. A new form of professional investor fund (or PIF, as the unauthorised co-ownership AIF is likely to become known) could be a good structure for investment in real estate and potentially other alternative asset classes.

Over the past two decades, an alphabet soup of new fund types have been introduced in the UK, including QISs, PAIFs, FAIFs, CoACs, and LTAFs. But each of these have been authorised fund structures, adding further layers of regulation and supervision to fund operation. This has meant that these structures have not been as attractive to institutional investors as had been anticipated. Instead, institutions wishing to invest in UK structures have largely been restricted to limited partnerships, corporates and unauthorised unit trusts. This may be about to change.

A majority of respondents to that review had called on the government to make the UK a more attractive place to set up new funds.

In January 2021, the Treasury launched a review of the UK funds regime. A response paper was issued in February 2022. A majority of respondents to that review had called on the government to make the UK a more attractive place to set up new funds. Respondents asked to prioritise a new form of unauthorised contractual fund structure.

Since then, we have been awaiting further news on the new vehicle (also referred to as a Professional Investor Fund, or “PIF”). In December, amendments were included in the Financial Services and Markets Bill (“FSMB”) to allow the creation of the PIF. Once adopted, the Treasury will have power to amend legislation and create an “unauthorised co-ownership AIF” based on the existing authorised contractual schemes (“CoACS”).

What is an unauthorised co-ownership AIF/PIF?

It is not yet clear what a PIF will look like. But we anticipate that it will be a wholly new type of vehicle for the UK that closely resembles the existing CoACS regime. It will be created by contract (we anticipate an industry standard form to evolve as the starting point) between an AIFM and a depositary. We assume it will be open to professional investors and will require a full scope AIFM to be appointed to manage it, as well as needing a UK depositary to provide oversight and custodial functions. Following the same model as the CoACS, we anticipate that investors will be provided with limited liability and similar insolvency rules. Whilst variations will likely be permitted, we anticipate it mainly being used for closed-ended, single (not umbrella) funds.

It is not yet clear what a PIF will look like. But we anticipate that it will be a wholly new type of vehicle for the UK that closely resembles the existing CoACS regime.

The PIF has several features that could set it apart from existing options. As an unauthorised vehicle it should be quick to set up and easier to maintain than its authorised counterpart, the CoACS. It also has the benefit as a closed-ended fund of having tradeable units without first requiring a listing. Additionally, it is onshore and therefore becomes a serious contender alongside established offshore structures with equivalent tax treatment.

What is the likely tax treatment of a PIF?

The tax treatment of the PIF is yet to be confirmed by the Government. It is hoped the PIF will be treated for UK tax purposes in broadly the same way as a CoACS.  If this were the case, the PIF would be transparent for income (similar to a partnership) and any gain made by the itself PIF on disposal of investments would not be subject to tax. The issue and transfer of units in the PIF would not be subject to stamp duty or SDLT and the PIF would be able to register for VAT.

This would make the PIF an excellent vehicle for investment by institutional investors that want the agility of an unauthorised structure but no longer want to use offshore equivalents (e.g. in the case of real estate investments the Jersey PUT, Luxembourg FCP and the CCF in Ireland).

This would make the PIF an excellent vehicle for investment by institutional investors that want the agility of an unauthorised structure but no longer want to use offshore equivalents

Conclusion

Will the PIF result in a sea change for the institutional alternative fund sector? Very possibly. It all depends on how the tax treatment is set, and the appetite of the Treasury and FCA to finalise the rules quickly. Regardless, we expect the PIF to be one to watch in 2023.