Author: mš
Source: Finanční poradce, 11.12.2008, issue 12, p. 32
Since 2006, Czech investors have had the opportunity to put their money into qualified investor funds. They can choose between funds investing in real estate, shares, bonds as well as private equity projects. The advantage of investing in these funds is the low taxation rate guaranteeing a high return. They are subject to a 5% income tax rate for legal entities, which for 2008 is 16% lower than for traditional share funds. A larger amount is thus divided between the shareholders. This is, however, a long-term investment for larger sums. The funds are subject to strict checks by the Czech National Bank.
WHO IS QUALIFIED?
As the name itself indicates, securities in these funds are aimed only at so-called Qualified Investors. These can be institutional investors defined by the law on collective investing (e.g. banks, insurance companies and pension funds), as well as individuals or other legal entities who substantiate with a statutory declaration their experience or knowledge of the field in which the fund will be investing (securities, real estate and so on). However, the law does not define the exact form of this declaration. By law, the fund may have at most one hundred investors and the lower boundary of each investor’s investment is one million crowns. This, however, is only the minimum amount stated by law, which each fund can increase as it wishes in its statutes. For example, the Arca Capital CEE fund has its minimum investment set at five million crowns. Within one year of obtaining the licence, each fund’s own capital must have reached a value of at least fifty million crowns. Funds can be founded for a maximum period of ten years which cannot be extended. However, a fund can merge with a more recent one, thus prolonging its existence. Considering the above-mentioned criteria, these funds are more suited to investors who can afford to invest large sums for a long period of time; a higher return will be their reward.
SEVERAL LEVELS OF CONTROL
The law does not define precisely what funds can and cannot invest in, so investment strategies need to be defined in detail in the fund’s statute. This is a document containing information on the collective investment fund’s method of investing and further essential information for investors to evaluate the investments precisely and correctly, processed in a form which is comprehensible to a qualified investor.
A well-prepared statute is essential for obtaining a licence from the Czech National Bank.
In practice, we can also find funds with various focuses investing in real estate, securities or private equity projects, for example. “By investing in private equity projects, investors are also supporting the Czech business environment. Their finances help small and medium-sized businesses to develop and allow them to invest in new technology or enter new markets,” explains the chairman of the board of Arca Capital CEE’s closed investment fund Pavel Makovec.
Qualified investor funds are subject to strict control by the Czech National Bank. Before commencing activity, each fund must go through a very careful licensing procedure. Every six months, it must present a report on its activity. The depository of the fund (bank) is another control mechanism.
Each investment fund must have a contract with a depository which records the fund’s holdings and checks whether the fund is using its holdings according to the statute and to law. The third control mechanism is entirely within the power of the fund’s founders. It is specified in the statute as a limit to the maximum amount spent on one investment, for example in one type of security, one item of real estate, or one company. This limit is introduced to limit the risk and to increase the fund’s stability. For example, in the Arca Capital CEE’s fund, the limit to the maximum amount invested in one project is set at 35% of the basic capital.
SHARES AND INVESTMENTS
Investors can choose between two types of qualified investor funds: share and investment.
In the Czech Republic, there are at present five share and thirteen investment funds, but their number changes all the time, since funds not only obtain licences, but also often lose them. This happens because the funds’ managers are not able to meet the legal condition to increase the fund’s basic capital within one year of obtaining the licence to at least fifty million crowns.
A share fund can only be founded by a licensed investment company, which then manages its holdings and sells to investors mutual funds certificates. A share fund can be founded as open or closed. An open fund does not have a limited number of mutual funds certificates issued and the right to repurchase the mutual funds certificates is held by the investment company at their owner’s request. With closed funds, the investment company does not repurchase the mutual funds certificates. Their investment is only settled when the share fund is liquidated.
EVEN WITHOUT ADMINISTRATION FEES
Investment funds are always founded as joint-stock companies which thanks to the shares’ bonds obtain finances which they then invest. Investors who decide to place their money in a closed investment fund buy shares from the fund’s founders and thus become shareholders in the fund. The only type of activity that an investment fund may undertake is collective investing and it can only be founded as closed. Depending on who administers the fund’s holdings, we differentiate between autonomous funds and funds controlled by an investment company (administrator). The managing board decides on how the investments are spread in an autonomous fund. This avoids having to pay a fee of up to 2% to the investment company for managing the portfolio. This shows up positively in the fund’s profits. During the licensing process, much stricter requirements are placed on autonomous funds, comparable to those required for founding an investment company. Investors have two possibilities of getting back their valorised capital: either by selling the investment fund’s shares to another investor or by a share in the liquidated balance of the fund’s holdings when the fund is liquidated after the expiration of the period for which the fund was established. The investment fund’s general meeting may also decide to liquidate the fund before the expiration of the period for which the fund was established. Following a decision by the general meeting, the investment fund may pay out a share of the fund’s profits to shareholders as dividends.
