Distribution Policy: Funds Vs Companies
Alternative Investment Funds have consistently been selected as the preferred vehicle for investments from both asset managers and investors. In the eyes of many, alternative investment funds have developed to represent the evolutionary immediate of Companies in the realm of investing and capital raising.
A Cyprus Investment Fund can only be set-up by first incorporating a Cyprus company and in principle the two are bound by very similar founding legal characteristics. Nonetheless, the Investment Funds industry has grown to develop a vast library of industry specific regulation that has been put in place to govern their operations. The primary piece of legislation in the context of Cyprus Investment Funds is the Alternative Investment Funds Law of 2018 L.124(I) of 2018 (“AIF Law”), and, for Companies, is the Companies Law Cap. 113.
This article seeks to highlight an important distinction in the rules governing the dividend distribution policies of the two as these are manifested in the relevant legislations. Precisely, the AIF Law permits Investment Funds to distribute dividends to investors both out of profits and proceeds (proceeds being the initial invested capital by its Investors), whereas, companies of any type, can only distribute dividends to their shareholders solely out of profits.
This offers Investment Funds more flexibility when it comes down to their dividend distribution policies. At face value this seems beneficial to the interests of investors given that they may start realizing returns (if any) and recovering initial capital invested at any point in the future and not wait instead until the Investment Fund starts generating profits. One can further argue that this could act as a buffer for investors who, by being distributed a part of their initial invested capital, minimize potential losses in instances of unprofitable Fund’s investments.
On the contrary, such an approach could be detrimental to the potential returns of the Fund that could have instead generated higher long-run returns. This is because returns could have been compounded on a greater amount of initial invested capital. Moreover, it could compromise the success of individual investments given that the money distributed could have instead been used for the actualisation of the investment. By definition, this approach leads to inefficient utilization of raised capital and in essence undermines the intention of the investor to invest its capital in the first place.
Concluding, it is of great importance for the dividend distribution policy to be aligned with the Fund’s pursued investment strategies and overall investment goals so as to not be damaging to the Fund’s overall performance. In the interest of trust and transparency, Fund Managers may furthermore disclose to their Investors the nature of any dividend distributions granted, split between profits and proceeds.