Article was written by Steven M. Pepa, Managing Director, Saratoga Capital Partners

As any industry player will tell you, the investment migration industry has traditionally been about lifestyle choices. Investors obtain their second citizenship or permanent residency solution usually after purchasing a compliant real estate, or to a lesser extent making a governmental donation.

Investment migration professionals are overwhelmingly focused on real property transactions, and the ‘sale’ so to speak is about which real estate is better than the next.

Over the last few years, however, the industry has started to change. Governments interested in investment migration as a consistent source of FDI have started to increasingly look at fund options when structuring their respective migration program.

Utility for government is obvious – funds provide different avenues for migration focused FDI, and theoretically can help a country create greater economic diversification.

Investment migration candidates, as a group, have also started to diversify. The investor is becoming much more receptive to a fund option, as investment migration is increasingly being viewed as a useful vertical to international tax planning and wealth preservation.

Today, investment migration funds come in many forms, and they are concentrated in the five jurisdictions offering the option: Bulgaria, Cyprus, Greece, Portugal and Turkey.

What follows is a short presentation of what investment migration professionals should look for when helping their clients to choose a proper fund for them.  Like any investment product, a migration fund is fraught with potential pitfalls if the consumer is not well served.

When choosing a fund, start with its corporate governance.

In my opinion, and assuming the investor has decided that the fund option is preferable over a compliant real estate transaction – and has also determined which migration program is best from a personal perspective – the analysis should start with corporate governance.  Good corporate governance is key.  A fund, after all, is a financial product.

A fund that has the right internal protocols governing itself, its manager and related parties – all of which should be designed to protect investors and enhance returns – will do much better than a fund that does not have such protocols.  The level of governance should be above that of the regulatory minimum.

Things to look for include:

• How are the boards of these key entities constituted?
• Are they full of related parties or family members?
• What are the professional qualifications of the people running the fund?

Although migration funds are not publicly listed (at least not yet in the industry), and are nothing more than private placements for investor capital in return for a migration solution, the closer a fund, its manager and related parties mimic public levels of good corporate governance the better.

Always look at the investment objectives and risks.

Even with good corporate governance, however, a particular fund may not be suitable.

One needs to carefully analyse a fund’s investment objectives and risks, management, fees and redemption options.

There are several questions to ask to get a good sense of risk and return:

• What is a fund’s long-term investment objective?  How does it get there?
• Is it focused on income, growth or a combination of the two?
• How does the manager expect the fund to perform in various market environments?
• What are the primary risks that this fund is exposed to, and how are they managed within the fund?

It is important to understand the risk and return profile of a fund before a determination can be made whether investment objectives sufficiently align.

Fees are always a concern.

Investment migration funds generally have three distinct types of fees: upfront or offering fees; operating fees; and liquidation fees.

Upfront fees include commissions and marketing fees for agents that are sourcing the ultimate clients.  How these fees are calculated by a fund, and do investors ultimately pay for them, is a good starting point in any discussion.  As well, is the investor required to pay a subscription fee to enter the fund?

Operating fees usually include the manager’s annual fee.  Some funds have high manager fees for sourcing opportunities for the fund and its investors. There may be performance-based fees based on achieving pre-specified metrics.  A high or low manager fee is not the question to ask.  Rather, ask for the justification of the fee by the manager and how they add value to the fund and investor return.

Liquidity fees include real estate disposition fees, loan termination fees, or other fees and expenses related to selling or liquidating fund assets. Fees can vary significantly by structure and asset type, so an important factor in reviewing fees is to compare similar funds.

Lockup, liquidity and redemption.

Another key area is the period of the lockup – how much longer than the investment migration regulated minimum does the fund manager ask an investor to hold?

As well, what are the redemption options and how liquid is the fund to meet those obligations?  When it comes to redemption, what frequency are redemptions offered?  Can an investor exit completely or is it staggered?  Are there any hidden fees on redemption – does the investor pay the manager a fee to leave the fund?

A short note on US persons.

Finally, a few thoughts on Americans as an investor class.  Although all countries have investment protection laws that apply to their citizens, the US Securities and Exchange Commission is quite a unique animal in that it has the power to ensure extraterritorial application of its investor protection laws, and is quite willing to use it!

Ask the fund if it accepts US persons as investors.  How is it structured to ensure that the fund properly falls within the US safe harbour provisions?  Picking a fund with an American in it (or conceivably will be in it) can create issues down the road for that fund, its manager, the other investors, and ultimately the investment migration agents marketing that financial product.