In order to properly conduct investment activity based on capital collected from multiple investors in the form of an Alternative Investment Company (ASI), investors or entities intending to invest funds via an ASI are faced, from the very outset, with a rather difficult choice between using a structure involving an externally managed ASI or one based on internal ASI management.

According to the wording of the Act on Investment Funds and the Management of Alternative Investment Funds, an ASI may only be managed by:

  • a capital company that is itself an alternative investment company, conducting activity as an internally managed ASI; or
  • a capital company that is the general partner of an alternative investment company, conducting activity as an externally managed ASI.

The applicable regulations therefore leave investors with a relatively broad choice regarding the form of ASI management — but this choice determines a number of further implications.

License vs. Registry Entry

In this context, it is important to distinguish between the internal or external nature of ASI management and the legal basis for conducting ASI management activity (whether internal or external). The Act provides for the performance of such activity either on the basis of a license granted by the Polish Financial Supervision Authority (KNF) or on the basis of an entry in the register of ASI managers, depending on the value of assets included in the investment portfolios of ASIs that the given ASI manager intends to manage or is managing.

Activity conducted on the basis of a registry entry requires that the value of assets in the investment portfolios of alternative investment companies managed or intended to be managed by the ASI manager does not exceed the PLN equivalent of EUR 100 million, or — in the case of ASIs that do not use AIF leverage and in which participation rights may be redeemed no earlier than five years after acquisition — does not exceed the PLN equivalent of EUR 500 million. Exceeding these thresholds results in the obligation to submit an application to KNF for a license to perform ASI management activity.

Activity conducted on the basis of a KNF license is subject to a number of statutory requirements, primarily concerning the ongoing performance of such activity. The justification for introducing detailed and rigorous rules governing the operation of licensed ASI managers (equivalent to investment fund management companies) is undoubtedly the high value of assets under management by such entities, exceeding the thresholds set out in Article 70zb of the Act.

The Act in particular imposes on licensed ASI managers the obligation to maintain a specified level of own funds and to implement internal regulations concerning the manner of performing ASI management activities — including internal control systems, policies, and procedures governing, among other things, risk management, liquidity, and conflict of interest management. Such an entity is also required to enter into an agreement with a depositary, who holds the ASI’s assets and maintains the ASI’s asset register.

According to Article 70zb(4) of the Act, an ASI manager performing the activity specified in Article 70e(1) without a license from the Commission, after obtaining entry in the register of ASI managers, is not subject to the provisions of Articles 70ba–70bd, 70d, 70f(3–12), 70g–70j, 70l–70r, and Titles IIIb, IV, XII, and XIII.

This exemption means that ASI managers operating on the basis of a registry entry are relieved from a number of rigorous statutory requirements applicable to licensed ASI managers, and the significantly simplified rules for these entities result in a substantial easing of their organizational and capital obligations. This also significantly reduces the risk of administrative penalties being imposed by KNF in the event of non-compliance with the Act.

The regulatory realities, the formal rigor of the licensing application process, and prevailing investment trends indicate that investors most often choose to commence operations on the basis of a registry entry — provided, of course, that the statutory limits on assets under management are observed.

Externally or Internally Managed ASI

Regardless of the legal basis for the ASI manager’s activity, the issue of selecting the appropriate structure within the legal framework defined by the Act remains to be resolved. From the investor’s perspective, the choice of model is not only organizational in nature but also affects the ability to conduct further investment activity.

In the case of VC/PE funds, for example, the impact of ASI regulations on the ability to obtain public funding is particularly relevant — including participation in the BRIdge Alfa program implemented by the National Centre for Research and Development (NCBR), which operates within a specific regulatory environment. The funding agreement is concluded by the intermediary entity (following a positive evaluation in the competition) with the ASI manager, who is then obliged to register the ASI in the National Court Register (KRS) and to conclude an appropriate management agreement with the ASI.

The choice between external and internal management will also be significant depending on the adopted method of making investment decisions and assessing investment risk, as well as the competence and size of the management team. In the case of external management, the entity fully responsible for proper ASI management and for the correct implementation of the ASI’s investment strategy and policy is the ASI’s general partner — a separate legal entity. Therefore, it is important to appropriately structure the contractual relationship between the ASI and the ZASI. In contrast, an internally managed ASI implements its investment strategy through a management team operating within its organizational structure. The functioning of this team — including the method of making investment decisions, possibly in the form of an investment committee — should be reflected in the ASI’s corporate documents already at the stage of submitting the application for registry entry.

Finally, this choice will affect the legal form of the ASI and all related strategic corporate and financial consequences. In the case of an internally managed ASI, the investor’s participation instrument will be shares in a joint-stock company or equity interests in a limited liability company, held by the investor in the ASI’s share capital, which will be redeemed primarily in accordance with the provisions of the Commercial Companies Code, but also taking into account the ASI’s internal regulations.

In the case of an externally managed ASI structured as a limited partnership or limited joint-stock partnership, internal corporate documents, ASI rules, and — in some cases — the provisions of the management agreement between the ASI and the ZASI will play a greater role in the investor’s exit from the investment.

Conclusion

Investors or entities planning to conduct investment activity via an ASI must make key decisions even before defining the essential elements of the ASI’s investment strategy and policy. The consequences of these decisions will have a profound impact on the ASI’s future operations.