Publication date: December 02, 2024
Alternative investment companies are a specific form of investment activity introduced into the Polish legal system within the framework of the provisions on investment funds, and specifically in the context of managing alternative investment funds. These regulations are contained in the Act of 27 May 2004 on investment funds and the Act of 22 July 2005 on the management of alternative investment funds, Journal of Laws 2024.1034. AIICs are therefore a specific form of asset management that creates the possibility of investing in alternative assets, such as real estate, private equity, raw materials or debt, while maintaining high flexibility in terms of investment strategies.
Legal Basis for Alternative Investment Companies
Alternative investment companies are regulated in the Polish legal system by the aforementioned acts on investment funds and on the management of alternative investment funds. In particular, their functioning is associated with the appropriate transformation of the legal form of investment funds, which can operate as capital companies. This means that Alternative Investment Companies are joint-stock companies or limited liability companies that can invest in a wide range of alternative assets.
Pursuant to Article 8a of the Act, alternative investment companies may conduct business in two forms, namely as:
– limited liability companies, joint-stock companies or European companies;
– limited partnerships or limited joint-stock partnerships in which the sole general partner is a limited liability company, joint-stock company or European company.
Legal form: According to the Investment Funds Act, alternative investment companies may take the form of a joint-stock company or a limited liability company. This means that investors acquire shares or stocks in such companies, which then invest these funds in accordance with a specific investment strategy.
Investment scope: Alternative investment companies, in accordance with the Act on the Management of Alternative Investment Funds, have the ability to invest in a wide range of assets, including:
– Real estate,
– Unlisted companies (private equity),
– Raw materials (e.g. gold, oil),
– Debt instruments (e.g. investments in corporate debt),
– Derivatives and other non-standard assets.
The Investment Funds Act provides great flexibility in the selection of investment instruments, which allows for the implementation of more complex investment strategies.
In accordance with Article 8b of the Act of 27 May 2004 on Investment Funds and the Act of 22 July 2005 on the Management of Alternative Investment Funds (AIF), Journal of Laws 2024, item 1034,
Alternative investment companies are managed by a so-called investment fund manager, which in the case of alternative investment company plays a role equivalent to the management board of an investment fund. In managing this fund, it is important that the people responsible for investment decisions have the appropriate qualifications and experience, and also comply with the requirements related to capital market regulations. Fund managers have an obligation of transparency, responsibility and compliance with legal regulations.
Participant Restrictions: In the case of alternative investment companies, as in other investment funds, there are specific regulations regarding the group of investors. According to the Act on the Management of Alternative Investment Funds, alternative investment companies are intended mainly for professional investors who meet certain criteria, such as the minimum investment value or the status of a professional investor (e.g. financial institutions, wealthy individual investors). Such funds are not aimed at the general public.
According to art. 8c of the Act, an investor in an alternative investment company is an entity that holds participation rights in an alternative investment company and meets the criteria of a professional client. The criteria of a professional client shall not apply if the alternative investment company has obtained the authorization referred to in art. 5 sec. 1 of the Regulation 2015/760 on European long-term investment funds, OJ EU.L.2015.123.98 of 2015.05.19.
The participation rights of an alternative investment company are, respectively, a share in the company and a stock.
In the case of a limited partnership and a limited joint-stock partnership, participation in a company is understood as all the rights and obligations of a partner in the company.
An entity meeting the criteria of a professional client may make a contribution to an alternative investment company in exchange for participation rights in that company.
The subject of a contribution to an alternative investment company operating in the form of a limited partnership may not be an inalienable right or the provision of work or services.
The alternative investment company manager who manages an alternative investment company investing assets in shares of companies admitted to trading on a regulated market shall prepare and publish an engagement policy that describes how the engagement of shareholders of such companies is taken into account by the alternative investment company in its investment strategy. The manager of an alternative investment company shall prepare and publish an annual report on the implementation of the policy. The report shall include in particular:
– general description of voting procedure;
– description of the most important votes;
– description of the method of using the services of a shareholder voting advisor, referred to in Article 4 § 1 item 16 of the Commercial Companies Code, Journal of Laws 2000 No. 94 item 1037.
An alternative investment company may be marketed among:
– professional clients;
– retail clients – in the event that it has obtained the authorisation referred to in Article 5 paragraph 1 of Regulation 2015/760.
The manager of an alternative investment company is obliged to notify the Commission in writing of the intention to introduce an alternative investment company to trading in the territory of the Republic of Poland.
Initial capital for conducting business activity:
– in respect to externally managed alternative investment company – amounts to at least the equivalent of EUR 125,000 expressed in PLN,
– in respect to internally managed alternative investment company – amounts to at least the equivalent of EUR 300,000 expressed in PLN;
– using the average exchange rate announced by the National Bank of Poland on the last business day preceding the date of submission of the application for a permit to perform business activity by the manager of the alternative investment company.
Initial capital shall be understood as the sum of the share capital in the amount in which it was paid up together with the issue premium, undistributed profits from previous years, as well as the net profit in the process of approval, provided that this profit results from the financial statements audited by a statutory auditor, and the reserve capital, reduced by the uncovered loss from previous years.
Benefits and Challenges of Alternative Investment Companies
Benefits
Flexibility in asset selection – Alternative investment companies have the ability to invest in a wider range of assets than traditional investment funds. This includes the ability to invest in real estate, private equity, venture capital or commodities, which allows for greater diversification of the investment portfolio.
Tax benefits – the Investment Funds Act provides tax preferences for alternative investment companies, which means that profits earned by these companies may be exempt from income tax, provided that the company meets certain conditions regarding the investment structure and activities.
Access to Niche Markets – Alternative investment companies can invest in assets that are hard to access or non-traditional in traditional markets, giving investors the opportunity to participate in profitable but riskier markets.
Challenges
Higher risk – Due to their flexibility in asset selection, alternative investment companies often invest in riskier assets, which is associated with a higher potential return, but also with greater risk. Risk can also result from the illiquidity of some of the assets in which these companies invest.
Lack of liquidity – Many of the investments of alternative investment companies (e.g. real estate and private equity) are illiquid. This means that investors may have difficulty selling their holdings in the short term, which may limit their ability to exit their investment if necessary.
Regulatory Complexity – Managing alternative investment funds involves meeting specific regulatory requirements, both domestic and EU.
Summary
Alternative investment companies are an attractive form of investment that offers great flexibility in terms of asset selection and investment strategies. Based on the provisions of the Act on Investment Funds and on the Management of Alternative Investment Funds, alternative investment companies can invest in a wide range of alternative assets, which allows for the implementation of complex investment strategies, but at the same time involves higher risk. For this reason, alternative investment companies are mainly aimed at professional investors and require extensive experience in investing.