Formation and management of credit funds in Italy

Formation and management

What legal form of vehicle is typically used for credit funds formed in your jurisdiction? Does such a vehicle have a separate legal personality or existence under the law of your jurisdiction? Is it possible to create umbrella structures that permit the creation of sub-funds? What are the legal consequences for investors, managers and investment advisers in respect of each of these structures?

Credit funds must be structured as closed-end alternative investment funds, either in contractual or in corporate form.

The fund in contractual form has no legal personality and must be externally managed by an alternative investment fund manager (AIFM). The fund in corporate form (SICAF, which is similar to a joint stock company) has legal personality and can be either self managed or externally managed by an AIFM.

A fund can be organised in segments, which can be established from time to time and are fully segregated among each other, except for the liabilities that are identified as regarding the whole fund.

From a legal point of view, the position of investors, managers and advisers does not differ significantly between a contractual and a corporate structure, although governance rights in the corporate structure may be crafted more similarly to what happens in other jurisdictions, which may make foreign investors feel more comfortable with it.

Can the fund vehicle be unregulated? If so, does this affect the ability to originate loans or otherwise execute its investment strategy?

The most used credit fund type is the reserved one, which is very flexible as regards the creation of complex structures and can derogate to all limits set forth for retail funds. In addition, it is not subject to the authorisation of the Bank of Italy.

This makes it basically unregulated, although the key principles regarding actually having the characteristics of a genuine fund and being managed in compliance with the laws and regulations must be complied with.

A reserved fund can be subscribed to by professional investors, and retail investors who invest at least €500,000 (or €100,000 in specific circumstances).

What is the process for forming a credit fund vehicle in your jurisdiction? Are there any practical impediments to speed to market, such as account opening or banking and regulatory permissions?

A reserved credit fund in contractual form can be established by the managing body (typically the board of directors) of its AIFM by way of a resolution approving the rules of management of the fund.

A reserved externally managed credit fund in corporate form (SICAF) must be established before a notary by the initial shareholders, who execute an incorporation deed with attached the relevant by-laws.

A reserved self-managed credit fund in corporate form (SICAF) must be established before a notary by the initial shareholders, who enter into an incorporation deed with attached the relevant by-laws, and must be authorised by the Bank of Italy. The authorisation process usually takes around six months, as the self-managed SICAF is not only a fund but also an AIFM managing its own assets, and therefore the Bank of Italy must check its activity plan, its organisational structure and the prerequisites of its shareholders and directors.

If the AIFM or SICAF is ‘above threshold’ (ie, a fully authorised AIFM under the Alternative Investment Fund Managers Directive (AIFMD)), then a marketing authorisation of the units or shares of the fund must be requested to the Italian Companies and Exchange Commission (Consob). Authorisation is granted (if that is the case) within 20 to 30 business days from filing. No other filing or authorisation is required.

A contractual fund has no minimum capital requirements. A SICAF’s capital must be equal at least to €50,000.

The main ongoing costs are the annual management fee (usually 1­–2 per cent fund size), annual custodian fees (usually 0.015–0.02 per cent net asset value (NAV)), auditing firm’s fees and, for the SICAF, directors’ and statutory auditors’ compensation (which may vary). Other costs may be borne by the fund if provided for in the rules of management or the by-laws, but it is usually a matter of negotiation with cornerstone investors.

Is a credit fund vehicle formed in your jurisdiction required to maintain locally a custodian or administrator, a registered office, books and records, a corporate secretary, employees, professional anti-money laundering (AML) officers or other substance? If so, how is that requirement typically satisfied?

The fund itself, if in contractual form, does not need any substance but needs an AIFM, a custodian and an auditing firm. If the fund is in corporate form, it also needs a board of directors and statutory auditors but, unless it is a self-managed SICAF (ie, if it is an AIF and an AIFM), no other resources or organisation are needed.

The AIFM takes care of all the management, marketing, compliance and administration activities regarding an externally managed fund or SICAF.

What access to information about a private credit fund formed in your jurisdiction is the public granted by law? How is it accessed? If applicable, what are the consequences of failing to make such information available? What information (in addition to that available to the general public) are shareholders and limited partners able to see? Is it possible to reduce access rights as a matter of contract?

All information is usually kept confidential. Public announcements may be made when a closing takes place, and reference to investors’ categories (institutional, funds-of-funds, pension funds, etc) may be released, but no details of the investors are made public unless they agree so.

The same happens among investors; confidentiality provisions are usually applied, except where a disclosure is needed for investors to exercise their rights.

The above applies less to corporate funds, as companies must communicate to the public register (which is publicly accessible) the content of their by-laws and their shareholders.

In what circumstances would the limited liability of investors in a credit fund formed in your jurisdiction not be respected as a matter of local law? Is there a list of actions in which investors can participate without losing their limited liability?

Investors’ assets are totally segregated from a fund’s assets, and all liabilities of the fund must be fulfilled with its own assets only. The investors shall be liable within the limit of respective commitments. Certain governance rights are usually granted to investors, and if these rights are in compliance with laws and regulations and do not lead to the fund being requalified as not being a fund, their exercise by investors cannot lead to losing their limited liability. These governance rights typically include the right to replace the AIFM, veto rights on amendments to fund rules or by-laws, on transactions in conflict of interest, on derogation to investment limits, on the extension of the fund or investment period, on key people replacement and on launch of successor funds.

What are the fiduciary duties owed to a credit fund formed in your jurisdiction and its third-party investors by that fund’s manager, investment adviser or other similar control party or fiduciary? To what extent can those fiduciary duties be modified by agreement of the parties?

The fiduciary duties of the AIFM are set forth by law and consist of the obligation to exercise its professional care for the safe and prudent management of the fund in the exclusive interest of the investors. The AIFM is directly responsible for the investors (and the fund) for the actions of the third-party service providers it appoints in the interest of the fund.

Does your jurisdiction recognise a ‘gross negligence’ (as opposed to ‘simple negligence’) standard of liability applicable to the management of a credit fund? If so, how does this standard differ from a simple negligence standard?

As an AIFM is a professional intermediary expressly authorised for exercising a reserved activity, there is no significant difference between gross and simple negligence, and the required duty of care is higher than the one due by a non-professional operator.

Are there any other special issues or requirements particular to credit fund vehicles formed in your jurisdiction? Is conversion or redomiciling to vehicles in your jurisdiction permitted? If so, in converting or redomiciling vehicles formed in other jurisdictions into vehicles in your jurisdiction, what are the most material terms that typically must be modified and how common is this process? How long does it typically take?

Reserved credit funds, like any other reserved alternative fund, must be set up and managed by an AIFM, have a plurality of investors, and be invested as a whole on the basis of a predetermined investment policy and independently from the investors.

There are no specific requirements for reserved credit funds additional to those provided for other reserved alternative funds, except for certain limitations on leverage (the maximum ratio being 1.5) and a proper diversification of investments. Loans granted in Italy must be compliant with the same provisions applicable to banks as regards transparency and relationships with clients.

Conversion or redomiciling of credit funds in Italy is not common and, as long as the fund is a reserved one, is not regulated by specific provisions of law. If the fund is in corporate form, the conversion or redomiciling must be carried out in compliance with the rules governing the change of registered office of the company, and must involve in Italian notary public for the relevant amendments of the by-laws.

With respect to institutional sponsors of credit funds organised in your jurisdiction, what are some of the primary legal and regulatory consequences and other key issues for the credit fund and its general partner and investment manager or adviser arising out of a bankruptcy, insolvency, change of control, restructuring or similar transaction of the credit fund's sponsor?

If the sponsor is also the AIFM of the fund, it must be replaced with another AIFM as soon as possible to avoid any service disruption. If the sponsor is an investor and it is no longer able to fulfil its commitment in the fund, measures can be included in the fund rules to exclude the defaulting investor and, if no other action is feasible, eventually cancel its interest in the fund with a significant reduction of the redemption price and a penalty.