Investment trends from a Cyprus market perspective
Petros Mavrommatis 15:08 - 25 September 2023
How the investment landscape has changed and why the outlook remains extremely interesting
Since 2013, Cyprus has emerged as a hub for international investment through the growing Investment Funds industry. The country has operated as a place of international business and tax structuring at least since the ’90s but the landscape has changed, following the introduction of primarily regulated investment structures under the supervision of the Cyprus Securities and Exchange Commission (CySEC).
According to statistics published by CySEC in 2023, Total Assets Under Management stand at circa €9.5 billion under 333 Management Companies and Undertakings of Collective Investments, representing a decrease of approximately 3.7% compared to the previous year, attributed to the devaluation of assets, redemptions of investment shares and asset disposals. Of the 333 companies, only 243 appear to be active at the time of the publication of the statistics. Although these numbers cannot yet compare with the likes of traditional investment funds jurisdictions such as Luxembourg, Germany and Ireland, a huge and identifiable effort is being made by both the private and public sectors to attract reputable Fund Managers, global fund administrators and investors to the island.
In this context, the Republic of Cyprus, represented by the Ministry of Finance, has entrusted the European Investment Fund with the management of a new pool of funding to support innovative companies and start-ups based in Cyprus, through the creation of the Cyprus Equity Fund. According to a recent article, the CEF will be split between a €35m Venture Capital compartment and a €2.5m Acceleration compartment, and will be managed by 33East, which was selected through a competitive process. This demonstrates the investment opportunities that exist on the island and one could argue that we are still only at the beginning of the journey to becoming a reputable investment funds jurisdiction.
Recent global economic and geopolitical developments are impacting the investment landscape and managers must remain vigilant and adapt to this ever-changing environment that we have been experiencing since 2020 when the COVID-19 pandemic erupted. Investors have also experienced some difficult moments in the last few years with inflation and market prices fluctuating, starting from mid-2020 and continuing through the ongoing Russia-Ukraine war and its impact on global economies. As a result, we have seen Fund Managers looking into new investment opportunities to enable them to maintain a diversified portfolio.
Diversified investment opportunities in the health sector, solar energy projects, shipping, different types of distressed assets, discounting of receivables and tech start-ups are only a few of the investment trends we are witnessing in the fund and investment industry whilst, at the same time, we are also seeing diversification within existing portfolios and a greater focus on more traditional investments such as securities and real estate.
In the pursuit of reducing overexposures and enhancing risk-adjusted returns, alternative investments have also gained prominence. Such investments offer higher returns, yet are more costly and may contain liquidity constraints, depending on the type of investment.
Real estate remains one of the most attractive investment options, with varying returns through rental income and capital appreciation, depending on the location of the property. For example, in Cyprus, commercial and residential properties in Limassol both offer significantly higher rental yields compared to the other major cities of the island, primarily due to the tech companies and other firms setting up regional headquarters there, combined with limitations to infrastructure to accommodate the high demand.
Investment in securities remains the cornerstone of investment portfolios in Cyprus and globally, given that a well-diversified portfolio investing in securities has proven to be stable overall during the past few difficult years. As global economies recover, industries/sectors such as technology and renewable energy are thriving. Fund and Investment Managers have remained wary of the risks and have been placing particular emphasis on valuation matters to avoid overexposure to overpriced securities. Portfolio managers have been diversifying, depending on the strategy and risk appetite of their funds, including exposure to developed and emerging markets but also to large and smaller cap companies. At the same time, fixed income investments, such as government and corporate bonds, have a significant role in portfolio balancing, in terms of risk exposures for Fund Managers. Despite the low interest rates experienced globally, such fixed income investments provide stability and these are found in almost all portfolios.
As mentioned above, alternative types of investment have gained significant prominence, primarily in the largest of the investment portfolios of hedge funds and private equity in areas such as distressed assets, infrastructure projects, natural resources, healthcare and others. The introduction of the National Health System to Cyprus has attracted considerable interest and we have seen huge investments in this sector for the size of the economy. The largest private equity firms are setting up regional offices in the area to better monitor and identify investment opportunities in the eastern Mediterranean in the post-economic crisis era. Similar significant investments have been seen in Greece and Italy. In the most recent news, a Cypriot fund has invested in a company in Italy which owns an oil refinery. Furthermore, non-performing loans in both Greece and Cyprus have substantially moved out of the banking sector and have been acquired and serviced by investors, an investment opportunity driven by regulatory pressures and higher return probabilities.
We may conclude that the investment outlook remains very interesting – though unstable – as a result of all the current geopolitical uncertainties, not only due to the Russia-Ukraine war but also to the recent US banking economic crisis, the cloudy outlook for the Chinese economy and its relationship with the US, and the lack of growth in the eurozone. These issues will further push Fund Managers to look at further diversifying their portfolios into alternative investments, risk-adjusted returns, enhanced due diligence, and advanced valuation approaches, whilst these will create more opportunities for growth in many markets, including Cyprus.
By Petros Mavrommatis, Board Member, Head of Asset Management Services, KPMG in Cyprus
(This article first appeared in the Cyprus Journal of Wealth Management. To view it click here)