How to invest in Golden Visa Funds

An investment fund of € 500,000 or venture capital fund is one out of the eight qualified types of investment provided for a Golden Visa application. These “Golden Visa funds” are a type of collective investment under which all fund participants invest money together into stocks or other capital investments.

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Golden Visa funds in Portugal

The intention of the Golden Visa funds is the capitalization, innovation, and development of Portugal and the investments are established under Portuguese law. Because of this, funds need to have a maturity at the time of investment of at least five years and at least 60% of the value of the investments has to be made in commercial companies headquartered in Portugal. The fund also cannot cover assets in the real estate market. The investment in Golden Visa funds is managed by so-called investment fund management companies and are regulated by the Portuguese Capital Markets Board – CMVM, plus audited, and valued by independent and licensed companies providing additional security and transparency to the investor.

In order to qualify for a temporary residence permit, the investor must perform and maintain an investment activity for a minimum period of 5 years. The investment activities that may entitle the investor to a temporary residence permit are foreseen in the relevant law. The investment activity may be performed directly by the applicant or through a single shareholder limited liability company incorporated in Portugal (or in another EU Member State, as long as it has a permanent establishment in Portugal).

All funds are regulated by the Portuguese authorities (CMVM, the Bank of Portugal, the external Fund Manager, and the Tax Authorities). Regulated funds must ensure transparency, risk mitigation, and control, as well as regularly fully audited accounts. Some funds are backed by the Portuguese government through subsidies or financed by the IFD (Instituição Financeira de Desenvolvimento).

What are the benefits/advantages of Golden Visa funds?

Investing in funds is relatively easy although applicants should invest enough time to find the right solution for them. Not all golden visa funds are the same. Agents usually also ask for a fee to evaluate the funds of around 2000 EUR.
For Non-Residents, fund dividends are income tax-exempt (even withholding tax) and capital gains from participation units redemption or fund liquidation are income tax exempt in Portugal. But you have to pay an initial fee of up to 5% to sign up for the fund to the managing company.
Regulation ensures that investors can always resell their fund units to other investors, convert the units into real estate assets supported by the fund, or simply exit the fund.
By choosing a good investment management team in charge of a fund, the opportunities of the market otherwise inaccessible to the overseas investor are more easily captured.

How can I evaluate an investment fund?

After defining the investment objective, the individual risk preference, and the investment period, selecting a suitable investment product also requires the consideration of other important factors. For example, legal and tax law aspects must be observed in the case of funds with a foreign residence. It should also be clarified how high the costs of the assessment are.

The triangle of successful fund selection is:

Performance;
Risk;
Costs.

What information should be considered to characterize the investor?

Age;
Qualifications;
Greater or lesser risk aversion;
Availability for short, medium, or long-term commitment;
Knowledge of financial products.

What types of risk profiles exist?

There is no legislation regarding the different investment risk profiles. However, the most common designations are:

Conservative or prudent (suitable funds route for Golden Visa);
Balanced or moderate (suitable funds route for Golden Visa);
Bold or aggressive (not suitable funds route for Golden Visa).

How can I invest in a Golden Visa fund in Portugal?

Decides on the investment plan;
Open a bank account in Portugal;
Sign the fund documents;
Three documents will be needed at this point:
– Two bank documents: a) proof of the international transfer to the bank and b) proof of payment of the fund. Both documents will be supplied by the bank;
– One fund document (proof of acquisition of a specific fund) issued by the fund manager;
With the three documents, your lawyer can continue the GV process.
Apply for the Golden Visa and keep the investment for 6 years.

Where should I review the funds?

The preferred sources of information depend on the information needs and interests of the investor, as well as the type and amount of the investment. For an actively managed fund portfolio with equity funds, there is certainly a greater need for information than for a long-term savings plan with bond golden visa funds. Here are the following sources of information:

The value of the individual securities positions is shown on the account statement monthly, quarterly, or annually. For purchases and sales during the year, account movements should also be taken into consideration when calculating performance.
Fund performance charts can be accessed from fund databases. This requires entering the exact ISIN of the fund (see here an example of data on performance, risks, or costs of funds in recent years).
Fund companies’ fact sheets and product sheets show the value development of the golden visa funds, including further data on the portfolio structure, risk, and fund management, etc. These fact sheets are available on the websites of the fund companies. A list of all Austrian fund companies can be found here, and an overview of all foreign fund companies that are active in Austria is here.
For those particularly interested in a detailed portfolio structure of the fund, the semi-annual and annual reports are the most important source of information. The sales prospectuses and, above all, the simplified prospectuses are a very important and useful source of information before buying a fund. This is because information on costs (TER – Total Expense Ratio) and turnover (PTR – Portfolio Turnover Ratio) of the funds can be found here.

Can US citizens apply for Golden Visa funds?

In 2016 a resolution of the Assembly of the Republic in Portugal approved the agreement with the United States to reinforce tax compliance and implement the Foreign Account Tax Compliance Act (FATCA). With the entry into force of the US FATCA, all foreign financial entities are obliged to identify the accounts of their North American Clients (US Persons).

The act requires that foreign financial Institutions and other non-financial foreign entities report on the foreign assets held by their U.S. account holders or be subject to withholding on with holdable payments. The Act also contained legislation requiring U.S. persons to report their foreign financial accounts and foreign assets.

There are qualifying funds that will deal with the US government reporting requirements. Once the lawyers provide a report, US persons can then make their investments.

What is the fee structure for Golden Visa funds?

The traditional fee structure of funds is called “Two and Twenty” (2/20), which consists of a 2% management fee and a 20% performance fee. The management fee is a fixed fee charged on the total assets under management (AUM) of the fund and is ostensibly leveraged to maintain the fund’s operating costs. The performance fee, on the other hand, is charged on the profits made by the fund and is used to reward fund managers and dealers, with bonuses for outperforming the market. The commonly postulated justification for the Two and Twenty fee structure is that it strikes a delicate balance between safeguarding the financial sustainability of the fund management company and, at the same time, creating incentives for fund managers to provide solid absolute returns.

A fixed management fee of 2% ensures that the fund can survive an economic downturn if the fund is negatively exposed to pro-cyclical assets, while the 20% performance rate ensures that the fund always has the incentive to deliver absolute returns and is not merely relative to the investment. If fund managers are able to generate extraordinary profits as a result, then paying performance fees to investment managers can be a price worth paying.

Performance fee

The fund industry is rewarded with the idea that fund managers can use their superior investment advice to generate extraordinary returns for investors and, in turn, be rewarded with high fees for their skills. Therefore, it is no exaggeration to say that the fund’s fee structure should be treated on an equal footing with the golden visa funds’ performance. Investors should consider both when making decisions on where to allocate their precious capital.

Alternative Fee Structures

While the rate cut makes traditional funds more attractive to investors, sophisticated fee structures that link compensation closer to performance, offer an alternative mechanism for improving investor terms. For example, many funds employ a ‘high watermark’ to ensure that fund managers are not overpaid in performance fees as a result of depreciation followed by a compensatory appreciation in the net asset value (NAV) of the fund. Without a high watermark, fund managers would earn performance fees twice over the same general increase in asset value – what is known as “double-dipping” – which is considered by many investors to be an unfair situation. This is usually combined with a complex accounting mechanism called ‘equalization’, which ensures that all investors maintain the same NAV per share.

In other words, equalization relativizes the high watermark for each investor, preventing new investors from taking advantage of paying performance fees due to a high pre-investment watermark.

In addition, an increasing number of funds use obstacles to ensure that fund managers are not rewarded for performance that does not exceed what could have been achieved through a passive investment strategy. The obstacle can be charged at a fixed rate or linked to an appropriate market index and is used to discount the performance fee so that fund managers are rewarded only for superior market performance. While for ‘soft obstacles’, performance fees are charged on the entire funds’ return (given the minimum fee is exceeded) for ‘difficult obstacles’, fund managers only earn fees on returns that exceed the reference rate.

What is the difference between open-ended versus closed-ended funds?

One of those fundamental, though sometimes overlooked, fund-raising decisions is the choice between employing an open or closed fund structure. The fundamental difference between an open and a closed fund concerns the liquidity restrictions for investors to redeem their subscriptions. For open-ended funds, investors have the option to partially or fully redeem their subscription on each Redemption Day, subject to the redemption terms assigned in the Funds’ offering document. In other words, if investors decide to redeem their shares in the Fund, the fund is required to repurchase those shares at a price equal to the NAV per share on the relevant Redemption Day.

Closed-end funds, on the other hand, do not provide any internal mechanism for investors to redeem their subscriptions. Investor subscriptions are linked to the life of the fund unless investors can find a buyer for their shares on the secondary market. If investors do not want or are unable to sell their shares in the fund, investors will not receive the value of their shares until the time the fund manager decides: sometimes, not to the extent that the fund stops liquidating.

Should I worry about liquid or illiquid assets?

Yes! Liquidity restrictions on the redemption of investors’ shares in the Fund tend to reflect liquidity restrictions on the Fund’s underlying assets. If the Fund wants to invest in illiquid assets, such as real estate, unlisted companies, and other alternatives, then it is likely that the Fund will need to place restrictions on investors’ ability to redeem their shares. Otherwise, the Fund may be unable to satisfy investors’ redemption requests due to its inability to realize the fair value of its illiquid investments in a short period of time – what is sometimes referred to as a ‘liquidity gap’. This also protects non-bailout investors by ensuring that non-bailout investors do not implicitly subsidize bailout investors as a result of the Fund’s liquidity being compromised by excessive investor redemption requests.

Alternative liquidity restrictions

General restrictions on investor redemption requests represent an express limitation on investors’ ability to redeem at will, so fund managers should only accept such restrictions when there are restrictions on the liquidity of the Funds’ underlying assets. However, the available funds may still include certain provisions for managing the liquidity of investor shares, such as side buttons, locks, and gates. The side pockets allow the funds to separate net investments from illiquid so that illiquid investments are edited into a separate class of shares, of which investors incorporate a pro-rata share. Shares in the new side pocket class can only be redeemed when illiquid assets can be accurately valued, or which improves liquidity problems arising from investors redeeming their shares, during periods when the fund cannot realize the full value of its illiquid investments.

Alternatively, blocking periods can be used within a class of active shares to prevent redemptions within a certain period of time. If investors create by redeeming their investment during the lockout period, they must pay a substantial redemption fee that discourages investor redemptions until the lockout period ends. Gates, on the other hand, allows fund managers to suspend investor redemptions when there are significant net sources of the fund to maintain the liquidity of the fund’s assets. As a result, a wide variety of liquidity mechanisms available to fund managers ensures that liquidity management falls not only within the domain of portfolio management but also within the legal structure of the fund. As alternative investments gain increasing popularity with fund managers around the world, the understanding of the provided and closed white fund structures only grows in importance.

What kind of Golden Visa funds exist in Portugal?

a) Funds specifically designed for Golden Visa Investors

These funds are exclusively designed for Golden Visa investors. They usually offer the option of having a matching length or option of earlier withdrawal and accept €500K investments. These golden visa funds are often focused on preserving the investors’ capital and paying some type of yearly dividend.

b) Traditional Venture Capital Funds

These funds are normally invested in early to mid-stage tech companies with forecasted global growth. Sometimes there are higher minimum investments than the €500K threshold, with a fixed fund length of 10+ years. There is a higher risk but also higher potential rewards. The goal is to maximize the capital gains at the exit, with no yearly dividend payments.

c) Traditional Private Equity Funds

These funds are typically invested in more traditional markets or financial entities, sometimes with a focus on yearly dividends. There can be a higher minimum investment than the €500K threshold, with the fund length going up to 10+ years, with often a medium to high risk expecting rewards accordingly.