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The Ultimate Fund Terminology And Investment Guide

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Golden Visa Eligibility

Venture Capital Funds that have a maturity of at least 5 years and at least 60% of the investments realized in commercial companies with head offices in Portugal qualify for the Golden Visa.

CMVM

The Portuguese Securities Market Commission (CMVM) is tasked with supervising and regulating the financial instruments markets and the agents operating within those markets as well as promoting investor protection.

Sector

Represents the area of economic activity shared by similar businesses or asset classes. Funds can invest in more than one sector, such as a combination of Real Estate and Healthcare.

Sub-sector

Sectors are broken down further into sub-sectors. For example, real estate sector can be broken down into residential, commercial, and industrial sub- sectors.

Fund Manager / Asset Manager

Highly regulated by the CMVM, the Fund Manager is responsible for executing the investments and managing the fund’s trading activities. The Fund Manager has the power to oppose the Fund Advisor on any transaction, for reasons such as an overvaluation.

Fund Advisor

Responsible for creating the fund’s Investment Strategy and for overseeing the performance. Typically made from experienced teams with strong sector expertise.

Investment Strategy

The strategy set forth by the Fund Advisor designed as a guide for the selection of the investment portfolio. The Investment Strategy may include information such as the type of financial instrument, risk profile, geographic location, and time horizon of the investments.

Auditor

The Auditor is responsible for auditing the fund, including evaluating management’s processes’ for determining fair values.

Custodian Bank

The Custodian Bank is responsible for safekeeping the fund’s financial assets.

Subscription Fee

A fee that is payable in addition to the investment charged by the fund. Usually paid in addition to the investment amount and helps cover the fund- raising costs. Some funds in the market deduct the Subscription Fee from the investment amount. Fees may vary from fund to fund depending on numerous fund aspects, such as the financial structure.

Management Fee

Fee charged by the Fund Advisor and the Fund Manager for the management of the fund. The fee is paid from the fund’s resources (no additional cost to the investor) and typically ranges from 0.5% to 2.5%.

Supervision Fee

Fee charged by CMVM for the supervision of the fund and is paid annually from the fund’s resources (no additional cost to the investor).

Audit Fee

Fee charged by the Auditor for the audit of the fund and is paid annually from the fund’s resources (no additional cost to the investor).

Pipeline Investments

List of potential investments sourced by the Fund Advisor that fit the fund’s Investment Strategy. Investments may be at various stages: sourcing, post due diligence, negotiation, etc. In cases where the fund advisor does not exist, the process is managed by the fund management / asset management company.

Subscription Period

The period assigned by CMVM for the fund to issue new investors, which may not be more than 25% of the Fund Maturity. Funds may terminate the Subscription Period earlier than the initial Subscription Period if the total investment has been raised.

Subscription Period End

The closing date of the Subscription Period. Funds may terminate the subscription period prior to the Subscription Period End if total targeted investment has been raised.

Fund Maturity

States the total duration of the fund. Fund Maturity usually stretches from 6-10 years, excluding extensions (typically 1-4 years); funds have additional optional maturity lengths to account for liquidation and Golden Visa application extensions. Fund Maturity can typically be broken down into Subscription Period, Investment Term, and Liquidation Period.

Investment term

The period in which investments are executed. Depending on the sector, investments have varying maturities and the investment terms usually close 2-years prior to the maturity date. This allows investments to mature before the fund liquidates the assets.

Liquidation Period

The period in which the fund liquidates (sells) the assets in its portfolio. The Liquidation Period depends on the Investment Term and Fund Maturity, and in particular the lifecycle of the specific investments.

Target Size

Total amount to be raised by the fund. The target size usually has a maximum cap and may generally close at a lower value. Successful funds generally raise around 75% of their Target Size.

Minimum Investment

The minimum amount of investment accepted by the fund. Minimum Investments can be as small as €50,000 and are typically €350,000, the current Minimum Investment required by the Golden Visa. Funds that have a Minimum Investment threshold lower than €350,000 allow investors to diversify across funds.

Amount Raised

Total amount raised by the fund since the start of the Subscription Period. Some funds quote the actual investment in the fund, while other funds may report the amount based on total Subscription Fees paid (aka investor pipeline).

Countries of Scope

States the countries the fund intents to invest in. Although the fund must invest 60% of the fund raised in commercial companies with a head office in Portugal to qualify for the Golden Visa, the remaining 40% is permissible to invest outside Portugal.

Exit Strategy

Defines how the Fund Advisor intends to liquidate the fund. Depending on the Investment Strategy and capital structure of the fund, common options include liquidating the assets one by one or as a whole, paying down debt, setting-up a new fund and moving over the assets, and converting the shares into residential units (only for residential focused funds).

Dividend Yield

Typically paid annually, dividends represent the sum of money investors receive from the fund’s profits. Dividend yield, expressed as a percentage, shows how much a company pays out relative to its portfolio size.

Target Return / IRR

Target Return or more commonly known as Internal Rate of Return (IRR), refers to the profit that investors expect from their investment. IRR is calculated using the net cash inflow, total initial investment costs and the number of time periods. The Target Return accounts for the annual profits as well as the upside from the exit of the fund.

Hurdle Rate

The minimum compensation an investor receives before the Fund Advisors can receive their Performance Fee.

Performance fee

The fee payable to the Fund Advisor if certain performance standards have been met at fund maturity. Expressed as a percentage of profits, the Performance Fee is generally paid over the Hurdle Rate. Fees vary significantly from fund to fund and is generally based on the extent of the Fund Advisor’s role in generating the profits.

Special Purpose Vehicle (SPV)

A legal entity used by funds typically for the acquisition of a single project / asset. Each project/asset is held by a single SPV in order to isolate independent projects & assets from risks and liabilities of one another.

Leverage

Allows funds to generate return on risk capital by borrowing capital as a funding source. Depending on the investment strategy, funds may opt to borrow capital on the SPV level for its investments. When the cost of leverage is below the yield, leverage is a powerful tool.

Equity Structure

States the different types of tranches available for investment and the associated risk. Also indicates the Fund Advisor’s and Fund Manager’s equity position in the fund (if applicable).

Eligibility of U.S. citizens

States whether the fund allows U.S. citizens to invest. Due to the extra bureaucratic burden of the Foreign Account Tax Compliance Act (FATCA), some funds do not accept U.S. citizens, while the majority is compliant with the FATCA? requirements.

Necessary Documents

Documents required for subscribing into the fund. This is in addition to documents required for the Golden Visa application. Please check our Golden Visa Checklist for more information.

Recommended Lawyers

Although investors can work with any lawyer/law firm of their choosing, funds generally recommend working with lawyers that they have prior experience as this allows for a smoother and expedited onboarding process.

Expert Tips

Investment:

  • ➢  Track-record – experience is key. Make sure you look for an experienced team which has a solid track-record of managing funds and delivering returns to investors.

  • ➢  Amount Raised – is a good indicator of the attractiveness of the fund. Make sure the fund has raised capital to some extent before committing yourself. Funds that raise a substantial amount early on during the Subscription Period typically mean that the investors are confident in the product and management team.

  • ➢  Pipeline Investments – whether invested or under negotiation, pipeline investments convey that the fund can source investments aligned with its investment strategy. Finding the right investment at the correct valuation represents the strength of the fund managers in executing and cash deployment.

  • ➢  Downside Protection – understand the risks associated with the fund and how your investment is protected against downturns. Many Golden Visa funds that have relatively lower returns in the market have a downside protection mechanism, such as different traches of equity that compensate Golden Visa investors.

  • ➢  Early liquidation of Assets – this is particularly important for investors that may want to exit their investment prior to maturity, with the opportunity cost of losing their Golden Visa. Majority of the funds in the market do not keep a cash reserve to liquidate the investor, however, allow the investor to sell their units in the secondary market (to another investor). Understand how much assistance the Fund Advisor is willing to provide to you in a potential early exit.

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