SGEIC: Concept and fees

In the Spanish financial sector, the Sociedades Gestoras de Entidades de Inversión de Tipo Cerrado, commonly known as SGEICs, are an essential pillar for the management of collective investments in alternative assets. These types of companies mainly manage closed-end investment funds, such as venture capital firms and other closed-end collective investment entities (FICCs or SICCs), standing out for their specialisation, strict regulation and their focus on professional investors, although non-professional investors are also allowed to invest in vehicles managed by SGEICs, provided that the legal requirements for this purpose are met.
 

From a colloquial (non-legal) point of view, closed-ended investment funds are characterised by the fact that the entry or exit of new investors is restricted during their life cycle, which gives them a structural stability suitable for long-term investment strategies in illiquid assets such as unlisted companies, real estate or infrastructure. From a legal point of view, the ‘closed-end’ nature is determined by the fact that divestments take place simultaneously for all investors and each investor receives the proceeds according to the rights to which he is entitled in accordance with the fund's articles of incorporation.
 

At the national level, the regulation of SGEICs is mainly found in Law 22/2014, of 12 November, which regulates venture capital entities, other closed-end collective investment entities and management companies of closed-end collective investment entities (hereinafter, ‘Law 22/2014’), which incorporated European regulations on alternative investment funds into the Spanish legal system. As far as not provided for in Law 22/2014, the law regulating collective investment undertakings (Law 35/2003 of 4 November 2003) and the law regulating capital companies (Royal Legislative Decree 1/2010 of 2 July 2010) shall apply to SGEICs.
 

SGEICs are authorised and supervised by the National Securities Market Commission (CNMV). The purpose of this supervision is to ensure that SGEICs operate in accordance with the principles of transparency, integrity and investor protection.
 

Among the usual functions of SGEICs, the following stand out:
 

• The selection of suitable assets for the funds under management, such as transferable securities, real estate or infrastructure projects.
   
• The administration of funds, including the calculation of their net asset value.
   
• The management and control of the risks to which the funds are exposed.
   

Summary of the fee regime:
 

Fees represent a crucial aspect of the SGEICs' business model. Their structuring is very relevant because, on the one hand, they allow the SGEIC's promoter team to obtain a return that corresponds to the professionalised and specialised management they carry out but, on the other hand, they can have a direct impact on the profitability of the funds.
 

A description of all fees, charges and expenses to be borne directly or indirectly by the investors of the collective investment vehicle should be set out in the prospectus, which in turn should contain the articles of association (if the investment vehicle is a company) or management regulations (if it is a fund).
 

The fees usually charged by SGEICs are as follows (it should be noted that this article does not go into detail on the different ways in which, for reasons of tax efficiency, the collection of fees can be structured):
 

1. Management fee
    

This is usually fixed. During the first years of the fund's life, it is usually established on the basis of the investment commitments subscribed. Subsequently, it is usually set on the basis of other parameters such as the fund's assets.
 

This fee covers the operational costs of the SGEIC, such as those arising from investment selection processes, fund administration and monitoring services. In relation to SGEICs, the management fee is not subject to a maximum amount or percentage. However, it must be reasonable, proportionate and clearly specified in the fund prospectus. The CNMV supervises such adequacy and proportionality.
 

1. Performance or success fee
    

This is usually variable. It is not subject to a percentage or legal maximum amount. It must also be clearly defined in the fund prospectus, including the method of calculation.
 

The success fee is usually set according to the results obtained by the fund and is usually only received by the SGEIC once the return obtained by the fund exceeds a pre-determined threshold that allows the return of all the amounts paid by the investors plus an additional amount that represents an annual internal rate of return in the percentage set in the fund's documentation, thus aligning the interests of the SGEIC with those of the investors.
 

In recent years and due to the impact of sustainability regulations, part of these fees, mainly the success fee, is now usually set on the basis of the achievement of pre-determined sustainability parameters.
 

1. Other fees
    

Without prejudice to the above fees, additional fees may be set, such as, but not limited to, subscription and/or redemption fees: Although less common than those listed above, these may be charged for administration services provided in connection with the subscription or redemption of the shares or units of the vehicle (when investors enter or exit the vehicle). These fees must also be clearly specified in the fund's prospectus. The regulations allow these fees to be charged, but do not set a specific maximum limit.
 

As noted above, the fund prospectus should identify all fees and costs to be borne by investors. Where a custodian has been appointed, their custodian functions also usually give rise to an additional custody fee (although this is not charged directly to the SGEIC, but to the custodian itself). Likewise, the marketing of the shares or units of the vehicle by third parties other than the SGEIC usually gives rise to marketing fees that remunerate this marketing activity.