Private contribution funds catch on in Italy

Author: | Published: 24 May 2005
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Italian investment, in particular real estate investment funds known as contribution funds (fondi ad apporto) are becoming increasingly popular in the Italian market

Contribution funds are real estate investment funds set up by contributions in kind. Ordinary real estate funds issue units for cash, while contribution funds are set up through contributions of assets (real estate assets, rights relating to real estate and interests in real estate companies) against the issuance of units.

Contributions can be carried out by public entities - such as the government or public bodies or institutions (including publicly owned companies) - or by private parties. If more than 51% of the assets are contributed by public entities, the contribution funds qualify as public contribution funds (fondi ad apporto pubblico), which are established and still regulated by Article 14 bis of Law 86/1994. If the contributing entities are private parties, the contribution funds qualify as private contribution funds (fondi ad apporto privato).

In recent years private contribution funds have caught on in the Italian market. The first Italian private contribution fund was the real estate fund, Alpha Immobiliare, set up in June 2000. It was followed by Tecla Fondo Uffici in December 2003. Recently, the Bank of Italy has approved Patrimonio Uno, the first contribution fund promoted by the Ministry of Treasury through Patrimonio dello Stato SpA, the public vehicle set up to improve real estate assets owned by the public sector. Primary private participants are expected to contribute to Patrimonio Uno, whose initial net asset value will vary between €700 million and €1.4 billion ($829 million to $1.65 billion).

This progress has been spurred by the recently enacted Ministerial Decree 47/2003, which amended and integrated Ministerial Decree 228/1999, changing the legal framework for real estate investment funds and private contribution funds in particular. For the first time, the new law expressly provides for real estate investment funds where the subscription of units is effected through the contribution of real estate assets, rights on real estate and interests in real estate companies by private subjects.

 Specific provisions apply to private contribution funds. In particular:

Independent experts and financial intermediary
If the contributed assets are not traded in a regulated market, the Italian management company (SGR) must get an appraisal from an independent expert dated not earlier than 30 days before the date of the contribution. The SGR must also obtain a financial intermediary's opinion regarding the compatibility and profitability of the contributed assets with respect to the investment policy of the fund.

Transactions involving affiliates or shareholders of the SGR
Unlike the provisions generally applicable to Italian closed-ended funds, transactions involving affiliates or shareholders of the SGR are admitted for private contribution funds by Decree 228/1999, as amended by Decree 47/2003, but the following limitations apply:

  • the value of each asset to be assigned, purchased or contributed to the fund may not exceed 10% of the value of the fund; the total value of the transactions carried out, also indirectly, with the shareholders of the SGR cannot exceed 40% of the value of the fund; the total value of the transactions carried out, also indirectly, with the shareholders and the affiliates of the SGR may not exceed 60% of the value of the fund;
  • after the first issuance of the units, the value of each asset to be assigned to, purchased by, or contributed to the fund and the total value of the transactions made, also indirectly, with shareholders and affiliates of the SGR may not exceed 10% of value of the fund on an annual basis;
  • an independent expert must appraise the assets purchased or sold by the fund;
  • a number of units representing at least 30% of the contribution value subscribed by each shareholder and each affiliate of the SGR are locked up with that party for at least two years from the date of contribution; and
  • the resolution of the board of directors of the SGR concerning the transaction to be carried out with the shareholders or the affiliates of the SGR must explain the interest of the fund and the unit-holders in the relevant transaction and must be adopted with the favourable opinion of the controlling body.


Under the Decree, real estate investment funds may obtain financing of up to 60% of the value of their real estate assets, and up to 20% of the value of other assets held by the fund. These loans may also be obtained to increase the value of the assets in which the fund is invested (for example, for restructuring works, or splitting properties held in blocks). Loans may also be obtained to fund the early redemption of units, in compliance with these limits and for an amount not higher than 10% of the value of the fund.

Conflicts of interests and corporate governance

Conflicts of interests may arise in the collective asset management activity carried out by the SGR. Three different types of conflict can be identified within the management of investment funds:

  • institutional conflict of interests - when the decisions and the activity of an SGR managing investment funds and of the group to which the SGR belongs may overlap when selecting investment opportunities;
  • commercial conflict of interests - when an SGR receives a profit from commercial relationships with third parties (for example, outsourcers and advisers) relating to the management of its funds, which may lead the SGR not to act in the interest of the funds and the funds' unit holders;
  • the managerial conflict of interests - when an SGR manages more funds whose investment policies, dimension and features are similar, in the presence of an investment opportunity that is suitable for more than one of those funds.

Different practical solutions can be enacted by SGRs to avoid any conflict of interests.

 From an organizational point of view, SGRs, in compliance with applicable laws and regulations, must adopt internal procedures aimed at ensuring the correct performance of their collective asset management activity. To avoid conflicts of interest, internal procedures may provide for: (i) an internal monitoring aimed at identifying conflicts of interests in any potential transaction as well as in the day-to-day management of the fund; (ii) binding provisions regulating co-investments in investment opportunities that may be of interest to more funds managed by the same SGR,; (iii) an internal system controlling the observance of the provisions regulating conflicts of interest by the SGR; or (iv) a constant relationship between the activity carried out by the management teams of the funds and the SGR's internal auditing.

 Furthermore, to avoid conflicts of interest, the management regulation of the fund may provide for: (i) restrictions in the investment policy of the funds, stricter than the ones provided for by law, aimed at avoiding transactions that involve conflicts of interest; or (ii) the establishment of corporate bodies (for example, an advisory or supervisory committee) formed by independent subjects appointed by the majority of the fund's participants, having advisory and control functions and/or, in certain circumstances, the right of veto with respect to transactions involving potential conflicts of interests.

 Corporate governance appears to be the most efficient means of preventing conflicts of interest, in particular, after the issue of Law Decree 269/2003, which has amended Article 37 of the Legislative Decree 58/98 by adding paragraph 2 bis, relating to the corporate governance of closed-ended investment funds.

 Pursuant to the new Article 37, paragraph 2 bis, the management regulation of the fund can specify certain matters on which the participants may adopt resolutions, which are binding for the SGR. Meetings of the fund's participants can resolve upon replacing the SGR, listing the fund on the Italian Stock Exchange, or changing the fund's investment policy. Such meetings are convened by the SGR's board of directors, upon request of the fund's participants representing at least 10% of the value of the issued fund's units.

Resolutions are approved by the vote of participants representing at least 30% of the issued fund's units and are then transmitted to the Bank of Italy for authorization (they are deemed approved if the Bank of Italy does not reject the authorization request within four months of receipt). The possibility of replacing the SGR managing a fund was an issue for market players and lawyers dealing with investment funds in general, given the restrictive approach of the Bank of Italy in that respect. The new rules, which will have to be experienced under the funds' regulations to be modified or set up (as the case may be), represent the most innovative legislation ever enacted.