Nedim Ruso

Introduction

In an ever-changing world, spearheaded by political and economic turmoil and fuelled further through black swan events such as the pandemic, wildfires, and recently the invasion of Ukraine, it’s no doubt that citizens are looking to secure their future. Global uncertainty has forced individuals and families to pursue Residency and Citizenship by Investment (RCBI) programs that help secure a plan B in case things go south or for other reasons, such as to escape from high corporate taxes enforced by governments. For countries, these programs provide sustenance of foreign investment and significant economic benefits.

The RCBI industry offers a broad spectrum of alternatives; however, the Portuguese Golden Visa remains one of the most competitive and sought-after programs. Like other programs, real estate investments account for most investments for the Portuguese Golden Visa; however, fund investments are gaining prominence due to their low-cost structure and diversification.

What type of funds are there? What should I consider when choosing a fund? Understanding the market and trends will help you answer these questions. With money floating into capital markets, valuations are skyrocketing. With over 45 Golden Visa eligible funds, competition is rising, and so is the demand for new deals. Well, what does that all signify? As a result, funds are deploying capital at a much slower rate than raising it.

Foreign Direct Investment

Foreign direct investment (FDI) is crucial for host countries' economic growth and international competitiveness. The legal framework in Portugal encourages foreign investment as the government has no restriction on foreign capital entry. Portugal ranks as one of the best performing regulatory economies with 18 other countries and 39th in overall ease of doing business.

Compared to other notable Golden Visa markets, namely Greece and Spain, FDI Inflow as a % of GDP is higher in Portugal. FDI Inflow contributed 3.8% on average to Portugal's GDP between 2018 and 2020, whereas for Greece and Spain, 3-year averages are 2.0% and 2.1%, respectively. Financial & Insurance, Technical & Scientific, and Real Estate sectors represent most of the investment into Portugal. According to the latest figures from the Bank of Portugal, FDI inflows to Portugal reached 6.8 billion in 2021, with Financial & Insurance accounting for 38%. 

RCBI programs are among the contributors of FDI and play an essential role in Portugal's economy. Since its inception, Portugal's Golden Visa program has brought in €6.1 billion investment. The program accounted for 11.7% of the total FDI inflow between 2013 and 2021. The capital transfer options of Golden Visa, which includes Capital Transfer €1.5 million (Subalinea 1) and investment into venture capital funds (Subalinea 7), fall into the Financial & Insurance classification of FDI. The Financial & Insurance sectors commonly represent the largest bucket of FDI for most developed markets. The capital transfer investment options for the Golden Visa account for 5.2% of total Financial & Insurance FDI inflow between 2013 and 2021.

Market update and fund investments

Following a three-year decrease in the Portuguese Golden Visa market, the total market size increased by 42% from €461 million in 2021 to €654 million in 2022. 

Our predictions on fund investments are proving to be true as previously explained in our article: the fund market is undervalued! Fund investments increased by 670bps to 13.2% in 2022 from 6.5% in 2021, representing more than a 2-fold increase in share from 2021 and recording the largest investment since the program's inception with €86.3 million. We expect this trend to continue aggressively in the coming years. Whereas capital transfers increased its market share from 3.7% to 4.9% in 2022, increasing to €32.1 million in 2022 from €17.0 million in 2021.

Golden Visa funds invest in various sectors, including real estate, hospitality, technology, and healthcare. While some funds invest purely in one sector, other funds have a hybrid strategy. Out of the 49 funds in our study, over 70% have invested or will invest in real estate assets. Most real estate-focused funds invest in more than one sub-sector of real estate: residential, commercial, and industrial.

ESG and impact investing funds are gaining prominence in the market. Like many governments, Portugal incentivises sustainable development to reach environmental goals. Investments primarily focus on R&D and have strict corporate governance rules. While impact funds centre their investments around seed stages, ESG funds prefer to acquire companies with proven market demand and adopt a strict corporate governance strategy.

Fund Raising

The fund-raising cycle represents one of the earliest business stages for fund companies. Raising capital is underestimated and requires time, initial capital, and energy. Ask any fund advisor for their 1st fund-raising experience, and they will tell you how much struggle they faced. Sales cycles are stressful and can last anywhere from 1 month to a year. For new players, emotional drainage may leave little energy to run the business when cash is flowing out when it should be flowing in.

With competition surging in the Golden Visa space in Portugal, raising capital is becoming ever more challenging. Fund advisors aggressively promote, create webinars, travel for f2f meetings, and look for alternative referral channels. In a nutshell, the cost of acquiring investors is rising. Funds that fail to reach a target size might face difficulty successfully executing their investment strategy and getting the desired returns.

Fund advisors are responsible for creating the fund’s investment strategy, overseeing performance, and raising funds. The team of advisors typically has strong sector expertise. On the other hand, fund managers are highly regulated entities responsible for executing investments and managing the fund’s trading activities. Surging demand for fund investments has encouraged more and more fund managers to advise funds and keep the gains from performance fees.

What about the other side of the coin? Capital deployment, more commonly referred to as capital invested, is as significant as fund-raising. With inflation rising worldwide, leading economies face low or negative real interest rates. To alleviate capital deployment cycles, funds should have robust investment pipelines or screen for new deals swiftly. Cash sitting in the bank indicates that investors are not earning returns under current market conditions.