We examine the likely challenges and opportunities emerging in the investment funds industry during 2017.
The fact that the investment funds industry in Ireland continued to grow in 2016, despite the major headwinds it faced, is impressive. Initially, the uncertainty leading up to the Brexit referendum resulted in fund launches being put on hold. Then the unexpected referendum result led to immediate and significant market volatility, a dramatic fall in the value of Sterling and major fund redemptions.
Make no mistake, the Brexit result is not good news for the Irish economy generally. And the loss of a close partner at the EU negotiating table will be acutely felt. However, there are areas where Ireland's infrastructure can facilitate further close co-operation with Britain and one of those areas is the investment funds industry.
The British Prime Minister's recent assertion that Britain will be negotiating for a hard Brexit potentially creates more complication for UK-based managers of investment funds. Their future ability to passport their services throughout the EU looks to be diminishing, reinforced by the confirmation that a Norway-style membership of the EEA single market will not be considered by Britain. How will these managers continue to manage funds and sell them within the EU?
Ireland has a solution. Irish fund structures will continue to enable UK-based asset managers to manage and distribute EU UCITS and AIF products, without the need to relocate their operations out of the UK. This point is illustrated by the fact that Irish funds are already extensively used by US managers and other non-EU managers for distribution throughout the EU.
The Irish funds industry has always been and will continue to be a strong partner of UK-based asset managers. The fact that the Irish funds industry has the experience in structuring and establishing UCITS funds with strong governance structures based in Ireland that allow delegation of investment management to UK-based managers, will continue to facilitate the establishment of UCITS funds which can be managed out of the UK and passported throughout the EU.
There are also well-established AIFMD options in Ireland for UK based managers, ranging from self-managed AIFs, to AIFs appointing experienced third party AIFMs, to the establishment of the UK manager's own AIFM in Ireland. Investors are very familiar with these models and because of Ireland's proven track record in the industry, we look forward to continuing our successful partnership with the UK asset management industry throughout 2017 and beyond.
Central Bank Preparedness for Brexit
Key to the success of the Irish investment funds industry in the wake of Brexit, will be the role of the Central Bank of Ireland in terms of its preparedness for a potential increase in licensing applications. It is encouraging to note recent statements by Mr Gerry Cross, the Central Bank of Ireland's Director of Policy and Risk. He reaffirms that, while the outcome of the Brexit referendum may not have been expected, the Central Bank were well prepared for it when it happened. He also dismisses questions over the Central Bank's capacity to deal with a potential large volume of applications. He clarifies that the Central Bank is committed to meeting the relevant challenges, including through an increase in staff, both where additional numbers are needed and where contingency numbers may be needed.
Private Equity LPs
On the product side, we look forward to the publication in 2017 of the Irish legislation to modernise Ireland's Investment Limited Partnership regime. The new legislation will focus on four key areas:
- the introduction of umbrella funds as investment limited partnerships;
- reinforcing the limited partnership concept by ensuring that limited liability operates in a manner similar to other jurisdictions;
- ensuring that there are no unnecessary burdens on general partners arising from AIFMD; and
- providing that the information publicly available on such funds, their managers and investors is consistent with other jurisdictions.
The introduction of this legislation will greatly enhance Ireland's attractiveness as a domicile for regulated private equity funds to coincide with the increase in non-bank financing in Europe and the initiatives being introduced under the EU's Capital Markets Union initiative. It also builds on Ireland's recent tax changes relating to investment limited partnerships which confirms their tax transparency. This type of tax transparent partnership has typically been the preferred form of fund vehicle for private equity investment.
Loan Origination Funds
Another encouraging development is the extension of the loan origination fund regime in December 2016. The previous restriction on Loan Origination QIAIFs investing in non-loan assets has now been relaxed to also allow such funds to invest in debt and equity securities of entities or groups to which such funds lend or which are held for treasury, cash management of hedging purposes. This change comes into effect in January 2017 and is expected to encourage more loan origination funds to be established.
The prospect of being able to support the UK asset management industry further is one opportunity in what will undoubtedly be a challenging environment for Ireland in the wake of Brexit. This, coupled with continued enhancements to the Irish fund product offering, leaves this industry cautiously optimistic for the year ahead.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.