Overview of the Irish funds industry
Overview of the Irish regulated funds market
Ireland is regarded as a key strategic location by the world's investment funds industry. Investment funds established in Ireland are sold in over 70 countries across Europe, the Americas, Asia, Africa and the Middle East. As of August 2018, there were 7,100 Irish domiciled funds with net assets of over €2.52 trillion. While the majority of these fund assets are held in Undertakings for Collective Investment in Transferable Securities ("UCITS"), Irish-domiciled alternative investment funds ("AIFs") had in excess of €620 billion in net assets as of August 2018 (representing an increase in assets under management of approximately €100 billion since August 2017). The majority of the investment in these regulated investment funds comes from non-Irish, institutional investors.
The Central Bank of Ireland ("Central Bank") is responsible for the authorisation and supervision of regulated financial service providers in Ireland, including regulated investment funds and investment managers. The powers delegated to the Central Bank are set out in the laws and regulations applicable to the relevant financial services sector. In addition, the Central Bank issues guidance in relation to various aspects of the authorisation and ongoing requirements applicable to financial service providers and investment fund products in Ireland.
Common fund structures
Ireland as a domicile provides a variety of potential fund structures, which can be broadly categorised as regulated by the Central Bank or unregulated.
(a) Regulated structures
There are four main types of regulated fund structure in Ireland (as described below):
(i) variable capital investment companies ("Investment Companies"); (ii) Irish collective asset management vehicles (or "ICAVs"); (iii) unit trusts; and (iv) common contractual funds (or "CCFs"). Each of these regulated fund structures may be established as UCITS pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 2011, as amended (the "UCITS Regulations"), or as AIFs pursuant to the EU (Alternative Investment Fund Managers) Regulations 2013 (the "AIFMD Regulations"). An AIF may also be established as a regulated investment limited partnership (pursuant to the Investment Limited Partnership Act 1994). These structures may be organised in the form of umbrella schemes with segregated liability between compartments ("sub-funds").
- Investment companies
An Investment Company is established as a public limited company under the Irish Companies Acts 2014. They have a separate legal identity and there is no recourse to the shareholders. There is a requirement to spread risk if the fund is established as an Investment Company. It is typically the board of directors of the Investment Company that has to approve any decision to borrow, grant security or enter into derivatives, although it will be important in each case to review the Investment Company's constitutional documents, including its memorandum and articles of association, prospectus and/or supplement thereto, and any management agreements that have the authority to execute the necessary agreements.
The ICAV is an Irish corporate investment fund which was introduced to meet the needs of the global funds industry, pursuant to the Irish Collective Asset Management Act 2015 (the "ICAV Act"). Since its creation, the ICAV has replaced the Investment Company as the most commonly used structure for newly established funds in Ireland. The ICAV is a bespoke corporate structure that is specifically designed to give more administrative flexibility than an Investment Company. For example, the ICAV may:
- amend its constitutional documents without shareholder approval in respect of changes that do not prejudice the interest of shareholders and do not come within certain categories of changes specified by the Central Bank;
- where established as an umbrella fund, prepare separate financial statements for each sub-fund;
- issue debenture stock, bonds and any other securities; and
- allow directors to dispense with the holding of an AGM by giving written notice to all shareholders.
In addition and unlike Investment Companies, the ICAV may also be eligible to elect to be treated as a transparent entity for US federal income tax purposes. UCITS and AIFs established in Ireland as Investment Companies may convert into an ICAV subject to compliance with the conversion process specified by the Central Bank. Importantly, this conversion process does not affect the legal existence of the fund or any pre-conversion rights or obligations. The ICAV Act also contains a mechanism for existing corporate collective investment schemes established in the Cayman Islands, the British Virgin Islands, Bermuda, Jersey, Guernsey and the Isle of Man to migrate or redomicile to Ireland as an ICAV by operation of law. The analysis in relation to who has authority to contract to e.g. borrow, grant security, enter into derivatives, for an ICAV is the same as for an Investment Company.
- Unit Trusts
Unlike an Investment Company, a Unit Trust is not a separate legal entity but rather a contractual fund structure constituted by a trust deed between a trustee and a management company. In a Unit Trust, the trustee or its appointed nominee acts as legal owner of the fund's assets. As the Unit Trust does not have a separate legal personality, it cannot contract for itself. Managerial authority is exercised by the directors of the management company which, in the context of an AIF, may also perform the role of alternative investment fund manager ("AIFM"). While in many cases it is the directors of the management company who execute contracts, the trust deed and other relevant documents such as the management agreement should be carefully reviewed to confirm who has signing authority. For example, if assets are registered in the name of the trustee, the trustee will need to execute security over the assets of the Unit Trust and in some Unit Trusts, the trust deed may, for example, require joint execution by the trustee and the management company.
A CCF, similar to a Unit Trust and investment limited partnership, does not have a separate legal existence. It is a contractual arrangement established under a deed of constitution, giving investors the rights of co-owners of the assets of the CCF. As coowners, each investor in a CCF is deemed to hold an undivided co-ownership interest in the assets of the CCF as a tenant in common with other investors. A CCF may be treated as transparent for tax purposes, which is a key distinguishing feature from other types of Irish fund structures.
- Investment Limited Partnership ("ILP")
An ILP is established pursuant to the Investment Limited Partnership Act 1994. An ILP is a partnership between one or more general partners and one or more limited partners and is constituted by a partnership agreement. As with a Unit Trust, an ILP does not have an independent legal existence. It has one or more limited partners (which are similar to shareholders in an Investment Company or ICAV, or a unitholder in a Unit Trust) and a general partner who can enter into contracts on behalf of the ILP, which would include any loan agreement or security document. It is proposed to introduce a number of changes to the ILP structure which, subject to necessary changes to existing legislation, would make the ILP more broadly appealing to promoters of venture capital, and private equity funds in particular.
(b) Unregulated structures
- Limited partnerships
The limited partnership established pursuant to the Limited Partnership Act, 1907 is the favoured structure for unregulated investment funds in Ireland. A limited partnership is a partnership between one or more general partners and one or more limited partners, and is constituted by a partnership agreement. To have the benefit of limited liability, the limited partners are not permitted to engage in the management of the business of the partnership or to contractually bind the partnership – these functions are carried out by the general partner. There is a general limit of 20 partners in a limited partnership, although this limit can be raised to 50 where the limited partnership is formed 'for the purpose of, and whose main business consists of, the provision of investment and loan finance and ancillary facilities and services to persons engaged in industrial or commercial activities'.5 The analysis in relation to who has authority to contract, e.g. borrow, grant security or enter into derivatives for an unregulated limited partnership, is similar to that for an ILP.
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This guide first appeared in Global Legal Insights
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.