1. Investment Funds Market Overview
1.1 State of the Investment Funds Market
The latest statistics published by the Central Bank of Ireland (the Central Bank) show that the net asset value of Irish-domiciled funds exceeded EUR3 trillion at the end of the third quarter of 2020. This represents an annual increase of 5% (EUR149 billion) from EUR2.93 trillion at the end of the third quarter of 2019. Since the end of 2019, the net asset value of Irish-domiciled funds grew by almost EUR29 billion.
The number of Irish-domiciled funds (including sub-funds) grew from 7,707 at the end of 2019 to 7,821 at the end of the third quarter of 2020. On an annual basis, the number of Irish-domiciled funds increased by 252, growing from 7,569 at the end of the third quarter of 2019.
In terms of the number of Irish-domiciled funds by category, Irish-domiciled alternative investment funds (AIFs) (including sub-funds) reached 3,061 at the end of the third quarter of 2020, and the total number of Irish-domiciled undertakings for collective investment in transferable securities (UCITS) (including sub-funds) reached 4,760.
The total number of Irish-domiciled qualifying investor alternative investment funds (QIAIFs) reached 2,785 at the end of the third quarter of 2020, and the total assets held by Irish QIAIFs reached EUR716 billion.
The Investment Limited Partnerships (Amendment) Act 2020 was signed into law on 23 December 2020. This Act amends the Investment Limited Partnership Act 1994, the legislation governing Irish investment limited partnerships (ILPs). A summary of the amendments is set out in 4.1 Recent Developments and Proposals for Reform. It is anticipated that, as a result of these amendments, Ireland's limited partnership regime will become more attractive to managers of private equity funds and other less liquid asset classes.
2. Alternative Investment Funds
2.1 Fund Formation
2.1.1 Fund Structures
AIFs that are domiciled in Ireland are predominantly established as regulated funds and are required to be authorised by the Central Bank. Regulated AIFs in Ireland are sub-divided into two categories:
- retail investor alternative investment funds (RIAIFs); and
The vast majority of AIFs that are domiciled in Ireland are established as QIAIFs. As RIAIFs are generally targeted at retail investors, this type of fund will be discussed in 3. Retail Funds.
There are five legal structures currently available when establishing an AIF in Ireland:
- the investment company;
- the Irish collective asset-management vehicle (ICAV);
- the unit trust;
- the common contractual fund (CCF); and
- the ILP.
Historically, the investment company was the vehicle of choice for investors looking for an Irish corporate fund vehicle. However, this changed in 2015 with the introduction of the ICAV as a bespoke corporate structure that caters specifically for the needs of the funds industry.
Key advantages of the ICAV versus the investment company include:
- the ability to elect to dispense with the holding of an annual general meeting;
- the ability to file a "check the box" election to be treated as a partnership (or a disregarded entity if a single shareholder) for US federal income tax purposes;
- the ability to amend the ICAV's constitutional document, known as the instrument of incorporation, without shareholder approval for certain types of changes;
- the ability to prepare separate financial statements for separate sub-funds of the ICAV; and
- not being required to make the audited financial statements publicly available.
Investors seeking to use a trust structure for their investment fund can establish an AIF in Ireland structured as a unit trust. Unlike the investment company and the ICAV, which issue shares to their investors, unit trusts issue investors units representing a beneficial interest in the assets of the trust. As it is a trust arrangement, a unit trust is not a separate legal entity, meaning that it does not have power to enter into contracts in its own name. In practice, the board of directors of the fund manager acts on behalf of the unit trust.
While CCFs were initially developed in 2003 to facilitate the pooling of pension fund assets in a tax-efficient manner, this structure may be used by any entity that seeks to avail of a tax-transparent structure; however, individuals cannot invest in CCFs. A CCF is a contractual arrangement constituted by a deed of constitution entered into between a management company and a depositary. Units in a CCF identify the proportion of the underlying investments of the CCF to which an investor is beneficially entitled. Through contractual arrangements entered into with the management company, the investors participate and share in the property of the investment fund as co-owners of the assets of the fund. As a co-owner, each investor in the CCF holds an undivided co-ownership interest as a tenant in common with the other investors. The CCF is a tax-transparent structure, which means that investors in a CCF are treated as if they directly own a proportionate share of the underlying investments of the CCF rather than shares, units or interests in an entity that itself owns the underlying investments.
As set out in 1.1 State of the Investment Funds Market, the legislation governing the ILP structure offered in Ireland has recently been amended, to modernise the structure; details of the amendments are set out in 4.1 Recent Developments and Proposals for Reform. With the enactment of the amendments to the existing legislation governing ILPs, it will be possible for an ILP to be structured as an umbrella fund. Investors in an ILP hold interests in the limited partnership by entering into a partnership agreement with the general partner as limited partners.
An Irish fund can be established as either a standalone fund or an umbrella fund comprising one or more sub-funds, each with segregated liability. Each sub-fund will generally have a different investment objective and policies, and may comprise different classes of shares/units/interests. Typically, classes of shares/ units/interests are issued to allow for different fee arrangements, different minimum subscription amounts, different currencies and/or different distribution arrangements within the same sub-fund. The legislative regime enables the assets and liabilities of each sub-fund of an umbrella investment fund established as an investment company, ICAV, unit trust or CCF to be segregated from the assets and liabilities of the other sub-funds of that umbrella, meaning that the liabilities of a sub-fund are discharged solely from the assets of that sub-fund. A sub-fund of an umbrella fund is not a separate legal entity, but an umbrella fund may sue and be sued in respect of a particular sub-fund.
There are no restrictions on Irish alternative funds being structured as either open-ended or closed-ended; however, funds that have the ability to implement a redemption settlement period of greater than 90 days are categorised as open-ended with limited liquidity.
Master-feeder structures can be established for a variety of reasons, such as to cater for the different tax reporting requirements of certain categories of investors, including US taxable persons, non-US investors and US tax-exempt investors. Funds are increasingly being established in Ireland to act as the master fund in master-feeder structures, which include an Irish feeder fund for European investors alongside feeder funds that are domiciled in other jurisdictions, generally Delaware or the Cayman Islands. The use of an Irish master fund in the structure enables the passporting of the Irish master and/or Irish feeder fund throughout Europe using the AIFMD marketing passport.
The majority of investment managers and investment advisers appointed to act for Irish funds are domiciled in other jurisdictions, given that the portfolio management activities are often performed outside of Ireland. However, the number of Irishdomiciled investment managers and investment advisers is on the rise, and such entities are generally structured as private companies limited by shares. It is also possible for the alternative investment fund manager (AIFM) to retain portfolio management responsibilities and this is a relatively common model, particularly for less active and/or less liquid portfolios. In such cases, the AIFM may establish an investment committee with input from an investment adviser.
2.1.2 Common Process for Setting up Investment Funds
If an AIF is structured as either an investment company or an ICAV, it will need to be incorporated or registered with the Irish Companies Registration Office or the Central Bank, respectively, prior to an application being submitted to the Central Bank for authorisation of the fund as a QIAIF.
With the exception of limited asset classes in respect of which a pre-submission is required, there is a fast-track authorisation process for QIAIFs, which allows a QIAIF to be authorised by the Central Bank within 24 hours (by close of business on the day after submission of the application for authorisation) of filing the requisite documentation with the Central Bank. The prospectus, constitutional document and all material contracts being entered into in respect of the QIAIF must be submitted to the Central Bank as part of the application for authorisation of the fund. The Central Bank relies on confirmations from the fund's directors or manager (as relevant) and its Irish legal counsel that the fund complies with the requirements of the Central Bank.
Prior to the submission of the application for authorisation of a QIAIF, it is necessary to ensure that all service providers that are required to be pre-approved by the Central Bank to act for Irish-domiciled funds have indeed been approved to do so. This is most relevant for discretionary investment managers that have not previously provided such services to Irish-domiciled funds. Further details of the clearance process for discretionary investment managers are set out in 2.3.3 Local Regulatory Requirements for Non-local Managers.
The timeframe for the establishment and authorisation of a QIAIF generally ranges between six and 12 weeks, taking into account the various operational steps that need to be completed, such as the onboarding of service providers and the opening of various custody accounts, where required.
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