IRELAND is a leading jurisdiction for the global investment funds industry. At the end of 2023, over €4tn of net assets were held in almost 8,900 Irish domiciled funds (including sub-funds), representing a 12% annual asset growth. Ireland offers a range of fund vehicles for promoters to establish fund and feeder fund structures with an Irish domicile. Irish vehicles therefore feature regularly in subscription, net asset value (NAV) , hybrid, umbrella and other fund financings.
Before commencing due diligence on an Irish fund or considering the facility and security documents, it is crucial first to understand the type of Irish vehicle that is involved in the financing and, furthermore, whether the vehicle is a regulated or unregulated fund.
Regulated fund structures
The Central Bank of Ireland (CBI) is responsible for the authorisation and regulation of investment funds and investment managers in Ireland. The most common Irish regulated fund structures encountered in fund financings are:
- Irish collective asset-management vehicles (ICAV): ICAVs are incorporated under the Irish Collective Asset-management Vehicles Act 2015 (as amended) and have a bespoke corporate structure which makes the ICAV a popular choice of fund vehicle. Investors in an ICAV subscribe for shares and become shareholders in the ICAV.
- Investment limited partnerships (ILP): ILPs are constituted under the Investment Limited Partnership Act 1994 (as amended) (the ILP Act) as a partnership (without separate legal personality from its partners) and are gaining popularity in Ireland following recent amendments to the ILP Act, as further explored below. The general partner of the ILP is responsible for the management of the ILP and the investors in an ILP subscribe for partnership interests as limited partners with the benefit of limited liability.
- Variable capital investment companies (Investment Companies): Investment Companies are incorporated as a public limited company under the Companies Act 2014 (as amended). Although Investment Companies are still commonly encountered in Ireland, the Investment Company has been superseded by the ICAV and the ILP as the vehicle of choice for newly established funds.
Following the introduction of the ICAV in 2015, the ICAV overtook other fund structures to become the most common Irish fund vehicle encountered in fund finance transactions. ILPs are also gaining in popularity following the enactment of the Investment Limited Partnerships (Amendment) Act 2020, which modernised and amended the ILP Act to bring the ILP in line with comparable partnership structures in other leading fund jurisdictions. ILPs offer an attractive option to promoters who favour a partnership structure over the corporate structure of an ICAV.
Other regulated structures in Ireland include Unit Trusts, which are constituted under a trust deed with a trustee (who holds legal title to the fund's assets) and a management company responsible for the management of the fund), and Common Contractual Funds. These are unincorporated bodies established under contract law, providing investors with certain rights as co-owners of the fund's assets. Unit Trusts and Common Contractual Funds are very rarely encountered in fund financing transactions in Ireland.
Irish regulated funds may be established as Alternative Investment Funds (AIF) under the EU (Alternative Investment Fund Managers) Regulations 2013 (as amended, or other than ILPs, which can be established as AIFs only, as Undertakings for the Collective Investment in Transferable Securities (UCITS) under the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 (as amended). In fund financing transactions in Ireland, funds and feeder funds with an Irish domicile will commonly be AIFs and, in particular, qualifying investor AIFs (QIAIF). There is a 10% leverage limit for UCITS, and this, coupled with the fact that UCITS may only borrow for temporary purposes, means UCITS are encountered in fund finance transactions less frequently than AIFs.
Regulated funds may be established as standalone funds or take the form of umbrella funds with one or more sub-funds. Irish regulated fund vehicles cannot guarantee the obligations of third parties, including the obligations of other obligors or loan parties under a credit facility (with the key exception that a regulated fund may guarantee the liabilities of its wholly owned subsidiaries). The concept of a "guarantee" in this context is not defined in Irish law, but the consensus is that this prohibition on guaranteeing third-party obligations also prohibits the granting of security in respect of third-party obligations. A further structuring consideration is that, in the context of an umbrella fund, the principle of segregated liability extends to the sub-funds within the umbrella structure, meaning that the assets of one sub-fund cannot be used to guarantee or secure the obligations of another sub-fund in the umbrella, nor other third-party liabilities. These are important points that should be considered – and are sometimes overlooked – when structuring a fund finance transaction with Irish counterparties at the term sheet stage.
Unregulated fund structures
Unregulated fund vehicles are also common in Irish fund financing transactions either as the main fund vehicle or the asset holding vehicle under a regulated fund structure. Unregulated funds are usually incorporated as a designated activity company (DAC) which has been structured to comply with the requirements of section 110 of the Taxes Consolidation Act 1997 (a Section 110 Company). A Section 110 Company will benefit from a specific tax regime (the details of which are outside the scope of this guide) provided that it satisfies the necessary criteria upon incorporation, and on an ongoing basis, in order to preserve its status.
Although Section 110 Companies are unregulated fund vehicles, if a Section 110 Company is part of a structure including an Irish regulated fund, specific consideration should be given to whether the Section 110 Company will need to comply with the Irish rules and regulations.
Unregulated funds in Ireland may also be established as limited partnerships under the Limited Partnership Act 1907. However, unregulated limited partnership are not commonly encountered in subscription, NAV, or umbrella financings in Ireland and are not, therefore, covered in this guide.
ANATOMY OF A TRANSACTION
Due diligence
After determining the type of fund vehicle in the structure, and whether the vehicle is regulated or unregulated, due diligence is a crucial starting point on any fund financing transaction in Ireland. As emphasised elsewhere in this guide, due diligence often informs the legal and commercial terms of the facility and security documents, and it is important for a lender (and its counsel) to determine at an early stage whether there are any issues in the fund documents that should be corrected or dealt with prior to funding, either by amending the terms of the fund documents or by including specific provisions in the financing and security documents. Key issues to review in fund documents are set out under "Due diligence" in the main section of this guide. The purpose of this section is, therefore, to supplement and expand upon certain considerations set out elsewhere in this guide from an Irish perspective, and the "Due diligence" section referred to should be read alongside the below when reviewing fund documents for an Irish fund.
What are the fund and service provider documents for an Irish fund?
A number of service providers will be appointed to manage and act on behalf of an Irish fund. For AIFs, the directors of an ICAV or Investment Company, or the GP in respect of an ILP, are required to appoint an alternative investment fund manager (AIFM) with responsibility for the management of the fund. The AIFM will often delegate certain functions to other service providers, including an investment manager and administrator. The Alternative Investment Fund Managers Directive 2011 (AIFMD) also imposes an obligation on the AIFM to appoint a third-party depositary for the fund, which will have the specific role of safeguarding and verifying the ownership of the fund's assets.
Therefore, when undertaking due diligence on an Irish vehicle, it is important to obtain the fund documents (i.e. the incorporation and investor documents) and the service provider documents from the fund, as these documents will together determine whether the fund is permitted to enter into the financing and how it operates. For a regulated Irish fund (ICAV, ILP or Investment Company), the fund and service provider documents will include:
- Constitutional documents, namely: the instrument of incorporation for an ICAV; the memorandum and articles of association for an Investment Company; and the limited partnership agreement for an ILP and memorandum and articles of association for its GP. It is also important to confirm that the fund and its sub-fund have been approved by the CBI by obtaining a copy of the letter of authorisation for the fund/umbrella fund and letter of approval for each relevant sub-fund that is a party to the financing.
- Offering documents, including the prospectus or offering memorandum and, for sub-funds in an umbrella fund structure, the supplement to the prospectus/offering memorandum. The offering documents will contain an overview of the fund's investment mandate, risk factors and operations, including the process for calling capital and making distributions to investors. It is crucial to check the offering memorandum against the other fund and service provider documents to reveal any inconsistencies with the contractual terms governing the fund's relationship with its investors and service providers, as it is the contractual terms set out in these documents that a lender will need to rely on in the event of an enforcement of its security over the assets of the fund including, in the case of subscription-backed financing, the fund's rights to call capital from investors.
- Subscription documents, which will often take the form of a subscription agreement between the investor and the ICAV, Investment Company or ILP. It is also common for an Irish fund to enter into side letters with individual investors which (as noted elsewhere in this guide) supplement and, in some cases, override specific terms of the constitutional documents and offering documents in respect of a specific investor's capital commitment to the fund.
- Service provider documents, which will usually include a management agreement with the fund's AIFM/manager, an investment management agreement (and, in some cases, sub-investment management agreements), an administration agreement and a depositary agreement containing the terms upon which the depositary will oversee, control and, as applicable, hold the assets of the fund. These contracts contain the terms upon which key service providers are appointed to manage the fund and, as will be explored in further detail below, should be reviewed carefully by a lender (and its lawyers) who may need to rely on the role of these entities in the event of a security enforcement.
For unregulated Section 110 Companies, the key documentation to review as part of the due diligence of the fund will, similarly, include the constitutional documents, subscription documents and service provider documents for the Section 110 Company. The subscription documents for a Section 110 Company will usually take the form of a note issuance agreement for the issuance of profit participating notes (PPN) to investors. The key service providers to a Section 110 Company will usually include a registrar and paying agent (which will have responsibility for issuing and making payments under the PPNs and maintaining the register of noteholders) and an administrator. The lender should also obtain evidence that the Section 110 Company has filed the applicable notifications to the Irish Revenue Commissioners in respect of section 110 of the Taxes Consolidation Act 1997.
Power to borrow, guarantee and grant security
The constitutional documents for Irish fund entities, both regulated and unregulated, should include broad powers to borrow and create security, but the terms of the fund and service provider documents should be carefully reviewed to confirm, in particular, whether there are any limitations on leverage and which parties have authority to, and/or whose authorisation is required to, approve the borrowing and granting of security on behalf of the fund.
The constitutional documents of each fund can differ, but usually the directors of an ICAV, Investment Company or Section 110 Company will have the authority to borrow and provide security on behalf of a fund and enter into the relevant finance and security documents. For an ILP, the GP will have this authority. The fund and service provider documents should be reviewed to identify whether the consent of other parties – for example, the AIFM or investment manager – is required to approve the fund borrowing and entering into security. A lender would usually require evidence that the AIFM or investment manager has approved the financing and security, where the fund documents require such approval to be obtained. It is not an uncommon request from a borrower for an investment manager or sub-investment manager to sign the finance documents on behalf of the fund and, in some cases, without further authority from the board of directors of the fund or, as applicable, GP. In such cases it is vital to ensure that sufficient delegated authority exists for the investment manager or sub-investment manager to legally bind the fund.
As with any due diligence process, it is also important to ensure that the fund is permitted to grant security over the specific assets that will form part of the collateral. The fund documents may expressly set out the assets over which the fund can grant security (for example, in the context of a subscription-backed facility, a right to grant security over the unfunded capital commitments of investors), but the fund documents are not always as specific. As a minimum requirement, the fund documents should include a general permission for the fund to grant security over its assets.
The terms of the fund documents will need to be reviewed alongside applicable regulatory and legal restrictions. For example, as noted above, the principle of segregated liability prohibits the assets of an Irish regulated fund (or sub-fund) being used to guarantee or secure the liabilities of a third party, including the liabilities of other sub-funds in an umbrella structure. Despite these restrictions, it is not uncommon for the fund documents for an Irish regulated fund to suggest that the fund may guarantee and grant security for third-party liabilities (a situation that sometimes arises where the fund documents are based on precedents for a non-Irish vehicle) and, in such situations, the regulatory position will prevail. Likewise, leverage limits may apply to a fund in addition to any limitations set out in the fund documents. For example, as noted above, UCITS have a 10%. leverage limit and can only borrow debt for temporary purposes. If the structure includes a fund invested in Irish real estate, the CBI also imposes a 60% LTV limit where more than 50% of the value of the fund is attributable to Irish property.
Right to call capital and the capital call process, including waiver of defences
For Irish funds, it is most commonly the directors of the ICAV, Investment Company or Section 110 Company, or the GP in respect of an ILP, who have the authority to determine when capital calls are made by the fund. This role is often delegated to a fund service provider, for example the AIFM or investment manager, and the due diligence process should reveal which entities in the structure have discretion to call capital. In addition, the administrator typically assists in the capital call process, for example, by issuing capital call notices to investors and maintaining the shareholder or limited partner register, although the administrator would not usually have any discretion to determine when capital calls can be made. A lender providing a subscription-backed facility should carefully note as part of the due diligence process which entities need to authorise a capital call or otherwise have a role in the capital call process, as it is likely that contractual commitments from each such entity in favour of the lender will be required.
It is also important in the context of a subscription backed financing in Ireland, as elsewhere, to understand when capital calls can be made on investors. The fund documents will typically provide for calls to be made on a "Dealing Day" (as defined in the relevant constitutional documents of the fund) which falls during the investment period, subject to certain scenarios where a capital call might be permitted after the investment period has expired. Lenders should ensure that the terms of the fund documents permit capital calls to be made for the purposes of paying liabilities under the facility, including after the expiry of the investment period.
Irish fund vehicles will usually be required to calculate the net asset value (NAV) of the fund and its units/shares in order to determine the number of units/shares that will be issued to an investor in respect of a capital call. If it is not possible to determine the NAV, this will have a detrimental effect on the ability of the fund to issue capital calls to its investors, including in situations where such capital calls are required to repay a facility. It is therefore crucial to review the fund documents to determine the situations or events that permit the fund to suspend the calculation of the NAV (noting that such situations would usually include the insolvency of the fund or market events which have the effect of preventing the fund from accurately valuing the fund's assets) and what impact this might have on the fund's ability to issue a capital call under the terms of the fund documents. The investors will not be issued shares/units when they commit capital but have not yet been called. The fund documents will provide that investors will get shares/units issued to them each time they fund a utilisation request, but it would be uncommon for them to be provided with any "hard copies" of these. Holdings will be recorded on a register maintained by the administrator.
As noted in the main section of this guide under "Due diligence", lenders will often expect a "waiver of defences, set-off and counterclaim" provision to be included in the fund documents pursuant to which the investors agree to fund a capital call notwithstanding the occurrence of certain events. In an Irish context (and in addition to the scenarios explored in the section entitled "Subscription financing: Due diligence"), this waiver would usually include an undertaking to fund a capital call in the event that the NAV is suspended (and shares/units/ partnership interests in the fund cannot be or are not issued) or the fund vehicle is insolvent. The issues to be considered and implications of the inclusion of general or more specific "waiver" language are dealt with in the main "Due diligence" and "Subscription finance facility agreements" sections of this guide.
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Originally published by Brickfield Fund Finance Recruitment.
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.
