At our latest Knowledge Insights event, our expert panel comprised of partners Barry O'Connor, Donal O'Donovan, Michelle Ridge and Kevin Smith discussed Matheson's experience advising on the launch of Irish investment limited partnerships ("ILPs"). Reforms to the ILP vehicle introduced in early 2021 have enhanced the attractiveness of this option for private equity, venture capital and real asset strategies and there has been burgeoning interest in using this vehicle. Matheson has advised on a significant number of the new ILP launches in Ireland over the past 18 months.
Moderating the discussion, Asset Management and Investment Funds partner Michelle Ridge guided the panellists through a consideration of our experience engaging with the Central Bank of Ireland ("Central Bank") on ILP launches, particular features of the Irish framework that distinguish it from the frameworks available in other jurisdictions, as well as taxation and funding considerations.
Asset Management and Investment Funds partner Barry O'Connor outlined the various strategies we have seen implemented using the ILP and discussed the timing and authorisation process. Barry noted that, following some initial hesitancy from managers who may have been accustomed to tried and tested models in other jurisdictions, there has been year-on-year growth in the number of ILPs authorised and we expect this growth to continue.
The panel were firmly of the view that, in practical terms, the Irish system facilitates the management of the many 'moving parts' which have to be addressed prior to the launch of an ILP in Ireland. A number of key advantages of Ireland as a jurisdiction of choice for clients include the fact that Ireland is a common law system familiar to fund managers, English is the language in which business is conducted, the business culture is familiar and there is a significant depth and breadth of service providers in Ireland. In addition, the Central Bank is a pragmatic regulator and has been developing its processes in constructive ways, such as providing clarifications in relation to investment advisor arrangements and removing the need for a pre-submission for loan origination funds, which are positive changes from an ILP perspective.
For fund managers seeking to use the Irish ILP for the next iteration of an existing strategy, who may previously have used other jurisdictions, it was emphasised that, although there are some differences in the Irish rules, these differences are not seen as problematic or overly onerous, nor is the adaptation of documents considered to be challenging. It was also noted that, from our experience of launches to date, existing investors have had no issues with subsequent vintages of funds being set-up in Ireland rather than in the jurisdiction of the prior funds.
As regards taxation, Tax partner Kevin Smith outlined that Ireland's reverse hybrid rule ("RHR") is a key tax consideration when considering an ILP. The RHR has been in force since 1 January 2022 and requires Ireland to tax ILPs and other transparent funds if an investor (or associated investors) holds ≥50% of the ILP, treats the ILP as a corporation for their local tax purposes and the ILP's profits attributable to that investor(s) are not subject to tax in any jurisdiction as a result. Investors in an ILP typically would not hold over 50% of the fund and there is no automatic aggregation of holdings of limited partners, meaning the RHR is not usually in scope for ILPs. Where the RHR is applicable in respect of any investor, there is no negative tax outcome if the relevant investor is generally tax exempt or in a jurisdiction that does not impose tax. In addition, Ireland has implemented an exemption from the RHR for regulated collective investment schemes and this would apply to an ILP where the relevant conditions are satisfied. In short, the view of our tax experts is the RHR is very manageable and easily presented to and dealt with by investors in investor questionnaires.
Finance and Capital Markets partner Donal O'Donovan addressed the differences between an ILP and an ICAV (Irish Collective Asset-management Vehicle) from a fund financing perspective and, in particular, subscription line financing. In both cases, the underlying primary finance documents are very similar. In addition, due diligence requirements are similar in terms of the fund documentation and fund service provider documents (with an emphasis on the limited partnership agreement itself rather than a subscription agreement and prospectus), which is again something which is quite manageable from a client's point of view.
In response to a poll conducted during the webinar, all attendees to whom the question was relevant answered positively to the question "Would you consider using the ILP for your next fund launch?" Overall, the key takeaway from the webinar was that improvements to the Irish legal framework underpinning the ILP provide additional opportunities and choice of vehicle in terms of the launch of private equity, venture capital and real estate funds, making Ireland an even more attractive jurisdiction of choice for investment funds.
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