A Guide to Qualifying Investor AIFs
For almost 25 years, Ireland has been one of the world's leading alternative investment fund domiciles, with its original qualifying investor fund ("QIF") product internationally recognised as a very flexible alternative fund offering which could be launched quickly and within a regulated framework.
In conjunction with the introduction of the EU Directive 2011/61/EU on Alternative Investment Fund Managers ("AIFMD" or the "Directive"), the QIF has been replaced by what is considered an even better regulated product known as the qualifying investor alternative investment fund ("QIAIF"). Not only is the QIAIF suitable for hedge funds, FoHFs, less liquid and illiquid alternatives, private equity, venture capital, development capital and real estate funds (as well as most other types of investment fund exposure, whether considered "alternative" or not), it can also be marketed freely to professional investors throughout the 28 EU Member States (and the 3 additional European Economic Area Members States) by an authorised AIFM using AIFMD's marketing passport.
Latest available statistics at May 2015 indicate that there are now 1,920 QIAIFs (including sub-funds) representing in excess of Euro 355 billion in net assets.
QIAIFs benefit from the following features and Irish domicile infrastructure:
- a QIAIF with an authorised AIFM has access to European professional investors in 28 EU Member States (and the 3 additional European Economic Area Members States) using the AIFMD marketing passport;
- Euro 100,000 minimum subscription requirement (Euro 500,000 for QIAIFs seeking to disapply certain rules in respect of investment in underlying collective investment schemes);
- QIAIFs are available in 5 different legal structures;
- QIAIFs are not subject to Irish tax on income or gains and no Irish withholding taxes on redemption payments or dividends, provided certain straightforward conditions are adhered to;
- very few investment restrictions, the principal ones being those imposed by AIFMD on certain private equity type strategies and on investments in securitisations and certain Central Bank of Ireland imposed restrictions;
- no borrowing or leverage restrictions (other than for loan origination funds);
- fast-track, 24 hour regulatory approval process;
- internally(self)-managed, own AIFM, external AIFM and platform models all available;
- listing readily available on the Irish Stock Exchange, if desired;
- significant service provider infrastructure in Ireland, with 47 fund administrators and 18 depositories);
- capacity to migrate offshore funds from a number of domiciles to Ireland as QIAIFs, via a reasonably efficient process, avoiding any asset realisation;
- and many more.
At Dillon Eustace, assisting asset managers, fund sponsors, platform providers, investors and fund service providers (administrators, depositaries, prime brokers and others) with the structuring, formation and cross-border distribution of QIAIF (and prior QIF type) alternative funds has been a core part of our practice since the early 1990s. Our 40 lawyer (15 partner) Investment Funds legal team includes Irish, US, UK and Cayman qualified lawyers advising on product design, formation, authorisation and launch, prospectus and contractual documentation negotiation, interaction with regulators and exchanges.
We also offer funds listing and tax expertise, as well as follow-on regulatory and compliance advices, bringing to bear in-depth knowledge with a "can do" attitude. We are regular advisers to first-of-kind transactions and our team is recognised internationally as one of the most innovative and dynamic groups of lawyers in this practice area. The team has consistently been ranked as top tier by IFLR1000, The Legal 500, Chambers Global and Chambers Europe.
Before getting into the detail, it is worth taking a few moments to explain where QIAIFs fit in within the regulated fund space. First and foremost, they are Irish domiciled regulated funds.
The term qualifying investor alternative investment funds (or "QIAIF") is a Central Bank of Ireland ("Central Bank") regulatory categorisation, not a legal structure, used to designate those Irish domiciled alternative investment funds ("AIFs") which have adopted one of five different legal forms available under Irish law (ICAV, PLC, unit trust, CCF or ILP) and which have been granted authorisation by the Central Bank to be marketed solely to so-called "qualifying investors" and which are subject to a minimum initial subscription requirement of EUR 100,000 (or equivalent in other currencies) per investor. A higher EUR 500,000 per investor figure applies for QIAIFs seeking to disapply certain rules in respect of investment in underlying collective investment schemes.
When considering the QIAIF product, it is also important to appreciate that a QIAIF needs a depositary and also an alternative investment fund manager (AIFM) and that the status of its AIFM (authorised or registered, EU or non-EU) determines how the QIAIF can be managed and where and how it can be marketed.
In this Guide we focus on the QIAIF but, of necessity, we also include those AIFM related matters which impact operationally on QIAIFs and, particularly, on how they are marketed. We have a separate "Guide to AIFMD in Ireland" available on our website which deals with AIFM specific regulation in greater detail.
1.1 Pre-AIFMD background
Following the introduction of Directive 2011/61/EU ("AIFMD") into European law in July 2013, European investment funds are now categorised as either UCITS or AIFs.
UCITS are those EU domiciled investment funds which are highly regulated at product level, with strict investment, borrowing and leverage limits, as well as portfolio liquidity and diversification requirements. With a minimum fortnightly dealing requirement, UCITS are intended for sale (or at least capable of being sold to) to the retail market. The original 1985 UCITS Directive regime required that the UCITS fund itself obtain home EU Member State authorisation and gave an authorised UCITS an EU wide marketing passport.
That the UCITS authorisation and the UCITS passport attached to the product (i.e. the fund) itself reflected the fact that UCITS was originally very much a product directive, only requiring independent authorisation of UCITS management companies in a later incarnation.
Sitting alongside UCITS, most EU Member States also had their own forms of non-UCITS fund products, under regimes varying widely from one jurisdiction to another and even within jurisdictions, from one product to another. Unlike UCITS, there were no harmonised product rules for non-UCITS funds and no harmonised regime for how they were to be managed or how they could be sold.
Some jurisdictions regulated their non-UCITS products, or at least some of them, and others did not. Ireland was one of the EU Member States that did regulate non-UCITS funds, requiring that Irish domiciled non-UCITS variable capital investment companies, unit trusts, investment limited partnerships and common contractual funds obtain a prior authorisation from the Central Bank before they could operate, as well as imposing a reasonably strict regulatory regime on their managers, administrators and custodians.
In its role as regulator of non-UCITS funds, the Central Bank set its fund level product requirements by reference to the type of investor targeted – retail, professional or qualifying investor - imposing minimum subscription requirements on those dedicated for sale to professional or qualifying investors.
Although the retail investor non-UCITS product proved popular for the domestic market, the really successful Irish domiciled non-UCITS product was the qualifying investor fund (QIF) product which became widely used for a broad range of alternative strategies. One drawback, however, was that QIF distribution was always dependent upon the patchwork of local inward marketing / private placement rules of other EU Member States.
1.2 AIFMD changes the landscape
The introduction of AIFMD in 2013 changed the alternative funds landscape in Ireland and the rest of the EU in a dramatic fashion by imposing a harmonised set of organisational and operational rules and authorisation requirements on AIFMs, by introducing a harmonised set of legal obligations and liability standards for depositaries and by opening up the 28 EU Member States to a progressive, harmonised marketing regime for AIFs managed and marketed by, initially, EU domiciled authorised AIFMs.
In that latter regard, AIFMD has created a single marketplace within the EU for the marketing of AIFs, by providing for what is known as a marketing "passport".
The capacity to market AIFs on a cross-border basis within the EU depends on whether the AIFM is an EU AIFM or a non-EU AIFM, whether it is authorised or registered, the types and domiciles of the AIFs it manages or markets as well as when certain of the capacities under the Directive – particularly relevant for non-EU AIFMs – are "switched on". It will also depend on whether the AIFM is an external AIFM or an internally managed AIF. For the moment, only EU authorised AIFMs are able to use the marketing passport and initially only in respect of EU AIFs.
In other words, an Irish QIAIF (being an EU AIF) can be marketed throughout the EU using the marketing passport as long as it has either an Irish domiciled authorised AIFM or else an authorised AIFM based in another EU Member State.
Non-EU AIFs can be marketed by EU and by non-EU AIFM under a private placement regime in EU Member States (which is subject to a set of minimum harmonised rules under AIFMD) until at least 2018, provided the individual EU Member State allows for private placement – although all are obliged to, they can impose additional rules which may in practice block private placement or make it difficult. If and when the private placement regime is turned off by the European Commission, the marketing passport will be the only means of marketing AIFs in the EU.
Where the EU AIF is a feeder AIF (i.e. one which invests not less than 85% of its assets in shares of another AIF or invests at least 85% of its assets in more than one master AIF where those master AIFs have identical investment strategies or has otherwise an exposure of at least 85% of its assets to one or more such master AIF), then the right to market via the marketing passport (as opposed to via private placement) is subject to the condition that the master AIF is also an EU AIF and is managed by an authorised AIFM.
1.3 What is "marketing" under AIFMD?
The activity of "marketing" is defined in AIFMD as "a direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares in an AIF it manages to or with investors domiciled or with a registered office in the [European] Union", and even offerings or placements not undertaken by or on behalf of the AIFM, but at its initiative.
As the definition says, it covers both direct and indirect offerings or placements and not only covers activities of the AIFM but also those of others such as intermediaries or placement agents acting "on behalf of the AIFM".
Although many commentators argue that "reverse solicitation" (i.e. where the investor approaches the AIFM on its own initiative) does not constitute "marketing" under AIFMD, caution is advised if seeking to rely on the reverse solicitation argument. The AIFM would, we believe, need to consider at a minimum whether it had, for example, followed up with prospective investors after a conference or road show or whether it had corresponded with prospective investors in a way which would be considered "indirect" offering or placement. It would also need to take care in preparing offering and marketing materials, web portals etc. to ensure express and appropriate selling restrictions are included. Readers should take specific legal advice on a case by case and jurisdiction by jurisdiction basis if looking to rely on a reverse solicitation argument.
Notwithstanding that it is a very broad definition of "marketing", no additional guidance on the concept is provided by AIFMD leaving the definition open to interpretation across the various EU Member States. Most Member States have chosen not to provide guidance, but the UK Financial Conduct Authority (FCA) has done so, stating that marketing will occur when:
"a person seeks to raise capital by making a unit or share of an AIF available for purchase by a potential investor. This includes situations which constitute a contractual offer that can be accepted by a potential investor in order to make the investment and form a binding contract, and situations which constitute an invitation to the investor to make an offer to subscribe for the investment" (FCA Handbook).
It does seem that some market participants may be over relying on the UK guidance, or at least on the most literal interpretation of it that they think best favours their fact set. Other Member States may just look to the broad AIFMD definition and apply a wider, catch-all interpretation.
1.4 What is the "marketing passport"?
As indicated above, a QIAIF can be marketed throughout the EU under the marketing passport of an authorised EU AIFM or privately placed in all other cases.
What exactly is the "marketing passport"?
Since the implementation of AIFMD in late July 2013, an EU authorised AIFM has a "passport" to freely market its EU domiciled AIFs to "professional investors" in its own Member State and in other EU Member States, subject to a straightforward notification process.
In other words, once the AIFM is authorised in one EU Member State it does not need any further authorisation in any other EU Member State to market its EU AIFs to professional investors in those Member States. Unlike under the UCITS regime, the passport does not attach to the AIF. It is a passport granted to the AIFM. The Irish QIAIF is an EU AIF and, therefore, it can be marketed by an EU AIFM throughout the EU via the passport.
The marketing passport can only be used to market to professional investors. A "professional investor" is any investor which is considered to be a professional client or may be treated as a professional client on request within the meaning of Annex II of Directive 2004/39/EC (i.e. the "MiFID Directive"). Such investors comprise:
- credit institutions
- investment firms
- other authorised or regulated financial institutions
- insurance companies
- collective investment schemes and management companies of such schemes
- pension funds and management companies of such funds
- commodity and commodity derivatives dealers
- other institutional investors
- large undertakings meeting two of the following size requirements on a company basis:
- balance sheet total: EUR 20,000,000
- net turnover: EUR 40,000,000
- own funds: EUR 2,000,000.
- national and regional governments, public bodies that manage public debt, Central Banks, international and supranational institutions such as the World Bank, the IMF, the ECB, the EIB and other similar international organisations.
- other institutional investors whose main activity is to invest in financial instruments, including entities dedicated to the securitisation of assets or other financing transactions.
- clients other than those mentioned in sections (a) to (l) above, including public sector bodies and private individual investors, who, as a minimum, meet two of the following criteria and have opted to be treated as a professional client:
- the client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters,
- the size of the client's financial instrument portfolio, defined as including cash deposits and financial instruments exceeds EUR 500,000,
- the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged.
1.5 QIAIF Marketing Passport Notification Procedure
An Irish QIAIF can be freely marketed by an Irish/EU authorised AIFM to professional investors throughout the EU via the AIFMD marketing passport, subject to a straightforward notification process.
Under the AIFMD, the process of marketing an Irish QIAIF by an EU AIFM in the AIFM's home Member State, or in any other Member State, is set out in Articles 31 and 32 of the AIFMD, respectively.
The Central Bank has under Regulation 33 of the European Union (Alternative Investment Fund Managers) Regulations 2013, as amended (the "AIFM Regulations") issued specific guidance in relation to the process of marketing an Irish QIAIF managed by an Irish AIFM in another EU Member State.
In that guidance, the Central Bank notes that Irish AIFMs proposing to market EU AIFs – including QIAIFs - to professional investors in another Member State must notify the Central Bank in accordance with Regulation 33 of the AIFM Regulations. The notification letter and accompanying prescribed form (available on the Central Bank website) should be submitted by the Irish AIFM to the Central Bank for each Member State in respect of the AIF(s) it intends to market, together with the following:
- the AIF rules or instruments of incorporation for each AIF being marketed;
- any additional information referred to in Regulation 24(1) of the AIFM Regulations for each AIF that the AIFM intends to market;
- a description of, or any information on, the AIF available to investors.
- a letter, signed by a director of the AIFM, stating that the AIFM will market the relevant AIFs in accordance with AIFMD.
The notification should be submitted to AIFMDpassportingout@centralbank.ie. The Central Bank will inform the AIFM once transmission to the relevant host Member State competent authority(ies) has taken place and the AIFM can then commence to market the QIAIF in the relevant Member States.
To continue reading this article, please click here
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.