Dillon Eustace is one of Ireland's leading law firms focusing on corporate and M&A, financial services, banking and capital markets, litigation and dispute resolution, real estate, insurance and taxation. Headquartered in Dublin, Ireland, the firm's international practice has seen it establish offices in Tokyo, New York, Hong Kong and the Cayman Islands.
Within our seven main practice groups we have developed teams focusing on specific practice areas, bringing together in a co-ordinated fashion, lawyers, tax advisers and compliance professionals from different teams to advise on specific parts of a client's transaction or matter.
Background to development
Ireland is Europe's leading onshore hedge fund market. Over the past 30 years, since the outset of the UCITS fund regime, the jurisdiction has dedicated significant resources to building out its financial services industry. This investment by industry and governmental bodies has helped to grown an industry which today, according to Irish Funds (formerly the Irish Funds Industry Association), is home to 6,080 Irish-domiciled funds (including sub-funds) accounting for EUR1.78trillion in net assets. Taking into account all funds (UCITS, non-UCITS and non-Irish domiciled funds) those figures rise to 7,283 funds and EUR2.45 trillion respectively.
A physical manifestation of Ireland's expertise in servicing funds of all shapes and sizes, the Irish Financial Services Centre in Dublin ("IFSC") was set up by the Irish Government in 1987. The IFSC employs 35,000 people, an extremely large proportion of who are wording at the apex of the international financial services industry, and is home to half of the world's top 50 banking groups, including all major administrators, depositaries, law firms, accounting firms in addition to numerous financial technology firms.
"Ireland has the benefit of being home to a huge wealth of professionals who have not only worked in Ireland, but also internationally for many years," says Derbhil O'Riordan, Partner at Dillon Eustace (Cayman). "It isn't only Irish funds that are serviced from Ireland. If you look at the number of non-Irish domiciled funds being serviced, there are now approximately 7,700. Service providers in Ireland therefore not only have an ongoing engagement with the Irish funds industry, they engage with funds and fund sponsors that operate outside of the EU, giving an extremely wide range of experience and are well placed to support new product innovations as and when they arise."
The level of seniority that Ireland can draw upon from within the domestic industry, together with the number of graduates entering the financial services industry annually, makes it uniquely placed to support fund managers.
Flexible options under AIFMD
Consistently lauded by industry as a flexible place to do business, Ireland was faced with the same challenges under AIFMD as its European counterparts. In particular, Ireland was for-runner in offering solutions to the high operating and compliance costs of running an Alternative Investment Fund Manager (AlFM), as required for all EU Non-UCITS.
The Irish funds industry offered a number of solutions to fund managers, including self-managed AIFs (with an "internal" AIFM), but the most notable development within the industry in Ireland in response to AIFMD has been the use of AIFM platforms, whereby third party service providers are establishing Irish AIFMs "for rent" to fund managers, (particularly non-EU managers) who wish to market funds into Europe and benefit from economies of scale offered by a "platform" solution.
O'Riordan described this route as "extremely attractive to those fund managers without an existing regulatory footprint in Europe". "Third party AIFMs offer managers the option to join their platform, which will usually be an umbrella structure with a number of sub-funds or alternatively, to set up their own umbrella scheme and then appoint the AIFM to run it," explains O'Riordan.
"A third party AIFM will generally have its own service provider relationships and established, tried and tested fund documentation. Equally though, the AIFMs that Dillon Eustace work with day to day are extremely flexible in their offerings and will be agnostic as to which administrators, or depositaries the investment manager prefers to use. There are huge economies of scale to using a third party AIFM: they will already be meeting the regulatory requirements, they will have all the risk management and reporting capabilities in place, etc."
The Irish Qualified Investor Alternative Investment Fund ("QIAIF')
The Irish Qualified Investor Alternative Investment Fund (QIAIF) is the preferred fund structure used by investment managers wishing to avail of the AIFMD fund passport.
The Central Bank of Ireland ("Central Bank") and AIFMD legislation does not impose investment restrictions or parameters on QIAIFs in the same way as apply to UCITS funds. Instead, the QIAIF regime imposes minimum disclosure requirements including disclosure as to investment strategy, use of leverage borrowing and liquidity provisions in a QIAIF. The Central Bank QIAIF rules primarily relate to how an investment manager discloses to investors what it is they intend to do with the fund.
This flexibility has made the QIAIF the vehicle of choice for both hedge and private equity fund managers, with the varying fund structures, including Irish Collective Asset-Management Vehicles (`ICAV'), Unit Trusts, Limited Partnerships and Corporate entities offering a variety of solutions for fund managers seeking efficient tax structuring for investors. Given tax considerations of end-investors, the first step towards establishing a QIAIF is to consider which legal structure to use.
"Concurrently, the investment manager should decide which service providers they want to use. Fund managers making this choice will usually consider whether they are going to set up their own AIFM, or use a third party AIFM, use an existing platform, or set up a standalone platform at the same time as choosing relevant service providers."
"Once those decisions have been made and the relevant parties have been chosen, the manager will need to draft the fund documentation. This will include the AIFM Agreement, the Investment Management Agreement, Administration and Depositary Agreements etc. AIFMD is quite prescriptive on the terms that must be included in these documents, which can present a challenge for managers. In particular, AIFMD requires that an AIFM is required to meet certain conditions regarding payments of remuneration of staff, to ensure that the salaries and bonuses they are paid do not encourage excessive risk taking in portfolio management. The AIFM is required to ensure that its delegates comply with these rules, bringing third-country (for example SEC registered investment managers) within the remit of the AIFMD remuneration rules," explains O'Riordan.
An Irish QIAIF has a minimum investment of EUR100,000 per professional investor though in certain circumstances this minimum will be raised to EUR 500,000. For example, O'Riordan notes recent examples of QIAIF fund-of-funds structures investing into Cayman structures who, depending on their exposure to a given fund, would need to impose the higher investment minimums on their own investors.
Speed to market
Provided the AIFM and all key service providers are in place, in order to achieve authorisation of a QIAIF, all that will be required will be a regulatory filing at the Central Bank, when all fund documentation is agreed between the parties.
"The Central Bank issues authorisation on a one business day basis and is extremely practical in that sense."
"With the help of the fund manager's appointed law firm, provided all the documentation is in place and submitted by 3pm, the CBI will send out a letter of authorisation the following business day. Fund managers would need of course to bear in mind any requirements prior to making the submission, for example, pre-clearance of Directors, or establishment of an ICA or corporate structure," confirms O'Riordan.
Once the QIAIF has been authorised, from a marketing perspective the investment manager will need to notify the CBI of each EU Member State into which they wish to market the QIAIF. Although this is a straightforward procedure, the process can take up to 20 business days before the manager receives confirmation from the relevant EU jurisdiction that they are free to market their fund(s) there.
Irish ICAV
A key development in Ireland in the past 12 months is the new ICAV structure, which is poised to take the place of the public limited company as the "go-to" structure for Irish funds.
What the ICAV offers, is a corporate-type vehicle specifically providing for investment funds, outside of Irish corporate legislation.
A huge advantage of the ICAV for US investors is that it will not automatically be considered a corporation for US tax purposes and can elect to `check-the-box'. This allows it to be treated as a partnership, or disregarded entity, for US federal tax purposes and more readily facilitate investment by US taxable investors and/or US taxable and tax-exempt investors in a master feeder fund structure.
"Another advantage of the ICAV is that the constitutional document, the Instrument of Incorporation, can be amended in most circumstances with depositary approval. This contrasts very favourably to the Memorandum and Articles of Association of a public limited company which requires the sanction of shareholders even in the case of a small administrative or regulatory change.
"The ICAV also offers flexibility in that financial statements can be published on a sub-fund by sub-fund basis. This allows the investment manager to comply with reporting rules on a more practical basis by saying that they will comply within certain timeframes in accordance with the launch of the sub-fund, rather than the umbrella structure as a whole," says O'Riordan.
"If a manager decides to convert an Irish plc. into an ICAV, they should consider all of the benefits, together with any potential drawbacks for their investors. For example, if a change is being made in order to "check the box", regard should be had to what impact that could potentially have on existing US investors in the fund." says O'Riordan.
A few key features of the ICAV:
• Authorisation and supervision by the Central Bank;
• Establishment as a UCITS fund or an AIF;
• If established as an AIF, it may be structured as open-ended, closed ended or with limited liquidity;
• Possible establishment as an umbrella fund with segregated liability between sub-funds;
• Multiple share classes;
• The assets of the ICAV must be entrusted to a depositary;
• The paid up share capital of the ICAV must be equal to the net asset value of the ICAV;
• Registered office in Ireland;
• Board of directors and a minimum of two directors;
• A secretary must be appointed;
• The name of the ICAV must be approved by the Central Bank of Ireland.
