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Claude Niedner, Arendt & Medernach

Chapter 1: Legal & fund structuring


Over the years, Ireland has built out its financial services industry to become Europe's de facto onshore alternative funds domicile. 

Up until March 2015, the most popular legal entity was the Irish Plc, also known as a Part XIII Company. This has since been superceded by the hugely popular Irish Collective Asset Management Vehicle (ICAV). Since March 2015, more than 157 new funds have been registered with the CBI using the ICAV fund vehicle, equating to more than EUR8.4bn in AUM. The majority of ICAVs, moreover, have launched as AIFs to market into Europe. 

The ICAV was designed to improve efficiency and accessibility for new Irish investment funds, and now sits alongside the Irish Plc as a tailor-made corporate fund vehicle for both UCITS and Alternative Investment Funds (AIFs).

Managers who might already be running an existing Plc are able to transfer it into an ICAV should they wish, provided the manager seeks shareholder approval. 

"Under the legislation, the Plc `continues' as an ICAV, so while the legal structure is changing, the intention is to avoid causing a tax event for investors," explains Donnacha O'Connor, Partner at Dillon Eustace. 

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;

• Registered office in Ireland;

• Board of directors and a minimum of two directors.

"I think that, given that the ICAV is subject to its own bespoke legislation and distinct from general Irish company legislation, there is a general expectation that the advantages of an ICAV over an investment company will only increase and that the ICAV will be more responsive to changes in the needs of investors over time," comments Philip Lovegrove, a partner in law firm Matheson's Asset Management and Investment Funds Group.

The Irish Qualified Investor Alternative Investment Fund (‘QIAIF’)

Alongside the ICAV, 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 aforementioned ICAV, Limited Partnerships, Unit Trusts and Corporate entities offering a variety of solutions for fund managers seeking efficient tax structuring for investors. 

As of March 2016, there were 1961 QIAIFs (including 578 umbrella funds) registered with the CBI. 

"Other jurisdictions have come up with competing fund structures over the years but my view is what Ireland got right was that, from the outset, it created a regulated product, with minimal portfolio regulation and a quick and straightforward authorisation process.

"This has worked well. The Reserved AIF and Notified AIF being introduced to Luxembourg and Malta respectively may also provide a quick route to market. However, these are both unregulated funds. Ireland sees itself as being in the regulated funds business, so it is unlikely that the Irish government will sanction an equivalent unregulated fund structure in the foreseeable future," confirms O'Connor.

An interesting derivative of the QIAIF is the loan origination QIAIF, which Lovegrove confirms is beginning to receive increased interest from clients as the EU's Capital Markets Union project gathers momentum. This will harmonise regulation in the loan origination space and will, he says, help to reduce the risk of regulatory arbitrage between jurisdictions, ensuring a more coherent approach to the regulatory requirements that these funds will operate under. 

"This should, in turn, create further confidence among investors and borrowers in respect of direct lending funds and thereby drive further demand for such products. A loan origination QIAIF is subject to a minor additional reporting requirement in that a list of any undrawn committed credit lines must be submitted to the Central Bank with the fund's periodic reports," explains Lovegrove.

Luxembourg 

AIFMD is ultimately a manager-focused directive. Luxembourg was quick to recognise this and in 2013 it created the Luxembourg Limited Partnership Regime, allowing for Luxembourg AIFs to be treated as Luxembourg limited partnerships, which are not necessarily subject to direct supervision by the CSSF. 

Alongside the existing common limited partnership or `SCS' regime, which has a legal personality, managers can now choose to avail of the Special Limited Partnership (`SCSp' regime) with no legal personality. The SCSp regime brings greater flexibility to help attract managers used to the Anglo Saxon LP regime. 

There are now more than 1,000 of these limited partnerships registered in the Grand Duchy. 

The fact that managers can choose to avail of the Lux LP or Lux SLP regimes means that Luxembourg is well placed to cater to a wider range of alternative investment managers looking to bring onshore funds to market. 

As referenced by O'Connor above, Luxembourg is also currently preparing to launch a new unregulated AIF, known as the Reserved AIF. This will be the latest wave of innovation, following the SCSp regime, and will bring a further unregulated option to the table. 

Without going into too much detail, Luxembourg offers both regulated products – namely the Specialised Investment Fund (`SIF') and the société d'investissement de capital à risqué (`SICAR') and now, in the spirit of AIFMD, unregulated products – namely the SCSp and the Reserved AIF (`RAIF'). 

"Luxembourg has deposited a new Bill of Law with the Luxembourg Parliament called the Reserved Alternative Investment Fund `RAIF') Regime, and that regime embraces the concept of AIFMD being manager-focused regulation. These funds do not need to be under the direct supervision of the CSSF but they do need to appoint an authorised AIFM, based in Luxembourg or any other EU jurisdiction. 

"I think going forward, the RAIF will be the norm and the regulated alternative investment fund – the SIF – will probably become more of the exception," comments Claude Niedner (pictured), Chairman of the ALFI Alternative Investments Committee and Partner at law firm Arendt & Medernach (Luxembourg). 

It is hoped that the RAIF will be approved by the end of the summer. 

In terms of the legal entity, a RAIF can be created in the form of a company or a contractual common fund (FCP). If it is established as an investment company with variable capital it will be called a `SICAV'. There, it can choose to operate as a partnership (SCS or SCSp), a limited liability company, or a limited company form; whatever suits the manager best. 

One can think of the RAIF as combining the legal and tax features of the SIF and the SICAR fund regimes, but without the regulatory oversight of the CSSF. The SICAR was first introduced in 2004. Then, in 2007, the SIF was created. Within three years, more than 1,000 SIFs had been licensed by the CSSF. 

Fast forward to 2013 and over the last few years, the number of limited partnerships has likewise exceeded 1,000 in number. 

The RAIF is likely to prove just as popular, and reduce interest in the SICAR. After all, this was designed only for venture capital and private equity investments and is more rigid than the all-asset class capabilities of the RAIF. 

As Niedner states: "Why would you buy a 2004 car when you can go out and buy the 2016 model instead?" Following the success of the SIF and the limited partnership, I think we will likely see the number of RAIFs exceed 1,000 in the next five years."

Malta 

Since joining the EU in 2004, Malta has carved out a reputation for being the go-to jurisdiction for start-up managers. 

"The MFSA is very approachable to new promoters and offers appropriate guidance where necessary in order to faciliate the application process. Malta hosts a wide range of service providers, all of whom are well versed in structuring and supporting alternative investment funds, fund administration, risk management and so on," comments Nicholas Warren, Manager, Corporate Services, Chetcuti Cauchi Advocates. 

From a legal entity perspective, the most common structure for hedge funds in Malta is the SICAV. This can be used for single fund structures and umbrella fund structures, depending on the manager's preference. 

In addition to the SICAV, promoters can choose to avail of the investment company with fixed share capital, limited partnerships, unit trusts, common contractual funds and one structure that is becoming increasingly popular: the Recognised Incorporated Cell Company (`RICC'). The RICC does not require a CIS license, but will need to obtain a recognition certificate from the MFSA. 

The RICC works in a more advantageous way to a SICAV in that different SICAVs – not just sub-funds – can be plugged in to the RICC as incorporated cells," says Dr. Stefania Grech of Chetcuti Cauchi Advocates. "The RICC will have legal agreements in place with each underlying incorporated cell, which will be fund structures in and of themselves; multi-fund SICAVs with their own underlying sub-funds for example."

This plug and play option is ideal for start-ups who wish to avoid the costs of setting up their own standalone fund. Each incorporated cell is a separate legal entity, meaning the manager can easily unplug the fund and launch it as a standalone structure. 

Two rulebooks

Most managers, however, will want to get a standalone fund in place. To that end, Malta offers two rulebooks: the Professional Investor Fund (`PIF') regime and the AIF regime. Managers who prefer to remain out of scope of AIFMD and market their fund(s) under NPPR rules would ordinarily choose a PIF. 

The PIF regime defines three types of investors. An Extraordinary Investor is someone who invests EUR100,000 or more in the fund. A Qualifying Investor is defined as someone willing to invest EUR75,000 to EUR100,000, and an Experienced Investor as someone willing to invest EUR20,000. 

"The plan is to consolidate the PIF regime and have one category: the Qualifying Investor Fund. If a PIF is set up and does not opt to be a de minimis PIF (EUR100mn threshold for open-ended funds and EUR500mn for closed-ended funds), and the manager is aware that such thresholds will be exceeded after the fund launches, the MFSA will require the PIF to be converted into an AIF where it will fall under the full scope of AIFMD," explains Warren.

The Notified AIF

Like Luxembourg, Malta has also introduced an unregulated fund – in this case the Notified AIF – where the AIFM is responsible for the running of said vehicle.

"Once the AIFM has done all its due diligence and is happy with the NAIF's arrangements, it simply contacts the MFSA. Notification must be submitted within 30 days from date of resolution and the MFSA will then, within 10 days, include the fund in the list of notified funds, if the full application pack has been submitted," explains Warren.

Conclusion

The options available to managers wishing to establish an onshore European AIF are numerous. As with everything in the funds industry, the ultimate decision on where to structure the AIF will come down to manager preference and that of their target investors.

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