Ireland remains Europe's leading onshore hedge fund jurisdiction by some margin, yet up until a couple of years ago it could not offer fund sponsors a corporate fund structure similar to the SICAV in Luxembourg.
The Irish Government was fully aware of this need to improve Ireland's product competitiveness back in 2011, highlighting the fact in its Strategy for the International Financial Services Industry 2011-2016. The end result was the introduction of the Irish Collective Asset-Management Vehicle or ICAV, a new corporate vehicle that over the last 12 months has already proven to be more successful that was initially anticipated.
"The way we view the structure is as an enhancement of the existing corporate model that we have in Ireland," comments Stephen Carty, Investment Funds Partner, at Maples and Calder (Dublin). "There aren't a significant amount of differences – mostly pertaining to those managers wishing to target US investors – but in other areas it is pretty much a rework of the existing Irish company structure. Within a month or two of the ICAV legislation coming into effect last March, almost every vehicle being established in Ireland was through this new legal structure. At Maples and Calder, we have advised on 25 to 30 per cent of all new ICAVs established in Ireland. Across the board, it has been well received and embraced."
ICAVs can be used for UCITS or AIFs and can also be used by managers wishing to restructure an Irish plc. Since the ICAV came into effect on 18th March 2015, through the end of December some 129 ICAVs had been authorised by the Central Bank of Ireland. This has helped boost Ireland's funds industry, with assets in the Qualified Investor Alternative Investment Fund, or QIAIF, up 21 per cent through November 2015 over a 12-month period.
Net inflows to QIAIFs were EUR31 billion through November 2015, giving an overall aggregate total of EUR384 billion; this compares to EUR317 billion through November 2014.
Part of the reason for this growth is the ICAV as global fund managers look for an efficient solution to establishing regulated funds in Europe.
"One trend that we've seen over the last couple of years is the move from offshore jurisdictions to onshore Europe and Ireland is very well placed to attract a lot of those funds. The majority of ICAVs have been for new funds with only a small number being conversions from Irish plcs. We expect to see more conversions throughout 2016 and most new fund launches using a corporate structure are likely to use the ICAV," says Kieran Fox, Director of Business Development, Irish Funds, the representative body for the international investment fund community in Ireland.
Donnacha O'Connor, Partner at Dillon Eustace, confirms that there is "a huge amount of interest" in the ICAV coming from outside Europe.
"It has features that make it structurally very adaptable and very marketable inside and outside the EEA. It can benefit from the UCITS or AIFMD marketing passports. It can be established as a QIAIF, which has little or no portfolio regulation. It has the ability to be treated as tax transparent or not from a US federal income tax perspective. It is a corporate fund but is not subject to Irish or European company law," says O'Connor.
In addition to a fast evolving regulated fund ecosystem, Ireland is the fastest growing UCITS domicile, having grown 500 per cent in 11 years and 30 per cent over the last two years according to Irish Funds. This has been achieved thanks to Ireland having a world-class funds infrastructure, with some 46 administrators and 18 custodians supporting in excess of 850 promoters, 136 of which are US promoters.
"If one looks at net flows into Irish QIAIFs they have grown even quicker than UCITS, albeit from a smaller base. We don't expect there to be a flood of offshore hedge funds moving onshore to Europe but it is significantly more than a trickle as managers look towards onshore domiciles to establish fund ranges with the mindset of accessing European investors more easily and efficiently," says Fox.
The specific reasons for choosing an ICAV might not all be business critical for major established Irish corporate funds, but there are a few nuances to the ICAV that might lead to a conversion, such as the check the box option for US investors. In an existing Irish corporate structure, any changes to the constitutional document requires shareholder approval whereas in an ICAV it is only material changes that affect investors that require shareholder approval.
"Any housekeeping changes and ancillary updates can be eliminated from a shareholder vote, which makes things easier from a cost perspective," says Carty.
"Another of the ICAV's nuances, which can be viewed as advantageous, is that the manager can have separate financial statements prepared at the sub-fund level. That can be relevant to managed account platforms, in particular, where they have different managers and investment mandates operating altogether at the sub-fund level. In those instances, it is quite awkward for platform providers to share financial statements with investors without also including all other managers and strategies.
"With the ICAV, they can report purely on each individual sub-fund to the relevant investors."
Previously, using the Irish plc, MAP providers had to report on consolidated accounts across the platform. Now, by using the ICAV umbrella, MAP providers have the ability to structure funds-of-one or segregated managed accounts and provide separate financial reporting to each clients.
This is an important operational benefit and has led to more managed account platforms being created in Ireland, accounting for another important growth area alongside Ireland's funds ecosystem.
Permal Group, one of the industry's leading FoHF managers with USD20 billion in AUM, incorporated the very first ICAV last March following a decision to move a portion of its managed account platform (`PMAP') from the British Virgin Islands.
"Once we settled on Ireland, the obvious choice for us at the time was an Irish plc. We wanted to structure this as an umbrella to run one platform in one corporate vehicle as opposed to the way we had done it historically in the BVI, which was to use (and still use) separately incorporated limited companies that operate as professional open-ended funds," explains Michael McDonough, General Counsel at Permal Group.
"At the time, the ICAV was just being proposed in Ireland. The ICAV has a lot of benefits that you don't get from a plc structure, so we had a decision to make: do we launch the plc, do we wait for the ICAV to be introduced, or do we launch the plc and do a conversion into an ICAV?
"A couple of factors drove our decision to wait for the ICAV, in particular the additional time and cost it took in setting up a plc and then converting it to an ICAV at a later date."
Permal runs one of few buy-side managed account platforms in the industry. It currently has approximately 97 vehicles and USD7.7 billion of assets running on it in the BVI, of which around 14 have been transferred to the Dublin ICAV.
"We use this as an investment tool for our commingled fund products. In order for third parties to access the platform, each institutional investor sets up an SMA, where we act as the discretionary manager," explains McDonough, adding that part of the ICAV's operational flexibility is the ability to dispense with the need for holding an AGM. "Another point is that with a platform of this size and the number of sub-funds, the ability to do separate audited accounts for each sub-fund, and also stagger those so that you're not doing them all at once, is very beneficial."
These are propitious times for Ireland and the supply demand dynamics look set to remain strong. From a supply perspective, EU and non-EU managers alike increasingly see favourable investment opportunities as Europe's banking industry restructures, opening up institutional investment in "corporate Europe" via loan origination and credit strategies. On the demand side, European investors are clamouring to invest in regulated hedge funds, not only to access European assets but US assets as well.
"Regulation is here to stay and increasingly, US managers understand that if they want to market their funds to European investors they will have to adhere to AIFMD requirements. That is helping to drive interest in establishing QIAIFs in Ireland. Another observation that I'm seeing is that in Europe, institutional investors want access to US-based investment advisors to get access to alternative investment vehicles that can give them exposure to US assets," confirms Nick Tsafos, Chairman and Director of EisnerAmper Global Ltd.
"Therefore, in order to get these investors on board, US managers are looking to set up funds in Ireland and other European jurisdictions. We are seeing clients setting up in Ireland not just to get access to Irish assets but to get access to European investors. They tend not to be setting up offices in Ireland; if anything, they are establishing a physical presence in London and domiciling the fund(s) in Ireland."
This is a trend that McDonough recognises. By creating the Dublin ICAV, Permal wants to provide a transparent vehicle (as it already does in the BVI) so that large, predominantly European institutions can make the appropriate regulatory risk calculations (e.g. Solvency II capital ratios), and minimise the haircuts that they have to take from a regulatory capital weighting perspective.
"From our side, we are seeing a growing preference among institutional clients for more regulated products. Offshore `tax haven' jurisdictions don't cut it anymore with a lot of the institutional gatekeepers. And frankly they don't cut it with a lot of the people assigned to determine risk with respect to certain products. Rightly or wrongly, the optics of the situation are such that if it is not a regulated product then it can be considered to be higher risk by default, and the institutional market is becoming less interested in investing in such vehicles," says McDonough.
Carty is in no doubt that the appeal for regulated funds, in addition to the operational-friendly ICAV, has played out well for Ireland over the last 12 months. He says that Maples and Calder continue to see new entrants to the market; that is, managers who weren't previously creating Irish products who are now establishing structures in Ireland.
"That was a striking theme for us in 2015 in terms of new business. We are working with a range of Maples' global clients that are starting to look at Ireland, not solely because of the ICAV, but because of the regulatory benefits of the QIAIF, which is a very well recognised fund product within the EU regulated funds space.
"We have seen a good number of private equity and real estate managers coming to Ireland to pursue their investment strategies. In particular, where the manager is focusing on Ireland from a strategy perspective – in terms of private equity or real estate investments – it works quite well having the fund product structured there also. We have been getting quite a lot of `downstream' work coming from private equity and real estate managers and we've seen a good deal of growth, in particular, in commercial real estate," says Carty.
On the alternatives side, Ireland has consistently led the way in Europe. It was the first European jurisdiction to introduce a regulated hedge fund product with the QIF; now the QIAIF under AIFMD. It was the first country to publish detailed AIFMD regulations as outlined by the CBI, the first country to approve an AIFMD-compliant loan origination product, and was the first jurisdiction to fully authorise an AIFM.
This gives Ireland a clear distinction and advantage in terms of being a primary jurisdiction for the administration of hedge funds globally. In excess of 40 per cent of global hedge funds are administered in Ireland.
"One area where I think there is a distinction among regulated fund jurisdictions that counts in Ireland's favour is regulatory flexibility and the ability to bring products to market quickly. One example of this is the one-day authorisation period for QIAIFs," confirms McDonough.
"Ireland has built up an extensive network of relationships with fund managers in the UK and the US with strong business and cultural links in place. In terms of the expertise that we offer to back that up, Ireland is recognised as offering excellent capabilities in pricing and valuing complex assets, offering professional services for a wide range of alternative fund structures, strategies and asset classes. And on the regulatory side, there is a recognition that the CBI is very much at the forefront of being able to understand and provide sensible regulation when it comes to alternative fund strategies," explains Fox.
On the private equity side, Fox confirms that industry groups are working on Ireland's private equity offering to make it an even more attractive location for global PE groups
"We have further work planned this year, on the private equity side, to try and improve and increase the product offering that we have from a legislative perspective. We are looking at the Investment Limited Partnership Act to see how and where we can make it more efficient. So there is a constant improvement and evolution of Ireland's product offering," says Fox.
One potential area of future growth for Ireland, more so over the long term as opposed to 2016, is the Capital Markets Union. The CMU is an attempt to bring greater harmony across the EU and make its capital markets more efficient; this is especially so for infrastructure and real estate investments. With greater harmony across EU Member States, the hope is that the CMU will make it easier for institutions to invest in alternative assets to better manage their long-term liabilities.
"Non-bank financing is a critical aspect as well i.e. direct lending. That should help to broaden out the market and support the loan origination QIAIF. There is traction at an EU level to increase non-bank financing," concludes Fox.