More global asset managers could set sail for Ireland as its regulator relaxes loan origination fund rules, furthering the country’s reputation as a leading alternatives fund domicile.
Global asset managers are welcoming a change to rules that govern loan origination funds in Ireland – the latest example of shifting seas in EU regulation. Just one month after the Central Bank of Ireland (CBI) first announced the change, the new rules took effect 7 March.
Back in 2014, the asset management industry highly praised Ireland as the first EU Member State to introduce a specific regulatory framework for Loan Origination Qualifying Investor Alternative Investment Funds (L-QIAIFs). But the domicile lost steam from first mover advantage when some asset managers deemed the rules as overly-prescriptive and slightly restrictive. The resulting number of fund launches was lower than expected.
The main inhibitor was the fact that L-QIAIFs were not allowed to build up a diversified portfolio of credit assets. Before this welcome rule change, alternative asset managers launching Irish funds focused their portfolios predominantly on originating loans with some other limited investment permissions related to the loans. But, they were generally prohibited or heavily restricted from investing in other asset classes such as debt or equity securities. Such securities investments had to be in entities to which the L-QIAIF was lending, or used for treasury, cash management, or hedging purposes.
On 7 February, the CBI announced they were planning to introduce some flexibility by allowing L-QIAIFs to acquire debt and equity securities and the asset management industry responded positively.
Take a Different Tack
Following extensive consultation with the asset management industry, the CBI announced investment restriction rules would be relaxed as of March 7, 2018. Now, L-QIAIFs are now able to invest in a broad range of debt and credit instruments without also having to lend to those entities – a significant enhancement to allowable investment strategies for these fund types.
The change of tack gives L-QIAIFs the opportunity to better diversify and hunt greater yield more broadly. It also offers asset managers who previously may have gravitated towards the more liberal regimes in Luxembourg, an additional viable domicile option, to set up their AIFMD loan funds.
The rule change also presents a new opportunity for US asset managers. They can now replicate their US loan origination fund strategies in Ireland and passport them freely to institutional investors throughout the EU. The L-QIAIF rules are still prescriptive but further solidify Ireland’s standing as one of the leading fund domiciles for US alternative fund managers expanding into Europe.
On an Even Keel
More generally, we’ve entered a new period of regulatory prioritization, focused on the recalibration of existing rules, rather than new regulation. Regulators are more open-minded in their approach to the alternative asset management industry, and the relaxation of these L-QIAIF rules is just the latest example of that shift in focus. While maintaining focus on investor protection and systemic risk, EU regulators have been gradually shifting their stance to one of fostering economic growth, recognizing the important role alternative investment funds can play in boosting the economy.
Another example is the EU’s Capital Markets Union. One of their key initiatives is to make non-bank funding more accessible to small- and medium-sized enterprises across member states. Further capital adequacy laws such as Basel 3 act as a restraint to bank lending, yet banks currently remain the default source of funding to EU businesses. Much has been said about the European corporate and project funding model, which is very bank-centric, following in the footsteps of the US market, where funding sources are much more diverse. Shifts like this L-QIAIF rule relaxation help foster growth in the private sector loan origination, as the EU navigates towards this key macro-economic goal of less bank reliance overall.
Time to Set Sail
The updated rules took effect March 7 without the need for consultation nor legal review. As such, it looks like smooth sailing for loan origination fund managers. Under the CBI’s QIAIF fast-track authorization process, a Qualifying Investor Alternative Investment Fund can be authorized by the CBI within 24 hours, provided all contractual documentation is in place. In theory, we could see managers launch new L-QIAIFs this month.
The move marks a turn of the tide for asset managers wishing to establish themselves in Ireland and reap the rewards of loan origination fund’s continued growth.