Another step closer
We have been tracking the progress of the Irish Investment Limited Partnership Bill (ILP Bill) through its voyage and this week it took a couple of significant and most welcome policy steps towards its conclusion. There is a great deal of excitement and pent up appetite for Irish private funds. This latest option in the Irish toolkit is of particular interest to US and UK private fund managers and GPs, adding to Ireland’s already enviable fund domicile reputation. The new ILP framework is expected to herald the establishment in Ireland of a range of funds such as private equity, private debt, venture capital, infrastructure, real estate, and other illiquid strategies who normally utilize limited partnerships within their fund structure.
Further to the positive momentum we had highlighted previously, the ILP Bill legislation is making steady progress through the Irish Parliament with the latest reported update that the required legislation moves to the report stage on December 2nd. Industry sources remain hopeful that it will be fully concluded before the parliament’s Christmas break. For many, it would be a welcome early festive gift for an expectant industry.
While nothing can proceed until the legislation is fully formed, there are several administrative and regulatory matters required to be addressed before we can collectively move towards authorisation and launch of Irish ILPs. This week, the Central Bank of Ireland (CBI) published two significant publications linked directly to Irish ILPs and private fund framework. Both were music to industry ears as they resolved a number of concerns previously held. The devil is always in the detail and the two updates have firmly addressed some regulatory wrinkles and pave the way for a regime which will be very favourable to successful growth of private funds in Ireland.
Let’s look at both:
Updated AIFMD Q&A
Perhaps the most welcome policy update for many comes in the shape of the updated AIFMD Q&A. The update removes the requirement of a General Partner (GP) to an investment limited partnership being required to be separately approved by the CBI so long as the GP has appointed an authorised Alternative Investment Fund Manager (AIFM). This change further removes the regulatory requirement for the GP to maintain €125,000 minimum capital at all times. The Q&A acknowledges that the GP appoints the AIFM to the Irish QIAIF and acts in an oversight capacity but does not have to be an AIFM itself. The GP, its directors, and pre-approved control function (PCF) resources will be regulated by the CBI under its Fitness and Probity regime solely. As such, the regulatory and capitalisation burden that had been of some concern are now removed.
Consultation Paper (CP132)
The Central Bank of Ireland (CBI) has issued a consultation paper (CP132) focused primarily relating to the ability to tailor share class features for closed ended Qualified Investor Alternative Investment Funds (CEQIAIF). CP132 proposes that CEQIAIFs be uniquely granted permission to launch share classes with wider scope to allow varying forms of participation in the funds by investors. Such differentiation is currently is explicitly prohibited by prevailing Irish fund share class rules. The so called “Differentiated Share Classes” allow for share class features that would be par for the course to many private funds elsewhere.
Many of the proposed are the staple of private equity funds in other leading domiciles such as Luxembourg and Cayman Islands but the optionality in Ireland is extremely welcome. CP132 proposes to permit CEQIAIFs to issue share classes which permit:
- The profit and loss and capital of specific assets to be allocated to specific share classes where currently the rules require each share class participates equally in a single pool of assets.
- Investors to participate in some, but not all, of the assets of the CEQIAIF. Similar to above, all fund investors own and participate in a common pool of assets and a new sub-fund is required to segregated assets and investor types.
- Management share classes which can receive greater returns but remain subordinate to the returns to which other share classes are entitled.
The above broad permissions allow for share classes that may:
- Issue at a price other than the NAV without CBI approval.
- Include excuse provisions where an investor may “opt out” of a particular investment or capital call.
- Include exclude provisions where the fund may exclude an investor from a particular investment if that arrangement is predetermined and documented in writing with the investor and agreed legally and approved by the board of the CEQIAIF. Such exclude or exclude provisions are particularly important to certain regulated entities such as insurers, pension schemes, or even sovereign wealth funds who are often subject to investment parameters which require them to excuse themselves from certain investments. Similarly, it is helpful for investors who may have self-imposed screening rules such as ESG filters, for example, who may also not wish to participate in a certain investment.
- Allow for stage investing and series funding a staple of private equity and venture capital funds and allows new investors to acquire shares, new or transfers from existing investors.
- Management shares which may reflect a pre-determined fee arrangement or capital pay out which is not conducted on a pro-rata basis.
The additional scope for differentiation at share class level comes with some requirements for investor disclosure, capital accounting rules, and documented agreement in some instances. However, it broadly leaves that as a matter between the fund, its board, and its investors. So, the light touch approval and supervision regime synonymous with the QIAIF structure is maintained whilst balancing ease of set up with appropriate levels of investor protection and disclosure.
The suggested allowable share class differentiators will be familiar features to seasoned private fund participants. The latitude afforded by the CBI proposals gives the required flexibility to make the ILP fund and share class structuring framework competitive and aligned with other leading private fund domiciles, such as Luxembourg and Cayman Islands.
The consultation has a tight turnaround time and comments on the draft guidance and “general observations” may be sent to the CBI until December 22, upon which they will then work to prepare formal guidance. The compressed timeline is welcome in order to “get the ILP market” as soon as practicable.
Overall, while work remains, it is expected that Ireland should have a fully functioning ILP regime in place for private funds by the year-end which will be a most welcome silver lining to a challenging year.
Arrange a more detailed discussion on what this exciting update means for your business and Ireland as a private equity and private debt domicile by contacting one of our Alternative Fund experts in your region.
Ainun Ayub – London
Andrew Ritchie – London
Chris Adams – Luxembourg
Jeff Dorigan – Boston
Chris McChesney – Boston
Alan O’Sullivan – Dublin
Chris Pigott – Hong Kong