Recent statistics from the international funds industry show a significant increase in the use of Irish fund structures by both US and London based investment managers. For example, the 2011 Lipper Fund Encyclopaedia showed an incredible increase of over 35% in the level of assets under management in Irish funds which had US based promoters, as well as a 6% increase in the number of US managers getting new regulatory approvals to act in respect of Irish funds and an 8.8 % increase in the overall number of new Irish funds established by US managers in the period. Similarly, there was an increase of 10% in UK, largely London based, investment managers obtaining authorisation to establish Irish funds, an increase of 14% in the number of Irish funds established and the level of assets in their Irish structures increased by 31% in the period.
Separately, the Central Bank of Ireland (the “Central Bank”) released statistics as at the end of November 2011 confirming that the net asset value of Irish domiciled funds reached a record high in excess of €1 trillion. This represents an increase of more than 30% over the previous two years.
In addition, the European Fund and Asset Management Association (“EFAMA”) released its annual statistical report in February 2012 which confirmed that Irish UCITS (Undertakings for Collective Investment in Transferable Securities) experienced the highest net inflows of any fund domicile during 2011. Ireland attracted net inflows amounting to €62 billion in 2011, some €50 billion more than the next most successful domicile and bucked a trend that saw most domiciles experiencing large outflows. Furthermore, the EFAMA statistics show that in the last 11 years the net assets of Irish UCITS have grown by more than 500% and that Ireland’s share in the overall UCITS market increased by 26% since the beginning of 2011. In the fourth quarter of 2011 alone, Irish UCITS attracted five times more new monies than those of all other jurisdictions combined.
While Ireland is undoubtedly making impressive gains on the UCITS front it is also enjoying increased activity on the alternative side, which it dominates with 63% of the European domiciled hedge fund market. The Central Bank’s statistics show new record highs in relation to both the number of Qualifying Investor Funds, (“QIFs”) being established, which has now increased to 1,420, and in relation to the level of assets held therein, which now stands at €182 billion.
Key reasons behind this growth include the accumulated experience of the Irish funds industry, robust on-going regulation of the sector, the increased competitiveness of the Irish economy and the range of fund products available under the Irish regulatory regime, which include both UCITs and QIFs.
UCITS may be established in Ireland pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations (S.I. 352/2011), (the “UCITS Regulations”) which implemented the “UCITS IV” regime in Ireland.
Ireland is one of the leading jurisdictions for the domiciliation of cross-border UCITS and these may be established in Ireland in any of the following legal forms:
- an open-ended investment company with variable capital;
- an open-ended unit trust; or
- an open-ended common contractual fund (“CCF”).
The principal advantage of having a fund authorised as a UCITS is that, once authorised in one EU Member State, it can, through a “passport” regime, be sold in all other EU Member States without requiring further authorisation in each target Member State. UCITS are also having an impact outside Europe. The UCITS brand is now globally recognised and, due to its reputation as a regulated product with a strong emphasis on investor protection, regulators in the Far East, the Middle East and in Latin America, for example, are comfortable to allow UCITS to be sold in their jurisdictions following local registration. This is critical for managers seeking global distribution opportunities.
UCITS are regarded as the most highly-regulated funds because of the necessity to comply with a common European standard. UCITS operate on the basis of their potential for availability to the retail investor (although most are, in fact, targeted at institutional investors) and their investment and borrowing restrictions are generally not negotiable. These restrictions are aimed at ensuring an acceptable level of liquidity and risk diversification while limiting leverage.
The Qualifying Investor Fund, or “QIF”, is the most popular structure for regulated European hedge funds. The QIF is an Irish non-UCITS vehicle established under domestic Irish legislation and is now the most frequently used form of non-UCITS fund available in Ireland, comprising 65% of the total number of such funds and 75% of the assets of Irish non-UCITS funds.
The general investment and borrowing restrictions imposed by the Central Bank on investment funds in Ireland are largely automatically eliminated by using the QIF structure and as such funds can pursue aggressive investment strategies they are the vehicle of choice for:
- Hedge funds
- Real estate funds
- Infrastructure funds
- Private equity funds
- Venture capital funds.
The regulatory requirements regarding the appointment of prime brokers to QIFs have now been clarified by a specific Guidance Note issued by the Central Bank and many of the attributes of this product have been fine tuned to ensure it is extremely competitive internationally, for example the minimum subscription amount has been reduced to €100,000 and QIFs can avail of a fast-track approval process whereby eligible funds can be approved in only 24 hours.
QIFs can invest in underlying assets directly or through wholly owned special purpose vehicles. This is of special interest, for example, for real estate funds where each real estate investment can be made through a separate entity to ringfence any liability concerns relating to each project. Such structuring may also be used for tax efficiency purposes.
The QIF is largely automatically compatible with the relevant criteria for alternative funds under the AIFMD and is expected to be the vehicle of choice for asset managers wishing to take advantage of the new pan-European passport which will be available from 2013.