In a welcome development, the Central Bank of Ireland announced on 25 November 2016 that it intends to relax its restrictions on loan originating Qualifying Investor Alternative Investment Funds ("QIAIFs") engaging in activities other than lending and related operations.
Specifically, the Central Bank is proposing to amend its Alternative Investment Fund ("AIF") Rulebook to allow a loan originating QIAIF to make certain investments linked to its loan origination strategy other than those arising directly from that strategy, with effect from 3 January 2017.
Currently, the AIF Rulebook states that a loan originating QIAIF must "limit its operations to the business of issuing loans, participating in loans, participations in lending and operations directly arising therefrom, including handling assets which are realised security, to the exclusion of all other commercial business."
Under the proposed amendment, loan originating QIAIFs will be allowed to engage in operations relating to the business of issuing loans, participating in loans and participations in lending. In other words, they will no longer be restricted to engaging in operations arising directly from these activities. Operations permitted under the proposed amendment will include investing in debt and equity securities of entities or groups to which the loan originating QIAIF lends or which are held for treasury, cash management or hedging purposes.
The Central Bank's proposed amendment parallels the rules applicable to loan origination at EU level. In particular, the ELTIF Regulation 2015/760 permits ELTIFs to invest in a range of eligible assets including participations, such as equity or quasi-equity instruments, debt instruments in qualifying portfolio undertakings and loans provided to them. Loan origination is also possible in the context of the EuVECA Regulation 345/2013 and the EuSEF Regulation 346/2013, subject to some constraints.
The proposed amendment also ties in with a central aim of the EU's Capital Markets Union, namely to promote alternative sources of non-bank lending to the European economy. The European Commission is expected to consult on the elements of a European framework on loan origination shortly. This follows the publication of an Opinion by the European Securities and Markets Authority in April this year outlining key principles of such a European Framework (see our related briefing here).
As mentioned, the proposed amendment to the AIF Handbook will take effect from 3 January 2017. The Central Bank has decided against consulting on the amendment, given the limited nature of the change, but comments can be submitted for consideration while the Central Bank is finalising its arrangements.
We expect that loan originating QIAIFs and those interested in becoming involved in loan origination will welcome the increased flexibility offered by the proposed amendment.
You may access the Central Bank's proposed amendment here.