1. CATEGORIES OF REGULATED FUNDS IN IRELAND
There are two broad categories of regulated investment funds in Ireland, UCITS and AIFs. Each can be established as unit trusts, corporates, common contractual funds (“CCF”), Irish Collective Asset-management Vehicles (“ICAV”), and in addition AIFs can be established as partnerships.
|Unit Trusts||Unit Trusts|
|Investment Companies||Investment Companies|
|Investment Limited Partnerships|
Either category of fund may be established as a single fund or as an umbrella fund comprising one or more sub-funds with segregated liability, each of which may have different investment objectives and policies.
The principal benefit of a UCITS classification is that an EU wide regulatory regime exists and the fund may be offered to the public throughout the EU, subject to compliance with the cross-border notification procedures specified by the UCITS Directive (the “UCITS passport”). UCITS may be offered to both institutional and retail investors.
The other category of regulated investment funds in Ireland are AIFs, the managers of which are subject to the regulations implementing the EU’s Alternative Investment Fund Managers Directive (“AIFMD”). The two principal types of AIFs are QIAIFs and RIAIFs. The professional investor fund (“PIF”) category was discontinued but the Central Bank allowed existing PIFs as at 22 July 2013 to continue in existence.
|Non-UCITS||AIFMD||Transitional Periods to comply with AIFMD|
|QIF||QIAIF||2 year transitional period if est. after 22 July 2013 – AIF Rulebook. This transitional period is still continuing.|
|Retail Non-UCITS||RIAIF||This transitional period is still continuing.|
- EU AIFMs who manage AIFs in the EU; and
- Non-EU AIFMs which manage EU AIFs or which market EU or non-EU AIFs in the EU.
AIFMD provides for the marketing of AIFs to professional and retail investors across the EU and the opportunity to manage AIFs domiciled in Member States (other than the AIFM’s home Member State) (the so called “AIFMD Passport”). The rules applicable to AIFs are set out in the Central Bank’s AIF Rulebook. QIAIF’s and RIAIF’s can be managed in the manner set out in the table below.
|Fund||External Irish/ Other EU AIFM Non-EU AIFM||Non-EU AIFM||Internally managed AIF|
|QIAIF||Yes, fully authorised or a “registered” or sub-threshold AIFM.||Yes||Yes|
|RIAIF||Yes, but not possible to establish with “registered” or sub-threshold AIFM.||No||Yes|
The minimum subscription amount for a QIAIF is €100,000 and it is not subject to investment, borrowing or leverage limits. Nevertheless, there is a statutory requirement to spread risk if the QIAIF is established as an investment company and there are restrictions on AIFs granting loans or acting as guarantor on behalf of third parties. In contrast, there is no minimum subscription requirement for a RIAIF. However, borrowings cannot exceed 25% of a RIAIF’s net assets but, in contrast to a UCITS, borrowings can be effected for investment purposes as well as to meet redemption requests.
2. CONTRACTING WITH IRISH FUNDS
|Form of Funds||Separate Legal Entity||Contracting Party for Derivatives||Key Documents|
|Unit Trust||No||Management company or AIFM Trustee/Depositary*||Trust deed, Management/AIFM agreement (“M/AIFMA”), Constitutional documents of manager/AIFM/ investment manager (“ConDocs”), Investment management agreement (“IMA”).|
|CCF||No||Management company or AIFM Depository*||Depositary agreement (“DA”), M/ AIFMA, ConDocs, IMA.|
|Investment Company||Yes||AIFM/investment manager Depository*||Constitution of the investment company, DA, AIFMA, IMA, ConDocs.|
|ICAV||Yes||AIFM/investment manager Depository*||Instrument of incorporation of ICAV, DA, AIFM agreement, IMA, ConDocs.|
3. STRUCTURE AND NATURE OF THE LEND AND SECURITY
Generally lending to a fund is done by way of either (i) a bilateral or syndicated facility, (ii) a note issuance agreement providing for the issuance of notes by the issuer in favour of the note holder or (iii) a derivative. Note that whilst there are restrictions on AIFs lending, it is possible to establish AIFs focused on loan origination, including investing in secondary market loans.
The security for a transaction of this kind generally compromises a fixed charge over all of the fund’s right, title and interest in any cash and/or securities account recorded for the fund’s benefit in the books and records of the custodian. This is often coupled with an account control agreement and an assignment in respect of all of the fund’s right, title, and interest in respect of the custody agreement entered into between the fund and the custodian in order to regulate rights and facilitate enforcement. It is also possible to take collateral over capital calls, capital contributions and related agreements, though this is less common as Irish regulated funds usually have investor capital fully contributed.
There is no ability for sub-funds of Irish regulated umbrella funds to guarantee each other or for funds to guarantee third parties. As mentioned above, a fund may be established as an umbrella fund, having a number of sub-funds with segregated liability. Segregation of liability is achieved by statute in the case of UCITS and AIFs established as investment companies and ICAVs, and by contract in the case of unit trusts, CCFs and limited partnerships.
In situations where security is being taken by way of assignment over the custodian agreement, the custody agreement must be reviewed to determine if the prior written consent of the custodian or the Central Bank is required. In situations where there is a true assignment of the custodian agreement, i.e. where one of the parties of the custodian agreement is changing, the Central Bank’s consent is required as per the Central Banks “Change of Service Provider” requirements. However, where the assignment is taking place purely for the purpose of granting security and the parties to the custody agreement are not changing, the Central Bank permits regulated funds to grant security over their assets in connection with borrowings and for a receiver to be appointed to enforce such security and accordingly, express consent of the Central Bank should not be required in such cases, subject to the specific provisions of the custody agreement.
4. REAL ESTATE BACKED SECURITY
QIAIFs are not permitted to carry on a trading business, with the exception of private equity and venture capital funds, but can establish a property fund structure. This structure comprises of a Property Holding Company (“PropCo”) which remains within the QIAIF as a subsidiary. An Operating Company (“OpCo”) is established and a declaration of trust in favour of the QIAIF is common. As a result, the OpCo gets the benefit of tax exemption for QIAIFs. A PropCo normally creates a lease agreement with the OpCo. Establishing this type of structure creates a number of considerations detailed below:
|Connected Party Transaction Rules||The OpCo may be a connected party to a promoter/investment manager or affiliate. The CBI requires that transactions be negotiated at arm’s length.|
|Public Participation||There is a requirement for QIAIFs to provide facilities for direct and indirect participation by the public. Failure to provide such facilities could result in revocation of QIAIF authorisation and loss of tax exempt status.|
|QIAIF acting as guarantor/ Cross Security||A cross guarantee by a QIAIF of liabilities of a third party, i.e. the OpCo is not permitted. An OpCo can guarantee a PropCo and create security over its assets to support this guarantee. A PropCo cannot guarantee an OpCo.|
5. CONVERSION/MIGRATION OF FUNDS
Conversion to ICAV
It is possible for an existing Irish UCITS or an AIF fund to convert into an ICAV using a process prescribed by the Central Bank of Ireland (the “Central Bank”) to become an ICAV. It is routine and does not disrupt the legal existence of the entity, or any of its prior rights or obligations. The procedure involves an application being made to the Central Bank, which maintains a register of ICAVs, containing various required documentation and statutory declarations. The Central Bank then publishes a notice of the proposed conversion in the Companies Registration Office Gazette, and once the Central Bank has processed the application it issues a certificate of registration, at which point the ICAV will be deemed to exist.
Migration of Cayman/BVI Investment Funds into Ireland
It is possible for an existing BVI, Cayman and Jersey established fund to migrate into an ICAV, investment company or unit trust in Ireland.
In the case of investment funds, authorisation by the Central Bank is co-ordinated with the Irish Companies Registration Office (the “CRO”) in order to achieve simultaneous authorisation and registration. It involves an application being made to the CRO to be registered as a company by way of continuation, accompanied by the requisite documents. The applicable procedures relating to the re-domiciliation of unit trusts mirror the regime for investment companies set out above.
6. ISSUES FOR LENDERS TO LOOK OUT FOR
- Get a full understanding of the fund structure.
- Place of incorporation of key players such as depositary/custodian/trustee.
- if there’s a sub-custodian or nominee, if so where is it located;
- where are accounts located, which are book entry and which holds the physical asset;
- who controls them, is there a legal and beneficial ownership split; and
- is any third party consent required.
All these inform who to lend to, who to take security from and at what level and the governing law of the security documents.