Loan Origination for Irish Funds
For the first time in Ireland, an Irish regulated fund will be permitted to be a loan originating entity. The Central Bank has published the applicable rules for this structure following a consultation with industry.
The Irish loan originating structure will operate within the Central Bank’s regime for products compliant with the Alternative Investment Fund Manager’s Directive (“AIFMD”). This means that the loan originating funds will be structured as a qualifying investor alternative investment fund (“QIAIF”) and will be able to avail of the Central Bank’s fast track authorisation process.
In order to avail of the new regime, a QIAIF must limit its activities to: “the business of issuing loans, participating in loans, participations in lending and to operations directly arising from therefrom, including handling assets which are realised security, to the exclusion of all other commercial business”. This means that the QIAIF may not pursue other investment strategies within the same sub-fund.
The new rules apply where a QIAIF engages in loan origination as part of a syndication or club deal. There are some limitations on the loans permitted to be provided by the QIAIF. Loans cannot be originated for the purpose of investment in financial instruments and cannot be granted to: (i) natural persons; (ii) to certain related parties; (iii) other investment funds; (iv) financial institutions or to their related companies (with some minor exceptions); or (v) persons intending to invest in equities or other traded investments or commodities.
The additional requirements imposed by the Central Bank on loan originating QIAIFs include requirements in the following areas:
- Credit granting, monitoring and management
The QIAIF must implement and maintain policies and procedures in relation to the assessment, pricing and granting of credit, the management of concentration risk and credit risk and the diversification of credit positions. A comprehensive stress testing programme must also be carried out by the QIAIF.
- Due diligence by investors
Although not required, where it is proposed to provide access to information regarding the QIAIF to potential investors for due diligence purposes, such access has been made available on a non-discriminatory basis to all potential investors and must include all material information.
- Portfolio diversification requirements
The QIAIF must limit exposure to any one issuer or group to 25% of net assets within a specified timeframe.
- Liquidity and distribution
The QIAIF must be closed-ended and of a finite nature. This means that during that period limited redemption and distribution rights may be offered to investors.
The QIAIF must not have gross assets of more than 200% of its net asset value (with a level of discretion afforded to the Central Bank in this regard) and should this limit be exceeded, Central Bank approval must be obtained within 30 days and a formal plan to re-align the QIAIF’s leverage ratio be put in place.
- Reporting and disclosures
Information on the loans, non-performing exposures, undrawn committed credit lines, exposures subject to forbearance activities and material changes to the QIAIF’s credit assessment and monitoring procedures must be reported periodically to investors and the Central Bank. Detailed risk disclosures are required to be included in all offering and marketing material of the QIAIF.
The development of the Irish loan originating fund structure is a direct result of an increase in demand for an alternative to bank finance due to the restricted access to bank credit and deleveraging in the aftermath of the financial crisis. This new fund structure provides a means of bringing project financiers, who need finance to get their project off the ground, together with asset managers, and thereby transforming investment funds from asset management vehicles into asset creation vehicles. It provides a welcome example of the desire of the Irish regulatory regime and funds industry to provide managers with a product solution in areas where there is high investor demand.
The Central Bank’s Consultation on Fund Management Company Effectiveness
The Central Bank published a consultation paper (“CP86”) on Fund Management Company Effectiveness. This consultation paper is specifically focused on the area of delegate oversight by fund management companies, whether the “fund management company” be authorised under the UCITS or AIFMD regimes and whether it is an external management company or a self-managed fund.
CP 86 looks at both the initial authorisation process and the on-going day-to-day operation of fund management companies. While the Central Bank recognizes that various methods of resourcing and delegation of functions are used, the key requirement is that there are sufficient resources to ensure that the firm is operating effectively and that all statutory obligations can be met.
The Central Bank have invited public consultation on four key measures, which aim to encourage the continuous improvement of fund management company effectiveness. These are:
1. Central Bank fund management company delegate oversight guidance
The Central Bank has recognized that the quality of oversight performed by fund management companies over their delegates varies quite considerably. The Central Bank has therefore concluded that they need to take action to promote and underpin good practices. They intend to do this by issuing guidance as to what they would expect from the fund management companies, while noting that there is no “one size fits all” approach.
2. Streamlining designated managerial functions
The Central Bank proposes streamlining the current management functions into a list of six, comprising of: (i) Risk Management (ii) Investment Management; (iii) Regulatory Compliance; (iv) Distribution; (v) Capital and Financial Management; and (vi) Organisational Effectiveness.
The Central Bank has identified a specific weakness in the current regime that there is no requirement that a comprehensive distribution strategy be put in place at the time of a fund launch. It is hoped that the broadening of the current function of “complaints handling” to a general “Distribution” function will address this. The second material proposed change is the introduction of a task of organisational effectiveness oversight. This role, which is likely to be appropriate for the Chairman, is one of oversight of the adequacy of the internal resources within the authorised entity, the effectiveness of the board, the impact, if any of conflicts of interest on effectiveness and the effectiveness of the designation of the retained tasks as a mechanism of ensuring day-to-day control.
3. Requirement for Irish resident directors
Currently the Central Bank requires fund management companies to have at least two Irish resident directors. The Central Bank has noted that it is particularly concerned to encourage a broad range of relevant skills and competencies on fund management company boards and that some areas of competence may be relatively scarce. The Central Bank is considering a proposal to relax the requirements for two Irish directors in certain circumstances, provided individuals are in Ireland for a certain number of working days per year.
4. Rationale for board composition
It is proposed to introduce a new rule to require fund management companies to document as part of the authorisation process specifically how the composition of its board as a whole provides it with sufficient expertise to conduct the tasks expected of the directors, whether acting as members of the board or, where relevant, as the designated person for a managerial function. The Central Bank has specifically noted that it believes that where a fund management company has a contract for the provision of legal services, it does not also have to ensure that the board itself also includes legal expertise.
The closing date for responses to CP 86 is 12 December 2014.
Full text of CP 86
A link to the full text of CP 86, including the questions posed to the public for consultation is available here.