Ireland: Investment Funds 2024

1. Market Overview

1.1 State of the Market

The latest statistics published by the Central Bank of Ireland ("Central Bank") show that the net asset value (NAV) of Irish-domiciled funds increased for the fourth successive quarter, driven mainly by transaction inflows, to EUR3.854 trillion at the end of the third quarter of 2023, representing a 6% increase (EUR219 billion) from EUR3.635 trillion at the end of Q3 2022. The number of Irish-domiciled funds (including sub-funds) grew from 8,447 at the end of 2022 to 8,766 at the end of the third quarter of 2023.

In terms of the number of Irish-domiciled funds by category, Irish-domiciled alternative investment funds (AIFs) (including sub-funds) reached 3,391 at the end of the third quarter of 2023 and the total number of Irish-domiciled undertakings for collective investment in transferable securities (UCITS) (including sub-funds) reached 5,375.

2. Alternative Investment Funds

2.1 Fund Formation

2.1.1 Fund Structures

AIFs that are domiciled in Ireland are predominantly established as regulated funds and are required to be authorised by the Central Bank. Regulated AIFs in Ireland are sub-divided into retail investor alternative investment funds (RIAIFs) and qualifying investor alternative investment funds (QIAIFs), with the vast majority of Ireland-domiciled AIFs being established as QIAIFs. As RIAIFs are generally targeted at retail investors, this type of fund will be discussed in 3. Retail Funds.

Five legal structures are currently available when establishing a regulated AIF in Ireland:

• investment company;
• Irish collective asset-management vehicle (ICAV);
• unit trust;
• common contractual fund (CCF); and
• investment limited partnership (ILP).

Investment Company

Historically, the investment company was the vehicle of choice for investors looking for an Irish corporate fund vehicle. However, this changed in 2015 with the introduction of the ICAV as a bespoke corporate structure that caters specifically for the needs of the funds industry.

ICAV

The key advantages of the ICAV versus the investment company include:

• the ability to elect to dispense with the holding of an annual general meeting;
• the ability to file a "check the box" election to be treated as a partnership (or a disregarded entity if a single shareholder) for US federal income tax purposes;
• the ability to amend the ICAV's constitutional document, known as the instrument of incorporation, without shareholder approval for certain types of changes;
• the ability to prepare separate financial statements for separate sub-funds of the ICAV; and
• not being required to make the audited financial statements publicly available.

Unit Trust

Investors seeking to use a trust structure for their investment fund can establish an AIF in Ireland structured as a unit trust. Unlike the investment company and the ICAV, which issue shares to their investors, unit trusts issue investors units representing a beneficial interest in the assets of the trust. As it is a trust arrangement, a unit trust is not a separate legal entity, meaning that it does not have power to enter into contracts in its own name. In practice, the board of directors of the fund manager acts on behalf of the unit trust.

CCF

While CCFs were initially developed in 2003 to facilitate the pooling of pension fund assets in a tax-efficient manner, this structure may be used by any entity seeking a tax-transparent structure; however, individuals cannot invest in CCFs. A CCF is a contractual arrangement constituted by a deed of constitution entered into between a management company and a depositary. Units in a CCF identify the proportion of the underlying investments of the CCF to which an investor is beneficially entitled.

Through contractual arrangements entered into with the management company, the investors participate and share in the property of the investment fund as co-owners of the assets of the fund. As a co-owner, each investor in the CCF holds an undivided co-ownership interest as a tenant in common with the other investors.

The CCF is a tax-transparent structure, which means that investors in a CCF are treated as if they directly own a proportionate share of the underlying investments of the CCF rather than shares, units or interests in an entity that itself owns the underlying investments.

ILP

The Investment Limited Partnerships (Amendment) Act 2020 took effect in early 2021, amending the legislation governing ILPs, Ireland's regulated investment funds partnership product. These amendments have enhanced the product offering by bringing it more in line with the partnership structures in other fund jurisdictions and introducing best in class features.

While partnership structures are generally used for investment funds with strategies relating to private equity or debt, real estate, infrastructure or other types of illiquid assets, the ILP is a flexible structure that can be utilised by asset managers seeking to establish either open-ended or closed-ended investment funds through a regulated partnership structure. An ILP can now be structured as an umbrella fund, offering greater flexibility for those seeking to establish funds in Ireland. Investors in an ILP hold interests in the limited partnership by entering into a partnership agreement with the general partner as limited partners.

An Irish fund can be established as either a standalone fund or an umbrella fund comprising one or more sub-funds, each with segregated liability. Each sub-fund will generally have a different investment objective and policies, and may comprise different classes of shares/units/interests. Typically, classes of shares/units/interests are issued to allow for different fee arrangements, different minimum subscription amounts, different currencies and/or different distribution arrangements within the same sub-fund. The legislative regime enables the assets and liabilities of each sub-fund of an umbrella investment fund established as an investment company, ICAV, unit trust, CCF or ILP to be segregated from the assets and liabilities of the other sub-funds of that umbrella, meaning that the liabilities of a sub-fund are discharged solely from the assets of that sub-fund. A sub-fund of an umbrella fund is not a separate legal entity, but an umbrella fund may sue and be sued in respect of a particular sub-fund.

General

There are certain restrictions on Irish alternative funds being structured as either open-ended or closed-ended. For example, a loan-origination QIAIF must be closed-ended and the Central Bank will only authorise property funds structured as (i) closed-ended or (ii) open-ended with limited liquidity as per the Central Bank's AIF Rulebook.

Funds that have the ability to implement a redemption settlement period of more than 90 days are categorised as open-ended with limited liquidity. Master-feeder structures can be established for a variety of reasons, such as to cater for the different tax reporting requirements of certain categories of investors, including US taxable persons, non-US investors and US tax-exempt investors.

AIFs are increasingly being established in Ireland to act as the master fund in master-feeder structures, which include an Irish feeder fund for European investors alongside feeder funds that are domiciled in other jurisdictions, generally Delaware or the Cayman Islands. The use of an Irish master fund in the structure enables the passporting of the Irish master and/or Irish feeder fund throughout Europe using the Alternative Investment Fund Managers Directive (AIFMD) marketing passport.

The majority of investment managers and investment advisers appointed to act for Irish funds are domiciled in other jurisdictions, as the portfolio management activities are often performed outside of Ireland. However, the number of Irish-domiciled investment managers and investment advisers is on the rise, and such entities are generally structured as private companies limited by shares. It is also possible for the alternative investment fund manager (AIFM) to retain portfolio management responsibilities; this is a relatively common model, particularly for less active and/or less liquid portfolios. In such cases, the AIFM may establish an investment committee with input from an investment adviser.

2.1.2 Common Process for Setting Up Investment Funds

If an AIF is structured as an investment company or an ICAV, it will need to be incorporated or registered with the Irish Companies Registration Office or the Central Bank, respectively, prior to an application being submitted to the Central Bank for authorisation of the fund as a QIAIF.

With the exception of limited asset classes that require a pre-submission (namely QIAIFs proposing to invest in Irish property assets or in digital assets), there is a fast-track authorisation process under which QIAIFs can be authorised by the Central Bank within 24 hours (by close of business on the day after submission of the application for authorisation) of filing the requisite documentation with the Central Bank. The prospectus, constitutional document and all material contracts being entered into in respect of the QIAIF must be submitted to the Central Bank as part of the application for authorisation of the fund. The Central Bank relies on confirmations from the fund's directors or manager (as relevant) and its Irish legal counsel that the fund complies with the requirements of the Central Bank.

Prior to the submission of the application for authorisation of a QIAIF, it is necessary to ensure that all service providers have received any requisite approvals from the Central Bank to act for Irish-domiciled funds. This is most relevant for discretionary investment managers that have not previously provided such services to Irish-domiciled funds. Further details of the clearance process for discretionary investment managers are set out in 2.3.3 Local Regulatory Requirements for Non-local Managers.

The timeframe for the establishment and authorisation of a QIAIF (not subject to any pre-submission requirements) generally ranges between six and 12 weeks, taking into account the various operational steps that need to be completed, such as the onboarding of service providers and the opening of various custody accounts, where required.

2.1.3 Limited Liability

Investors are generally only liable for any amounts outstanding on partly paid shares or, in a capital call structure, for any amounts committed but not yet called. The losses that an investor will suffer will be limited to the subscription or commitment amount.

In addition, umbrella funds have segregated liability between sub-funds, which means that the assets and liabilities of a sub-fund are ring-fenced and such assets cannot be used to satisfy the liabilities of another sub-fund.

2.1.4 Disclosure Requirements

Irish investment funds are required to provide investors with a prospectus disclosing key information about the investment strategy, the parties involved and the potential risks relevant to investing in the fund. Certain UCITS and AIFs are also required to provide a key information document (KID) to investors prior to accepting their investment in the fund, in accordance with the requirements of the amended Packaged Retail and Insurance-based Products (PRIIPs) Regulation where those products are made available to investors in the EEA that are not classified as professional investors under MiFID. The rules concerning the UCITS key investor information document (KIID) still apply in certain specific situations.

Irish investment funds are also required to provide financial statements and an annual report on the financial state of the entity to investors. In contrast to the position applicable to an investment company, umbrella ICAVs may publish separate financial statements for each sub-fund.

The disclosure and reporting requirements set out in the AIFMD are applicable to Irish AIFs, including the disclosure requirements set out in Article 23 and the reporting requirements set out in Articles 3 and 24 (also known as Annex IV reporting).

In addition, the Central Bank requires monthly and quarterly returns to be submitted, including details on the gross and net asset value, investor dealing activity, and fees and expenses accrued during the period. Ad hoc regulatory reporting is also required in certain circumstances, such as the suspension of an investment fund, material breaches of the investment policy, or material errors in the calculation of the investment fund's NAV.

2.2 Fund Investment

2.2.1 Types of Investors in Alternative Funds

Investors in QIAIFs are not confined to any particular geographic region, and QIAIFs have also proved popular to investors outside of Europe, including in the Americas and Asia. QIAIFs can be used to invest in a wide range of asset classes and have proved particularly popular for a variety of hedge fund strategies, amongst others.

As investment in QIAIFs is limited to qualifying investors, a wide variety of institutional investors invest in such funds, such as pension schemes and insurance companies, together with private wealth investment comprising family offices and high net worth individuals.

2.2.2 Legal Structures Used by Fund Managers

Entities seeking authorisation as Irish AIFMs in accordance with the AIFMD are typically established as private companies limited by shares.

2.2.3 Restrictions on Investors

Investments in QIAIFs can only be made by qualifying investors, which are typically institutional investors or sophisticated high net worth individuals. QIAIFs require a minimum subscription of EUR100,000, although exemptions can be granted to:

• the fund's manager or general partner;
• any entity providing investment management or advisory services to the fund; and
• a director or employee of any of the above, in certain circumstances.

To view the full article, click here.