Focus On Private Funds Will Boost Ireland's Global Standing

This article was originally published by Law360. 

It is no secret that in recent years, investors and managers have become increasingly focused on private markets and the private funds that provide access to them.

This interest has been primarily driven by the expectation that public markets will offer reduced returns in the future, with outsized returns being more likely to occur in private markets going forward.

As such, institutional investors and pension funds among others are now allocating greater portions of their capital to private markets via private equity, private credit, direct lending, loan origination, infrastructure, property and venture capital funds¹.

Ireland is, without question, a leading fund domicile for highly regulated investment funds, including, in particular, undertakings for collective investment in transferable securities, undertakings for collective investment in transferable securities-based exchange-traded funds and money market funds.

However, for various reasons, it hosts smaller levels of alternative assets compared with its peers and is at risk of not being in an optimum position to capitalize on the ascending trajectory of the private funds space.

We believe that it is crucial for Ireland to enhance its private funds offering to maintain its standing as a global domicile for investment funds as the market increasingly pivots to private funds.

In this article we will discuss some of the issues that have contributed to Ireland's sluggish move toward private assets, while also highlighting some recent developments that point toward a brighter future.

Background

When it comes to alternative investment funds, a key distinction between Ireland and other jurisdictions is Ireland's approach to fund or so-called product-level regulation.

Currently, the framework in Ireland is broadly such that both the fund and the alternative investment fund manager must be regulated — this additional product-level regulation has led to practical complications and the slower-than-expected development of Ireland as a domicile for private funds.²

The two most popular and well-known private fund products in Ireland are qualifying investor alternative investment funds³ and loan originating qualifying investor alternative investment funds,⁴ both of which are regulated at product-level by the Central Bank of Ireland, or CBI, pursuant to the alternative investment fund rule book and its associated guidance⁵.

The additional CBI product-level rules have led to some challenges when it comes to the structuring of certain types of private funds in Ireland.

Some examples of this include:

• The broad application of the prohibition on granting loans by qualifying investor alternative investment funds: Only loan originating qualifying investor alternative investment funds can engage in loan origination, and the prohibition on a qualifying investor alternative investment fund from acting as a guarantor on behalf of third parties — these prohibitions are not consistent with how typical private equity strategies operate and the typical fund financing arrangements, such as bridge financing, put in place by private funds; and
• The rules and requirements in the CBI's alternative investment funds Rulebook in relation to investment through subsidiary companies, which are practically burdensome in the private funds space and go beyond the protections set out in the Alternative Investment Fund Manager Directive⁶.

Until recently, the only real alternative to the qualifying investor alternative investment fund or the loan originating qualifying investor alternative investment fund for a private fund in Ireland was a partnership structure set up under the Limited Partnership Act of 1907 — the only fund product not regulated by the CBI⁷.

To date the 1907 limited partnership has been predominantly used in the venture capital industry, for infrastructure funds and, on a smaller scale, for private equity.

However, as the 1907 act was not drafted specifically for the funds industry,⁸ there are a number of difficulties with using the structure for private funds, making it less popular than equivalent structures available in other jurisdictions.

These include the lack of a value-added tax exemption on management services, which is currently available only to funds regulated by the CBI; limits on the number of investors a 1907 limited partnership may have; and effectively requiring 1907 limited partnership to be funded via debt or loans, rather than equity. For these reasons it has not attracted widespread use.

Recent Developments

There have, however, been some promising developments recently with the introduction of an updated, flexible European long-term investment fund, or ELTIF, framework and the recognition in the Department of Finance's Funds Sector 2030 review that further attention and development of Ireland's private funds offering is needed if Ireland is to establish itself as a serious player in the area.

Irish ELTIF

With the introduction of the ELTIF in Ireland in March, a new regulatory wrapper is available for private funds in Ireland. This is more flexible, in many respects, than the current regimes that apply to qualifying investor alternative investment funds and loan originating qualifying investor alternative investment funds. 

We believe that the professional investor-only ELTIF, in respect of which there are limited investment restrictions, and to which restrictions apply across all European jurisdictions, offers a significant opportunity for Ireland.

We expect that the professional investor-only ELTIF will likely be an attractive option in Ireland going forward as an alternative to the qualifying investor alternative investment fund or the loan originating qualifying investor alternative investment fund — in addition to its promise in enabling the retailization of private assets that an ELTIF targeted at retail investors offers.

This is primarily due to the lack of additional Irish product-level investment restrictions on the professional investor-only ELTIF and the professional investor-only ELTIF's status as a regulated product⁹.

The table below highlights the flexibility and opportunity that the professional investor-only ELTIF presents for private funds in Ireland, and also provides an overview of some of the key considerations relevant to private fund structuring in Ireland. It has been prepared on an asset class agnostic basis in order to highlight the full range of considerations and options in one table.

Note that certain of these considerations may not be relevant or important for particular asset classes or structures.