knowledge 22 December 2021 |

Central Bank Issues Updated AIFMD Q&A and UCITS Q&A

The updated Q&As (which include new IDs 1151, 1152 and 1153 under the AIFMD Q&A and IDs 1105 and 1106 under the UCITS Q&A) clarify the CBI’s expectations in respect of:

• arrangements involving a non-discretionary investment advisor (an “Advisor”) which provides services to a Qualifying Investor Alternative Investment Fund (“QIAIF”) whereby the Advisor receives a higher proportion of the fees than other service providers to the QIAIF. This update will be of particular interest to firms which intend launching an Investment Limited Partnership (“ILP”) in this jurisdiction. An ILP may be established as a QIAIF and often, in the case of certain private funds, will rely on the services provided by an Advisor; and

• compliance with ESMA guidelines on performance fees in UCITS and certain types of alternative investment fund (“AIF”).

Non-discretionary investment advisors which provide services to a QIAIF

ID 1151 of the AIFMD Q&A clarifies the CBI’s expectations in respect of an arrangement involving an Advisor which provides services to a QIAIF operating a private equity strategy or investing in physical assets which do not qualify as financial instruments. The CBI acknowledges that the role of the Advisor in these fund structures is to provide relevant expertise and a range of services in order to enable the alternative investment fund manager (“AIFM”) (or investment manager, if applicable) to perform their mandate.

In essence, ID 1151 provides for a disclosure-based process which must be complied with to allow for delegation to an Advisor. The disclosures required by the CBI include:

• Identification of the Advisor
  
  Details identifying the Advisor and the services provided should be ‘comprehensively disclosed’ in the prospectus of the QIAIF. The CBI notes these services may relate to identification and origination of investment proposals, due diligence and other operational activities relating to the assets or proposed investments of the QIAIF.

• Fees
  
  The CBI notes that a QIAIF is required to disclose in its prospectus how fees of each service provider are accrued and paid. The CBI states that where such fees are payable directly from the assets of the QIAIF, the maximum fee and the potential to pay out of pocket expenses on normal commercial terms of each of the service providers is to be disclosed in the QIAIF’s prospectus. The CBI also states that where a single figure is disclosed in the prospectus that covers all of the fees payable out of the assets of the QIAIF, the prospectus should disclose that ‘the investment advisor will receive a fee greater than typically paid to a non-discretionary investment advisor’. The CBI also confirms that this disclosure should cross-reference details of the services that the Advisor is providing to the QIAIF in order to provide context for the fee.

• Ongoing oversight and review of services
  
  The CBI also expects the prospectus of the QIAIF to detail the role of the AIFM with respect to its ongoing oversight and review of services provided by the Advisor. Detail to be provided should include information on how the AIFM will discharge its functions under AIFMD Level 2¹, including, Article 75(e) and (f) which relate to delegation of the AIFM functions.

The CBI confirms that it intends to keep these arrangements under review and may conduct additional supervisory initiatives with respect to QIAIFs, including the role of Advisors. The CBI also confirms that the Advisor should only be carrying out a role which is advisory in nature and the AIFM should be in a position to evidence same, if requested by the CBI.

Performance fees in fund structures with multiple managers/advisors

New IDs 1152 and 1153 of the AIFMD Q&A and IDs 1105 and 1106 of the UCITS Q&A implement updates to the ESMA Q&As² which confirm that in the case of a global underperformance of a fund with different delegated portfolio managers performance fees should not be paid to those delegated portfolio managers who have overperformed.

We have set out the key deadlines contained in the new IDs below:

Key Deadlines
ID 1152 (AIFMD Q&A)	The CBI requires that existing multi-manager retail investor alternative investment funds (“RIAIFs”) will have transitioned their current performance fee models into compliance with the ESMA Q&A by 1 January 2023 and will have updated their prospectuses by that time. CBI application forms will be updated shortly.
ID 1153 (AIFMD Q&A)	From 20 December 2021, the CBI will not authorise new multi-manager RIAIFs that have a performance fee structure which does not comply with the ESMA Q&A.
ID 1105 (UCITS Q&A)	The CBI requires that existing multi-manager UCITS will have transitioned their current performance fee models into compliance with the ESMA Q&A by 1 January 2023 and will have updated their prospectuses accordingly by that time. The CBI will update The Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective Investment in Transferable Securities) Regulations 2019 and CBI application forms in due course.
ID 1106 (UCITS Q&A)	From 20 December 2021, the CBI will not authorise new multi-manager UCITS that have a performance fee structure which does not comply with the ESMA Q&A.

Comment

Ireland modernised its ILP fund regime by introducing new legislation in December 2020 which was further enhanced in February 2021 when the CBI introduced new Guidance relating to share class features for closed-ended funds.  The CBI’s acknowledgement of the important role played by non-discretionary advisers to private equity or physical asset funds and the ability of those advisers to receive the significant portion of the fees payable by the fund is a very welcome clarification and greatly enhances the likelihood of the new ILP regime being used by private equity firms.

Our briefing here provides a high-level overview of the ILP fund structure, including an ILP’s key features and the roles and responsibilities of the general partner and limited partner, the QIAIF and the ILP fund authorisation process. For more information in relation to the ILP, or any other Irish investment structure, please feel free to contact one of the members of our team.