Full Steam Ahead for the Investment Limited Partnership
Ireland’s new legislative framework for Investment Limited Partnerships (“ILPs”) entered into effect on 1 February 2021. The next day, the Central Bank of Ireland published (here):
- guidance on share class features of closed-ended qualifying investor alternative investment funds (“CE-QIAIFs”), which will facilitate, inter alia, different levels of investor participation within the same QIAIF, which is a common feature of closed-ended vehicles (the “CE-QIAIF Guidance”);
- guidance setting out the Central Bank’s requirements for depositaries of assets other than financial instruments (“DAoFI”) seeking authorisation under Regulation 22(3)(b) of the AIFM Regulations (the “DAoFI Guidance”); and
- updated AIFMD Q&A to include new Q&A relating to the authorisation of a DAoFI and the scope of the defined term “issuing body” as contained in the AIF Rulebook.
The new guidance issued by the Central Bank is intended to complement the existing regulation of QIAIFs. Following on from the above changes, Ireland now has a modern, flexible, limited partnership legal structure and regulatory framework, consistent with those available in other international funds domiciles.
Overview of the Investment Limited Partnership
The Investment Limited Partnerships Act 1994 (the “Act”) provides for the establishment of a regulated ILP structure. This Act has recently been amended by the Investment Limited Partnerships (Amendment) Act 2020 (the “ILP Amendment Act”), which has modernised the Irish ILP structure in order to reflect changes in, and to cater for common features utilised within, the global private funds market. Since 1 February 2021, it is possible to establish an ILP which is regulated pursuant to this modern and more flexible regulatory framework, which is outlined in more detail in our briefing here.
The CE-QIAIF Guidance
An ILP may be authorised as a retail investor alternative investment fund (“RIAIF”) or a QIAIF, which may be either open-ended or closed-ended. However, in practice, given the type of investment strategies that are typically pursued by limited partnership vehicles, and the fact that investors in an ILP tend to be institutional and sophisticated investors, most ILPs will likely be QIAIFs and, in the main, CE-QIAIFs.
The Central Bank’s AIF Rulebook sets out the conditions which the Central Bank imposes on investment funds, including QIAIFs, as well as on fund service providers. Generally under the AIF Rulebook, the capital gains/losses and income arising from the assets of a QIAIF must be distributed and/or must accrue equally to each unitholder relative to their participation in the QIAIF, subject to certain exceptions.
The CE-QIAIF Guidance, which follows on from an earlier consultation (CP 132), published by the Central Bank in November 2020, sets out further instances where a CE-QIAIF will be able to differentiate between share classes and/or investor participations/interests1 in the CE-QIAIF (e.g., the allocation of the returns of specific assets to particular share classes and/or investors).
This is subject to the fulfilment of a number of requirements relating to both the features of the relevant share class and ensuring investor protection.
According to the CE-QIAIF Guidance, a CE-QIAIF will be permitted to establish differentiated share classes to reflect one or more of the following features (the “Features”):
- issue of shares at a price other than net asset value (“NAV”) without the prior approval of the Central Bank;
- excuse and/or exclude provisions;
- stage investing; and
- management participation.
In order for a CE-QIAIF to provide for share classes which cater for one or more of the Features and to allocate the returns of a specific asset to one or more share classes, it must fulfil the following five general conditions:
- the CE-QIAIF’s constitutional document must provide for the ability to establish differentiated share classes providing for these Features, which must be disclosed to unitholders in advance;
- the CE-QIAIF’s prospectus must permit the establishment of differentiated share classes which provide for different levels of participation within the CE-QIAIF;
- the unitholder’s interest in a CE-QIAIF must be proportionate to:
- the capital it has paid into the CE-QIAIF at a particular point in time; and/or
- the pre-determined flow of capital returns to the share class; and/or
- the extent to which the share class held by the unitholder participates in the assets of the CE-QIAIF;
- where the investor has subscribed to the CE-QIAIF on the basis of a capital commitment and drawdown mechanism, the CE-QIAIF must maintain records on a per-investor basis to enable it to clearly identify commitments paid and commitments outstanding for each investor (“capital accounting”), and
- the capital accounting methodology must be consistent with the requirements of Commission Delegated Regulation 231/2013.
The CE-QIAIF Guidance also sets out additional conditions for each Feature (i.e., (i) shares issued at prices other than NAV; (ii) share classes enabling the exercise of excuse and/or exclude provisions; (iii) stage investing; and (iv) share classes providing for management participation).
An AIFM must appoint a depositary for each AIF it manages, pursuant to Regulation 22 of the European Union (Alternative Investment Fund Managers) Regulations 2013 (the “Regulations”), which transpose the Alternative Investment Fund Managers Directive 2011/61/EU (“AIFMD”) into Irish law.
Typically, the ability to carry on the role of a depositary is restricted to certain types of institutions, such as a credit institution, investment firm or investment business firm. However, for closed-ended funds, which do not generally invest in assets that must be held in custody, the Regulations provide for a lighter regime whereby another entity which carries out depositary services as part of its professional activities may carry out the depositary functions provided it is authorised to do so and it can provide sufficient financial and professional guarantees to enable it to perform the depositary functions efficiently.
The DAoFI Guidance sets out the Central Bank’s requirements for an entity seeking such an authorisation under this lighter regime, including requirements regarding: eligibility; capital; the application of the AIF Rulebook; professional indemnity insurance cover; financial and non-financial assets; AIFs to which a DAoFI may be appointed; and disclosure. The Central Bank’s updated AIFMD Q&A provide additional information on some of these issues.
According to the DAoFI Guidance, it will only be possible to appoint a DAoFI in respect of a QIAIF and the Central Bank expects that such QIAIFs will materially invest in illiquid assets. While the Central Bank does not set out an exhaustive list of the type non-financial assets that would automatically be acceptable for a DAoFI to safe-keep, it considers that these will include documents of title for asset classes such as infrastructure, intellectual property, plant and equipment, land, art and wine. The Central Bank Q&A set out a list of such asset classes, which will be updated from time to time.
Where an AIF in respect of which a DAoFI is appointed invests in financial instruments which are the subject of custody obligations, the DAoFI may either:
- appoint a sub-custodian to custody these assets and concurrently discharge its liability to the AIF in respect of these assets; or
- hold additional capital.
The AIF Rulebook provides, subject to some exceptions, that neither a RIAIF nor a QIAIF (nor its management company, general partner or AIFM) may acquire any shares carrying voting rights which would enable the RIAIF or QIAIF to exercise significant influence over the management of an “issuing body”.
The Central Bank has updated the AIFMD Q&A to confirm that, in this case, the term “issuing body” includes an “issuer” as defined in Regulation 5(1) of the Regulations.2
The regulatory framework applicable to ILPs has changed substantially over the last few months with the introduction of the ILP Amendment Act, the new CE-QIAIF Guidance, the new DAoFI Guidance and the updated AIFMD Q&A. As a result, Ireland now offers the full suite of preferred legal structures for real asset/private equity investment, which, coupled with Ireland’s extensive and experienced professional services sector, makes Ireland a jurisdiction of choice for such investments.
- In the context of the CE-QIAIF Guidance, references to “shares” or “share classes” includes reference to the nature of the participation in the CE-QIAIF (i.e., depending on the legal structure, this may be by way of units, share classes or, where the product is not unitised (e.g., in the context of an ILP), participations/interests).
- Pursuant to Regulation 5(1) of the Regulations, "issuer" means an issuer within the meaning of point (d) of Article 2(1) of Directive 2004/109/EC where that issuer has its registered office in the European Union, and where its shares are admitted to trading on a regulated market within the meaning of Regulation 3(1) of the European Union (Markets in Financial Instruments) Regulations 2017.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.
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