From relatively humble beginnings in the late 1980s, Ireland has developed into one of the leading international fund centres, ranking amongst the most flexible and advantageous in the world. This is due in no small part to the wide variety of fund vehicles which may be established under the Irish legal and regulatory system, the existence of a highly developed fund administration industry, and a willingness on the part of the Irish regulatory authorities – the Irish Financial Regulator and the Irish Stock Exchange – and the Irish Government to work with the industry to adapt and develop regulation to meet international promoters needs.
It is worth noting that Ireland is not simply a funds domicile. It is a fund administration centre of excellence, with over USD1.2tr in assets under administration (based on the most recent industry statistics from Lipper Fitzrovia as of 30 June, 2006), across all asset classes. In addition to the mainstay of the domiciled business – the UCITS products – Ireland is recognised as one of the leading administration centres for hedge funds and funds of hedge funds globally, with some commentators estimating that almost 30% of all hedge funds are now administered in Ireland.
Latest available statistics from the Irish Funds Industry Association show:
- NAV of all Irish domiciled funds of over USD900bn (October 2006), across 321 different promoters
- NAV of alternative investment funds administered in Ireland of USD474bn (June 2005)
- 4,034 Irish domiciled and 2,483 non-domiciled funds under administration
- by jurisdiction, the largest promoter groups being from the US, the UK, Italy and Germany.
In coming years, we expect to see Ireland increase its share of the global funds market as UCITS III continues to develop and the new accelerated authorisation regime for the most sophisticated product type takes off. In the background, there is also the possibility of some harmonisation of Europe’s private placement rules for alternative fund products which Ireland is well placed to service.
Without doubt, one of the key factors in Ireland’s success has been people, with an estimated 8,000 now working across the large number of fund administration and custody/trustee services providers, the specialist legal, audit, tax and listing firms, and more recently the consulting firms. Whilst originally Dublin oriented, one of the relatively recent features of the Irish industry has been the expansion of fund administration operations into the regional cities and towns with many of the leading players having significant satellite operations outside the capital. Reflecting this reality, the Dublin Funds Industry Association was recently re-branded as the Irish Fund Industry Association (IFIA).
A short history lesson
In 1987, the Irish Government ‘ring fenced’ for tax purposes an area formerly known as the Customs House Docks in central Dublin, which became known as the International Financial Services Centre (IFSC). The key developments for the funds industry came two years later with the transposition in 1989 of the 1985 UCITS Directive (85/611/EEC) into domestic law by the introduction of the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 1989 (UCITS Regulations), establishing variable and fixed capital investment companies, as well as unit trusts, as UCITS type schemes, and the Finance Act 1989, which exempted IFSC-based funds from corporation tax and capital gains tax and exempted payments made to investors resident outside Ireland from withholding tax.
Following the adoption of the UCITS Directive and the cross-border marketing of UCITS from the IFSC, it soon became clear that there was a demand from investors for non-UCITS products similar to those available to investors in continental Europe. This led to new legislation and the Unit Trusts Act, 1990 was passed. Amongst other matters, that legislation transferred immediate responsibility for the registration, authorisation and supervision of unit trusts from the Registrar of Companies and the then Department of Industry and Commerce to the Irish Financial Services Regulatory Authority (formerly the Central Bank of Ireland) (the ‘Financial Regulator’).
Industry demand also led to the inclusion of Part XIII in the Companies Act, 1990 which created a new legal entity in Ireland, an investment company not subject to the UCITS Regulations, and this was followed in 1994 by the Investment Limited Partnerships Act, 1994 to facilitate mutual investment by institutional investors through the form of a limited partnership, as distinct from a trust or corporate vehicle.
The Finance Act 2000 brought further significant changes for Irish mutual funds, extending the tax exempt regime for IFSC funds to all Irish authorised funds and introducing new provisions with respect to the levying of tax due in respect of Irish resident and taxable investors.
This body of legislation was supplemented by the introduction in 2003 of both the UCITS III Product Directive and the UCITS III Management Company Directive into domestic law, as well as legislation underpinning a tax transparent pooled structure known as a CCF or common contractual fund.
More recently we have seen the Investment Funds, Companies and Miscellaneous Provisions Act, 2005 which introduced segregated liability for investment company umbrellas, cross investment within investment company umbrellas and a non-UCITS version of the CCF.
The Irish regulatory regime
The Irish investment funds regulatory regime is based on relevant domestic legislation – including EU legislation transposed locally – as outlined above, together with detailed sets of Notices and Guidance Notes issued by the Financial Regulator and, for listed funds, the listing rules and policy statements of the Irish Stock Exchange.
The Financial Regulator’s main focus is on both the suitability of the promoter and service providers to the relevant product and the product itself, having set product parameters based on, inter alia, the investor profile, investment diversification and counterparty exposure, leverage/borrowing arrangements, prospectus disclosure rules, related party dealings and audit requirements.
The first step in launching a new product is the promoter approval process – the general rule is that before the Financial Regulator will consider a new fund product, the promoter of the proposed fund must submit a formal application seeking approval to promote an Irish fund, supporting the application with appropriate background information. The Financial Regulator is concerned to ensure that only appropriately experienced reputable promoters are allowed to launch funds from Ireland, with the principal requirements being that the promoter must be regulated, have shareholders funds of not less than EUR635,000 and must have relevant experience in fund management/distribution. Unregulated promoters may be acceptable in certain circumstances.
Additionally, a regulated Irish administrator and a regulated Irish (or foreign branch) custodian must be appointed to the fund and the asset manager must be a regulated entity in its home jurisdiction for asset management business. Specific rules relating to other participants such as prime brokers also apply. The Financial Regulator must also be satisfied as to the directors of Irish funds or of their management companies, and all such appointments have to be pre-approved.
Once the participants meet the regulatory requirements, the focus is on the authorisation regime for the fund itself. The Financial Regulator carries out a detailed pre-authorisation review of the prospectus and of the custody arrangements of each fund based on submission of relevant documentation for review, with a certification regime imposed for most other material contracts to ensure that they meet with the regulatory requirements. The new regime for qualifying investor funds is a notable exception to this process, but that new regime is based on detailed procedures agreed with the industry supported by confirmations from those submitting such funds for authorisation and post-authorisation checks.
In addition to its role in the authorisation of funds, the Financial Regulator is responsible for the on-going supervision of Irish funds, enjoying extensive powers of inspection and intervention in the discharge of its statutory functions. The Financial Regulator has power to revoke authorisations where it appears to it that the provisions of the regulations have been contravened and that the prudential interests of investors are threatened.
Irish fund structures
Irish funds come in two broad regulatory categories – UCITS and non-UCITS – with the main legal structures used being:
- common contractual funds
- unit trusts
- variable capital investment companies.
Fixed capital investment companies and investment limited partnerships are also available, the former as a UCITS only and the latter as non-UCITS only.
UCITS structures
UCITS are the European harmonised fund product which can be sold cross-border within the European Union on a passporting basis, based on an authorisation from the EU member state in which the fund is domiciled. No further authorisation is required in the other member states.
Originally established under a 1985 framework, the UCITS product has been radically overhauled in recent years by virtue of the UCITS III Product and Management Company Directives.
Whilst UCITS continue to be popular for vanilla-type products and impose strict portfolio diversification, counterparty exposure and borrowing requirements, the recent changes in the UCITS product parameters now allow for currency funds, index trackers, funds of funds and funds with significant derivative exposures. UCITS III products are now being used for long/short type products, total return swap type arrangements and portfolios made up of derivatives on baskets of securities and on financial indices.
Much debate has been had over the last number of years regarding specific areas such as exposure to closed-ended funds, the treatment of embedded derivatives etc. and there is currently an EU wide consultation in progress regarding the capacity of UCITS to enter into derivatives on hedge fund indices, with the expectation that such structures will be allowed in the not too distant future. Importantly, in the context of leverage created through derivative positions, strict rules have been laid down regarding the calculation of leverage and exposure positions through leverage, with Ireland now having a clear framework regarding the risk management processes required to be put in place by asset managers or such funds. We understand that these procedures have been reviewed by regulators outside of the European Union and have been considered appropriate and robust.
Because of the necessity to comply with the common European standard, UCITS are the most highly regulated vehicles which can be established in Ireland and operate on the basis of their availability to the ‘man in the street’.
Non-UCITS structures
The non-UCITS structures are a domestic Irish product which do not avail of a European passport and therefore are generally sold on a private placement type basis in other jurisdictions. They have been extremely popular for structuring alternative type funds, in particular hedge funds, funds of hedge funds, real estate funds, private equity/venture capital type funds and master feeder type structures. Non-UCITS can be set up as open-ended, closed-ended or as limited liquidity type schemes and maximum flexibility is ensured in product design.
Each of the non-UCITS structures can be broken down into five sub-categories depending on the type of investor being targeted:
- the retail investor
- the professional investor
- the qualifying investor (institutional/high net worth).
This breakdown is the yardstick which the Financial Regulator uses to gauge the correct level of investment and borrowing restrictions to apply to non-UCITS products.
The Financial Regulator has issued a series of Notices which set out, inter alia, the investment and borrowing restrictions applicable to all vehicles, assuming a lowest common denominator. It is then up to the promoter to take advantage of the Financial Regulator's additional notices which disapply, either in full or to a given extent, those standard restrictions, either by virtue of the nature of the portfolio or the targeted investor profile.
Once the legal structure has been decided – unit trust, CCF, investment company, limited partnership – investor profile will then dictate the regulatory parameters of the scheme as follows:
Retail scheme
If a fund has no minimum subscription, or if it imposes a minimum subscription of less than EUR125,000, it will be considered to be a retail scheme. This type of fund is regularly used where the principal target market is retail investors outside the EU; it can of course be used within the EU but will not benefit from any European UCITS passport.
Even though its investment and borrowing restrictions are quite stringent (quite similar to UCITS), it is a very popular vehicle. A retail scheme's general investment restrictions prohibit it from investing more than 10% of its NAV in securities which are not listed or traded on an approved market, more than 10% of NAV in the securities of any one issuer, no more than 10% of its NAV in any class of security issued by a single issuer and borrowings cannot exceed 25% of NAV. There are, of course, carve out for retail fund of funds, real estate funds, private equity funds, retail fund of hedge funds, etc.
Professional scheme
If a minimum subscription requirement of at least EUR125,000 per investor is imposed, a fund will be considered to be a professional scheme. That means that the standard investment and borrowing restrictions that apply to a retail scheme can be disapplied to the extent agreed with the Regulator. Currently the Financial Regulator will allow investment in listed and unlisted securities subject to a general maximum of 20% of NAV in any one issuer. However, it is a case by case approach. Once appropriate security is put in place, a professional scheme can be leveraged to about 1:1.
Qualifying investor scheme
A qualifying investor scheme is one which must:
- impose a minimum subscription requirement of EUR250,000 per investor
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be marketed solely to the following qualifying investors:
- – any institution which owns or invests on a discretionary basis at least EUR25m or;
- – any individual with a minimum net worth in excess of EUR1.25m.
Institutions may not group amounts of less than EUR250,000 for individual investors unless pursuant to a fully discretionary investment mandate. Qualifying investors must self-certify that they meet these minimum criteria, and that they are aware of the risk involved in the proposed investment and of the fact that inherent in such investments is the potential to lose all of the sum invested. Exemptions from the qualifying criteria and minimum subscription requirements can be granted to the Investment Manager, the Directors and so-called ‘knowledgeable employees’.
There are virtually no investment restrictions imposed on qualifying investor schemes (QIFs) and no leverage and borrowing limits. Disclosure is the key.
The Irish Stock Exchange
The Irish Stock Exchange (ISE) is recognised worldwide as the leading centre for listing investment funds and currently lists over 4300 funds and sub-funds. The ISE lists all types of funds and has developed specific requirements to facilitate feeder funds, futures funds, hedge funds, property funds, venture capital funds and index tracker funds. The ISE pioneered the listing of hedge funds and funds of hedge funds and remains the listing centre of choice for many major hedge fund houses.
A listing on the ISE provides funds with many advantages including an increased profile, access to institutional investors who may only invest in listed products, and a publicly available NAV. The ISE constantly strives to keep its listing rules in sync with market developments. Recent policy changes in relation to derivative funds and side pockets highlight the ISE’s ability to react quickly to new products in the market while ensuring that an appropriate and proportionate listing regime is maintained.
The ISE has an experienced team of fund listing specialists who review listing applications in accordance with strict timeframes. Cumulatively the team has in excess of 50 years experience in listing both mutual and alternative investment funds. The combination of an experienced team together with strict review timetables enables promoters to get their products to market in an efficient manner without compromising the integrity of the listing process.
Key recent Irish developments
New QIF authorisation regime
Following discussions over several months between industry representatives and the Financial Regulator, new authorisation processes and enhanced product parameters for QIFs were introduced in February 2007.
As indicated above, QIFs are non-UCITS products available as investment companies, unit trusts or common contractual funds (single or umbrella with segregated liability) which have a minimum subscription requirement per investor of EUR250,000 (or equivalent) and which can be sold only to qualifying investors.
QIFs are the vehicles which are most frequently used in the alternative space – hedge funds, funds of hedge funds, venture capital/private equity, real estate funds etc – and are a mainstay of the non-UCITS Irish domiciled product offering.
The new authorisation regime provides that, subject to meeting pre-agreed parameters, a QIF will now be capable of being authorised by the Financial Regulator on a filing only basis so that once a complete application for authorisation is received by the Financial Regulator before 15:00 on day X, a letter of authorisation for the QIF can be issued by the Financial Regulator on day X+1.
There will no longer be a prior review process. A complete application will be one where all the relevant parties to the QIF (promoter, directors and relevant service providers) are all approved (i.e. have the appropriate authorisations/approvals from the Financial Regulator) and the QIF itself reflects the agreed parameters with confirmations issuing from the fund and certain service providers.
Master/feeder
The Financial Regulator has clarified its position for QIFs wishing to invest on a master-feeder basis into an ‘unregulated fund’. Normally a QIF can invest no more than 40% of net assets in a single unregulated fund, but an exception to the general rule may be applicable where the underlying fund is managed within the QIFs promoter's group, the group involved is a large institution with a proven, relevant track record, and the group provides adequate comfort in relation to its control and supervision of the unregulated fund.
The Financial Regulator clarified in June 2006 that it expected that a promoter looking for such flexibility would have a minimum capital of approximately EUR100m, assets under management in the region of EUR4bn, and had carried out asset management activity for a minimum of 10 years. It also clarified what it meant by ‘adequate comfort’ and indicated that derogation requests must be submitted by the investment manager and approved in advance of submitting a formal application for authorisation.
Real estate funds
2006 also witnessed a significant overhaul of the Irish regulated real estate funds regime making Ireland a competitive jurisdiction for such products going forward, particularly for QIF funds. The main changes allow title to real estate be registered in the name of the fund itself or of an underlying SPV (subject to a control process at the custodian level). Far more flexibility in terms of the types of real estate assets in which such funds can invest has also been provided as has flexibility in the investment mechanics, with the use of SPVs on a layered basis now being permitted without restriction and clarification brought to co-investment and joint venture type investments.
Other asset classes
2006 also saw clarity from the Financial Regulator regarding investments by non-UCITS schemes in unit-linked life products, with the Financial Regulator issuing guidance in the last number of months followed by further clarification on a case by case basis.
