Irish fund administrators reckon using the Qualifying Investor Alternative Investment Fund (QIAIF) vehicle to domicile a fund in Ireland make perfect sense for private equity managers raising capital from investors throughout Europe.
Despite its excellent record of servicing and administering alternative assets, Ireland has not attracted as much private equity fund business as its rivals in Guernsey, Jersey and Luxembourg. “Ireland has not historically been a centre for private equity,” says Hugh Stevens, head of private equity administration at BNP Paribas Securities Services. “They are somewhat behind Luxembourg and other jurisdictions as being the domicile of choice for private equity. While Ireland has been pushing itself as a private equity domicile, it has yet to fully take off.”
Take-off might just be imminent. Irish regulators and administrators are certainly working hard to enhance the appeal of Ireland to private equity managers –not least by keeping its fund options simple. “The Irish market is straightforward in that there are UCITS, which are totally unsuitable for the traditional unlisted private equity structure, and Alternative Investment Funds (AIFs),” says Donnacha O’Connor, partner at Dillon Eustace in Dublin. “Within that AIF bucket, there are retail AIFs and Qualifying Investor Alternative Investment Funds (QIAIFs). QIAIF is the predominant fund for everything that is not UCITS. A QIAIF is essentially characterised by having very few portfolio constraints other than those imposed by the Alternative Investment Fund Managers Directive (AIFMD).”
Private equity funds established as QIAIFs above the €500 million threshold must of course comply in full with the AIFMD. That entails appointing a depositary. Although private equity depositaries do not incur strict liability if assets are lost, finding providers has proved challenging, as most depositaries active in Ireland do not possess the skills to monitor private equity fund assets.
AIFMD also requires an independent valuation of those assets. If undertaken internally by the private equity firm, such valuation must be performed by colleagues who operate separately from deal teams, portfolio managers and individuals who decide remuneration. This represents a change of practice for private equity firms. Historically, deal teams carried out valuation tasks, which were then sent to colleagues in financial control, prior to submission to an internal valuation committee. Valuing private equity assets is not only intrinsically difficult, but is increasingly contentious between private equity managers and regulators. Inevitably, some firms will struggle to provide their reports in the 30 day time-frame laid down by the AIFMD.
The good news is that actually obtaining regulatory approval for a QIAIF in Ireland is simple and - according to a briefing by law firm Matheson - fast. Authorisation will usually be secured within 24 hours of a completed application form signed by the directors filing being submitted to the Central Bank of Ireland (CBI).
In the form, the directors have to explain the organisational structure of the QIAIF, including information on how its management will ensure the fund complies with its obligations under AIFMD; provide information on the remuneration policies and practices of the AIFM; share information on arrangements made for any delegation of duties to third parties; and make a statement of responsibility for the fulfilment of these obligations.
In the case of an externally managed QIAIF, the number of signatories gets long and complicated. Individual questionnaires must be signed by each director and senior manager, and any individual who has a direct or indirect shareholding or interest in the AIFM exceeding 10 per cent of the capital or voting rights. They must be joined by any individual who exerts significant influence over the management of the funds.
The long list of signatories is more than compensated by the generosity of the Irish tax system to private equity funds. Irrespective of whether the private equity fund is established as an investment company, unit trust or investment limited partnership, Irish funds are exempt from Irish taxation on income and gains derived from their portfolios, and they are not subject to any Irish tax on their net asset value.
“The legal structure in Ireland means that private equity funds are exempted from income taxation and capital gains tax,” explains Donnacha O’Connor. “While these tax provisions were originally intended for the Irish securitisation business, they have been readily embraced by all fund managers, and private equity is no exception. There has been talk about changes to Irish tax law but the government is pragmatic. I doubt it will be extended to funds. If it is, the funds industry will leave and relocate to Luxembourg.”
That is unlikely to happen while Ireland is still looking to attract private equity funds, and its growing success with real-estate funds and infrastructure funds suggests the country has good reason to be optimistic. “The Irish real estate market is open and transparent and growing, and has been since the financial crisis in Ireland,” says Hugh Stevens. “Domiciling a real estate fund in Ireland has enormous benefits. Most real estate has historically been domestic focused, but it is fast becoming a global asset class. Guernsey and Jersey are non-European Economic Area jurisdictions so the rules around AIFMD are less clear-cut. Ireland, however, will allow these managers to use the AIFMD passport so they can market beyond their home jurisdictions across the EU.”
For private equity funds, that marketing benefit may be the clinching consideration. “Admittedly, a lot of the private equity houses closed to fund-raising prior to 2011 and so they are out of scope for the AIFMD,” argues Donnach O’Connor. “But Ireland is in the EU, so any fully compliant AIFMs will enjoy the benefits of the marketing passport.”
Matheson: Establishing a Private Equity Fund in Ireland