Q2 2019 - Ireland as a Fund Domicile: A Success Story
The growth of Irish-domiciled funds has been impressive and continues at pace. Total net assets in Irish domiciled funds stood at EUR 2.5 trillion1 (U.S.$2.8 trillion) at the end of January 2019, continuing the recent double digit growth that the domicile has experienced. In particular, 986 fund managers from 53 countries currently have assets administered in Ireland and 272 of these managers are from North America. Further, 17 of the top 20 global asset managers have Irish-domiciled funds and continue to experience significant inflows, not just from Europe but also globally.
Types of Vehicles
UCITS (Undertakings for Collective Investment in Transferable Securities) is a regulatory framework that creates a harmonized regime throughout Europe for the management and sale of mutual funds. UCITS funds can be registered in Europe and sold to investors worldwide using unified regulatory and investor protection requirements. The UCITS regime was initially launched in 1989 to target retail investors and has over time become increasingly popular with institutional investors. UCITS established and authorized in one E.U. state can be sold into other E.U. member states without the requirement for additional authorization. The “European Passport” is central to the UCITS product, enabling fund promoters to create a single product for the entire E.U. rather than on a per jurisdiction basis. Irish UCITS are currently distributed into over 70 countries globally and are particularly popular in Europe, Asia and Latin America.
Alternative Investment Funds (AIFs) are established under the Alternative Investment Fund Management Directive (AIFMD). The comprehensive regulatory and supervisory framework open up the E.U. as a single marketplace for alternative funds (e.g., hedge funds, private equity funds, real estate funds, lending funds, infrastructure funds or any other structures that do not fit under UCITS) through the creation of a marketing “passport.” Irish AIFs do not have specific legal restrictions on the types of assets they invest in, but the investment policy must be approved.
Since the introduction of the Irish Collective Asset Management Vehicle (ICAV) in 2015, more than 500 vehicles (ICAVs) have been established and registered with the Central Bank of Ireland, generating in excess of U.S.$100 billion in assets under management. The ICAV is now firmly established as the fund vehicle of choice for managers launching new structures and can be established as UCITS or AIFs. The ICAV has largely replaced the Irish PLC or the Part XIII Company.
The ICAV was established under a bespoke piece of funds legislation which removed certain Irish company legal requirements and provides additional benefits such as:
- Financial Statements: The ability to prepare separate financial statements for individual sub-funds (with different financial year ends), rendering the process more relevant for shareholders.
- Tax benefits: The ICAV is also a corporate “check the box” entity and may be treated as a partnership for U.S. tax purposes, offering an attractive vehicle for U.S. taxable investors.
- Lower costs: Directors can dispense with the requirement to hold annual general meetings, upon providing 60 days’ notice to shareholders of its decision.
Investors can also avail of the Common Contractual Fund (CCF), a tax transparent fund vehicle which has become increasingly popular as it enables institutional investors to pool assets into a single fund vehicle with the aim of achieving cost savings, enhanced returns and operational efficiency through economies of scale and availing of double taxation treaties.
Why Irish Funds?
As well as the new ICAV fund structure and CCF growth, there are a number of other important factors which have contributed to this asset growth.
- Ireland is the only English-speaking common law jurisdiction in the Eurozone and is known for its clear and practical regulatory framework.
- Irish domiciled funds are exempt from corporation tax at the fund level and the income is therefore taxed at the level of the investor rather than the fund.
- Ireland is an internationally recognized, open and tax efficient jurisdiction. At 12.5%, Ireland has the lowest headline corporate tax rate in the Organization for Economic Co-operation and Development (OECD) and has tax treaties with over 70 countries, including the U.S.
- Ireland is a committed member of the European Union and will remain so post-Brexit, providing full market access to the E.U. and beyond. Therefore, Ireland offers managers access to the E.U.-wide marketing passport for both UCITS and AIFs.
Options for North American Investment Managers
There are two main options available to U.S. investment managers looking to establish a new fund structure in Ireland.
- Establish their own standalone vehicle. This remains the route taken by the larger, more sophisticated managers who want to retain full control and expect to accumulate substantial assets within 12 months. Increasingly, managers are appointing a third-party management company rather than creating their own.
- Establish a sub-fund on an existing platform. This is a more cost-effective solution, particularly for those U.S. managers who want to test the waters to see what assets they can gather through a European fund vehicle. Service providers are already in place and time to market is quicker and easier.
Key points that U.S. managers should consider when determining if an Irish vehicle is worth launching should include:
- What is the investment strategy of the fund? For example, environmental, social and governance (ESG) strategies are particularly popular with European investors currently.
- Is it a concentrated portfolio? If so, it may not work in a UCITS wrapper due to the diversification requirements. For example, no more than 10% of the net assets of the fund may be invested in instruments of any one issuer and 40% of the assets must not contain exposure exceeding 5% to individual issuers. There are some limited exceptions to this rule. The fund could still be launched as an AIF but some investors may require a UCITS so the strategy may need to be changed to meet these requirements.
- What is the distribution strategy? UCITS funds in particular are very popular in both Asia and Latin America. There are registration costs and requirements in some of the markets that should be factored into this decision as well.
- The AIF structure is particularly popular with managers looking to establish real estate, lending or private equity funds.
Investment managers are increasingly establishing Irish fund structures to mirror their existing Cayman or BVI range. These new structures complement the structures already in place and enable access to additional investors, capital and fund products. It is an exciting time for the funds industry in general and Ireland in particular.
Engaging Alternatives - Q2 2019