The Operational and Compliance Benefits that Establishing an Irish Fund May Have for U.S. Managers
Why establish your fund in Ireland?
Ireland has become a key strategic location for investment funds employing over 13,000 people directly in investment fund related activities. Irish domiciled funds had aggregate NAV of $2.6 trillion at Q1 2017, with growth ranging on average of 16% per annum since 2010, and Brexit has resulted in a further increase in activity.
Key benefits for a U.S. fund manager establishing in Ireland are:
- Ireland is a centre of excellence for funds with a strong infrastructure to provide access to the EU market of 500 million people.
- AIFs authorised in Ireland can be sold across the EU under a marketing passport.
- Ireland has a strong open Euro Zone economy with a politically stable government and a legal system based on common law, an independent judiciary and strong property rights.
- Irish funds are not subject to any fund tax, and non-Irish tax resident investors are not subject to Irish tax. The corporation tax rate is 12.5% with double tax agreements with 70 countries.
- Ireland has been particularly innovative in the funds industry becoming the first EU member states to introduce a specific regulatory framework for loan originating investment funds. Recent enhancements to this regime make loan origination funds even more attractive for promoters, managers and, most importantly, investors
- The introduction of a new investment vehicle called an Irish Collective Asset-Management Vehicle (“ICAV”) in 2015, a corporate vehicle designed for Irish Investment Funds. It may be established as an umbrella structure with a number of sub-funds and share classes, and has “check-the-box” functionality for U.S. investors.
- Ireland has a clear and practical regulatory framework.
The AIFMD Compliance Framework
The Alternative Investment Fund Managers Directive ("AIFMD") refers to the EU law implemented in 2013 following the global financial crisis. AIFMD introduced regulation that impacts the management of hedge funds, private equity, real estate funds and other alternative investment funds in the European Union. The big benefit associated with AIFMD is that it can facilitate the marketing of funds managed by an EEA1 AIFM to professional investor’s based in the EEA - a market with some 500 million+ inhabitants.
The Central Bank of Ireland (“CBI”) has configured the AIFMD management functions into six headings.
- Regulatory Compliance
- Fund Risk Management
- Operational Risk
- Investment Management
- Capital & Financial Management
* As outlined in CBI Guidance of 19 December 2016. The CBI also requires that the chair of the board of the AIFM assume responsibility for the organisational effectiveness of the AIFM to ensure that it is and remains fit for purpose, with due consideration for conflicts of interest and supervision of its delegates.
Outsourcing of AIFMD Compliance Functions
Whilst the cost and resource involved in establishing and operating its own EU AIFM is likely to suit only a larger scale investment manager, there are various compliance outsourcing solutions available through third-party service providers. Although AIFMD envisages delegation of certain management functions, it is clear that substance in the EU is expected and that delegation of management functions to the point of the AIFM becoming a letter box entity is not permitted. However, management functions may be delegated provided that certain conditions are met. This can be an attractive option for U.S. investment managers. Each model described below allows for the delegation of the portfolio management function to a U.S. investment manager.
Outsourcing Models ansd Benefits
1. Self-Managed AIF
A U.S. investment manager could choose to establish a self-managed AIF, and this would typically be structured as a sub-fund of a dedicated ICAV platform established by the manager. The AIF may apply itself to the CBI for authorisation as an AIFM; however this is quite a time consuming process, and typically takes eight or nine months from a standing start. In this case, the board of the AIF assumes responsibility for compliance with the requirements of AIFMD. In its execution, the AIF must of course be capable of evidencing to the regulator its thorough compliance with the requirements of AIFMD resulting in additional costs, as it will need the requisite level of local compliance expertise. From an outsourcing perspective, the AIF’s board could seek the support of “designated persons,” whereby suitably experienced individuals, pre-approved by the CBI, are appointed to support the board in respect of certain of the AIFMD management functions. The liability for non-compliance, however, remains with the board. A fund manager may also weigh up the monetary cost to investors of the self-managed model as against opting for an outsourcing model. The size of the AIF should warrant the resources expended to achieve AIFMD compliance. The self-managed model does not offer the benefits of an arm’s length oversight of the AIF. Investment managers, who are at a physical remove from the location of their fund, may consider the benefit of an external AIFM which can offer a local, independent oversight of the fund and its appointed service providers.
2. External AIFM
An increasingly common alternative is for the AIF to appoint an external AIFM, a fund management company that is independently authorised by the CBI to fulfil the role of AIFM. It is a separate legal entity, appropriately capitalised and staffed, with a suitably experienced board of directors. In appointing an external AIFM, the AIF delegates compliance with AIFMD in respect of the AIF to the AIFM. The responsibility for AIFMD compliance then sits with the board of the AIFM and not with that of the AIF. The AIFM then typically delegates the portfolio management back to the U.S. investment manager (subject to authorisation by the CBI). A major advantage to this option is that it significantly reduces the critical path to launching the fund as a local AIFM will already have the requisite regulatory approval. It is possible to launch an AIF within three months under this model. Economies of scale can also be expected and this may suit an AIF with a lower asset under management figure. A reduced regulatory cost could free up resources to be directed at core activities, including fundraising and marketing. The appointment of an external AIFM should ideally leave an AIF with the financial and regulatory relief of delegating to an external party on appropriate commercial terms, with the flexibility that a third-party appointment offers for future change. An AIFM may also seek authorisation from the CBI to act as a UCITS ManCo, giving it “Super ManCo” status and offering additional flexibility to investment managers who may wish to market different products under both headings but outsource the associated compliance function.
An alternative option is to have the local AIFM take the discretionary investment decisions for the fund, where the AIFM acts under the advisement of the U.S. sub-advisor. In this instance, there is no requirement for the sub-advisor to seek authorization from the CBI.
3. Hosted Platform
A more cost effective and expedient variation of option 2 above is where the AIF is structured as a sub-fund of the AIFM’s hosted umbrella ICAV platform. Here, the U.S. investment manager can avail of economies of scale by leveraging the AIFM’s pre-established infrastructure, including board of directors, AIFM, administrator, depositary and auditor. As the directors and company secretary are common to the platform, their costs are allocated across each of the hosted sub-funds. It is possible to launch an AIF within two months under this model. A hosted platform solution is akin to “plug and play,” and may be suitable for AIFs where there is uncertainty on the ultimate fund size. This option is facilitated by the flexibility of the ICAV investment fund vehicle, and in particular the segregation of assets and liabilities between sub-funds. The benefits associated with this option are the speed-to-market and the lower operating and establishment costs; however this should be weighed up against the inability to appoint directors or choose the service providers.
The outsourcing of AIFMD compliance functions can take different forms to suit U.S. managers of varying size and needs. In each form, the benefits include a local knowledge of the requirements and a freeing up of the U.S. investment manager’s time and resource to focus on its core expertise, in a cost efficient manner.
Tom Brennan is a partner with EisnerAmper Dublin; Carol O’Sullivan is a director with Davy Investment Fund Services (“DIFS”) and Graham Roche is a senior manager with DIFS. DIFS is part of the Davy Group which was established in 1926, and has “Super ManCo” status. In 2014 it was authorised by the Central Bank of Ireland as an Alternative Investment Fund Manager (‘AIFM’), and in 2017 it was authorised to act as a UCITS ManCo.
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