Asset Management Intelligence - May 2015 - Ireland – The Home of Alternative Investments
I was talking recently to a Dublin-based client who is an asset manager for a large U.S. private equity firm. I asked him what drove him to set up in Ireland – why are he and his firm in Ireland? His answer surprised me. “It wasn’t in the plan,” he replied. “I came to buy assets; I stayed for the Irish welcome.”
In this article, I will set out certain market trends that are helping Ireland develop as the location of choice for private equity asset managers.
Ireland serving hedge funds and structured products
Within the alternative investment universe, Ireland has long been recognized as a leading location for hedge funds and structured products.
The Irish funds industry has been phenomenally successful over the past 25 years in the domiciling and administration of hedge funds. In fact, over 40% of global hedge fund assets are serviced in Ireland, making it the largest hedge fund administration center in the world and Europe’s leading hedge fund domicile.
In addition, for over two decades, Ireland has had a tax regime, known as Section 110, designed to ensure that special purpose vehicles (“SPVs”) may be established in a tax-neutral manner. Together with the country’s extensive tax treaty network with over 70 countries, this has meant that Ireland is highly regarded as the location of choice for international arrangers for the establishment of SPVs for CDOs, CLOs, distressed debt, repackaging, RMBSs, U.S. life settlements, and other structured finance transactions.
Opportunities in private equity emerging for Ireland as a result of the financial crisis
The financial crisis immensely impacted Ireland’s economy, resulting in the collapse of the banking sector and causing property prices to fall by more than 50%. This created opportunities for a number of the largest U.S. private equity managers who have since been actively purchasing real assets and distressed debt in the Irish market.
As recovery begins to take hold these private equity investors are exiting their Irish investments. The country’s investment community is now focused on ensuring that these investors continue to use Ireland as a location for domiciling and servicing their global private equity investment strategies. There are also certain market trends observable at present which point to this being an opportune time for Ireland to leverage its hedge fund and structured finance expertise to develop as the leading location for private equity.
Trend #1: Move to regulated jurisdictions
Since the financial crisis, demand for regulated, onshore funds has been growing strongly and this trend is expected to continue as regulatory changes such as the Alternative Investment Fund Managers Directive and Dodd-Frank are fully implemented.
Trend #2: Capitalise on EU initiatives to promote non-bank finance
The EU has developed frameworks such as the European Venture Capital Fund (“EuVECA”) and the European Long Term Investment Fund (“ELTIF”) and is currently consulting on a strategy to develop a Capital Markets Union within the EU. The Commission’s Capital Markets Union Green Paper singles out private equity as a target area for future growth which would benefit from a more harmonized EU framework.
Trend #3: Combined strategies
Increasingly, hedge fund managers are seeking to adopt private equity strategies into their portfolios, also known as “hybrid strategies.”
Ireland’s response to this opportunity
In response to this opportunity, the investment community in Ireland has been working hard to ensure that the country meets the needs of private equity managers. For example, the Irish Funds Industry Association has recently established a private equity committee to engage with the industry and government to identify areas for development.
Another example of this commitment to the alternative investment industry is the recently published Irish Collective Asset-Management Vehicle (“ICAV”) Bill 2014 that has been welcomed by global fund promoters and, in particular, private equity firms.
The ICAV is being created in response to both industry and investor demands for a fund-specific vehicle that reduces the administrative burden on investment funds and provides a tax effective structure for U.S. investors. A distinct advantage of the new ICAV is that it will be considered to be an “eligible entity” for U.S. tax purposes, whereby it can elect to “check-the-box.” This is an important feature for U.S. investors and is a common feature of offshore fund structures, such as Cayman master-feeder funds. If a check-the-box election is made, the ICAV will be considered to be a tax transparent entity for U.S. federal income tax purposes, which, in some circumstances, can produce better results for U.S. taxpayers.
The opportunity for Ireland lies in developing the Irish welcome that my client received while continuing to respond to the needs of the global private equity industry. U.S.-based alternative managers considering their global investment structuring and servicing requirements will view Ireland as a domicile that is enthusiastic about helping them to grow their business. Already viewed as a leading location for hedge funds and structured finance, I expect Ireland to develop as a leading location for private equity managers in the coming years and cement its reputation as the home of alternative investments.
Asset Management Intelligence - May 2015
- Ireland – The Home of Alternative Investments
- The New (and Difficult) Environment for Emerging Managers
- New Consolidation Guidance Addresses Concerns of the Investment Management Industry
- Alternative Investment Industry Outlook for Q2 and Remainder of 2015
- State Income Taxation of Cross-Border Asset Management Services
- Insider Trading: More Confusion or Clarity?