AIFMD implementation in Ireland and private equity schemes
September 2013 | SPECIAL REPORT: PRIVATE EQUITY
Financier Worldwide Magazine
Ireland is well known as a fund domicile, and though it is perhaps better known as a domicile for UCITS funds and hedge funds, it is home to a growing number of private equity funds. It has been home to a funds industry for over 20 years and hosts or services the funds of over 850 international sponsors currently across all asset classes representing close to €2 trillion in assets.
Irelandhas now implemented the EU Alternative Investment Managers Fund Directive (the ‘Directive’ or ‘AIFMD’) into Irish law pursuant to the EU (Alternative Investment Fund Managers) Regulations 2013 (the ‘Regulations’). The Regulations are supported by a framework of rules and guidance issued by the Central Bank of Ireland (the ‘Central Bank’) in respect of the implementation of AIFMD with a view to ensuring that there is a complete framework in which managers can seek authorisation as AIFMs in Ireland, passport their services into Ireland from other EU Member States and establish funds in a manner consistent with the requirements of the Directive.
Within this framework, the Central Bank has designated two new categories of fund, namely Retail Alternative Investment Funds and Qualifying Alternative Investment Funds (QIAIFs), the latter being the successor to the QIF, the category of fund to which most private equity schemes established pre AIFMD in Ireland belong.
Limited partnerships have been the historic structure of choice for private equity firms and the Irish Investment Limited Partnership Act, 1994 provides for such a structure in a regulated fund context (though to date a very limited number of regulated funds have been housed within this structure). The alternative for private equity fund sponsors in an Irish regulated fund context is the Irish variable capital investment companies which provide a flexible corporate solution to fund sponsors and are the most common structure used to establish private equity schemes in Ireland. Unit trusts and common contractual funds (a tax transparent contractual based fund based on co-ownership of the fund’s assets) are also available structures.
Benefits of an Irish regulated private equity scheme
While the introduction of AIFMD will see an increase in the level of regulation and intervention in the management of private equity schemes including, new notification and asset stripping limitations, the Directive also opens up Europe as a single market place for private equity funds. In addition, the establishment of an Irish regulated scheme also offers the added benefit of minimisation of portfolio level withholding tax by accessing Ireland’s double taxation treaty network. Regulated private equity funds in Ireland are not subject to any taxes on their profits or gains. There are no Irish withholding taxes in respect of a distribution of payments to investors who are not resident or ordinarily resident in Ireland provided that the fund has been provided with an appropriate tax declaration signed by the investor. While Irish private equity funds themselves may have difficulty in accessing part of Ireland’s double-taxation treaty network (i.e., obtaining treaty benefits from certain jurisdictions), a taxable Irish acquisition vehicle can be used while the vehicle’s tax bill is minimised through the use of profit equalisation securities. An additional benefit of this structure is that it should eliminate any chance of a foreign tax exposure for the scheme as a result of being deemed resident or having a permanent establishment in another jurisdiction (where the investment manager is located) by the very reason that the Irish acquisition vehicle will be deemed to be liable to tax in Ireland and a resident thereof for purposes of the relevant treaty. These Irish vehicles can also work as part of a structure involving a non-Irish private equity fund.
The Central Bank and AIFMD transitional provisions
The roll out of AIFMD in Ireland has been the subject of heavy industry consultation and in particular discussions focusing on the applicable transitional provisions. In this regard, the Central Bank has confirmed that Irish and EU AIFMs of Irish AIFs performing activities before 22 July 2013 must take all necessary measures to comply with national implementing legislation and submit to the Central Bank an application for authorisation in the case of Irish AIFMs or submit a passporting application in the case of EU AIFMs within one year of the implementation date. The Central Bank has further reiterated the view expressed by the European Commission that during the one year transitional period Irish and EU AIFMs are expected to comply on a best efforts basis with national law. The expectation, therefore, is that existing AIFMs (including internally managed AIFs) and their service providers will need to start to take meaningful steps towards establishing and documenting their organisational and contractual arrangements to demonstrate a move towards compliance and then onwards to authorisation over the coming 6 to 12 months.
In respect of non-EU AIFMs the Central Bank has confirmed that it will allow a transition benefit to non-EU AIFMs. Any Irish domiciled QIF which was authorised prior to 22 July 2013 and which designates a non-EU entity as its AIFM will only be obliged to ensure that it has an AIFM capable of carrying out all the tasks of an authorised AIFM by 22 July 2015. In addition, for anyQIAIF which is authorised on or after 22 July 2013 on the basis of designating a non-EU AIFM, it must only ensure that the non-EU AIFM is capable of carrying out all the tasks of an authorised AIFM within two years from the QIAIF’s date of launch, i.e., the date when the initial offer period closes or, where there are multiple closings, the date of first closing.
QIAIFs authorised after 22 July 2013 which have a registered AIFM (i.e., AIFMs which are not subject to full rigours of the AIFMD regime but equally are not entitled to the full benefits of an authorised AIFM) are provided with a two year start-up period during which the Central Bank will not require that they have an authorised AIFM. After the start-up period, an authorised AIFM must be appointed. During the start-up period, these QIAIF are subject to the full AIFMD depositary regime excluding the AIFMD depositary liability provisions.
However, pre-existing AIFMs/AIFs and their sponsors do need to be aware of and to ensure that they are in a position to meet reporting obligations from the outset (i.e., from 22 July 2013) and that their service providers are in a position to assist them in doing so. Those reporting obligations apply irrespective of whether authorisation has been obtained.
Private equity QIAIFs
While generally QIAIFs are not permitted to acquire shares carrying voting rights which would enable them to exercise significant influence over the management of issuing bodies, this restriction is disapplied where the QIAIF is a private equity QIAIF provided its prospectus indicates its intention regarding the exercise of legal and management control over underlying issuers.
In addition, the Central Bank will permit a private equity QIAIF to extend its initial offer period up to two years and six months provided that the terms of the offer ensure that early investors are not prejudiced by the arrangements. Where such a QIAIF has multiple closings, the initial offer period must commence no later than the date of first closing.
Commonly found in closed-ended private equity schemes, QIAIFs can provide for partly-paid shares or units and for commitment arrangements (including through draw-downs of commitments through the issue of fully paid shares/units), and can provide for standard forms of penalties for defaulting investors.
QIAIFs structured as private equity funds will also need to consider and comply with the new disclosure and notification obligations and anti-asset stripping which apply to AIFMs which acquire ‘control’ of non-listed companies and issuers within the scope of the Directive.
The Irish funds industry has been working for some time towards being ‘AIFMD Ready’ and to address the needs of its clients in that regard. The AIFMD legal and regulatory framework has been established and is evolving to ensure effective implementation for all asset classes, and private equity schemes are no exception.
Etain de Valera is a partner at Dillon Eustace. She can be contacted on +353 1 667 0022 or by email: firstname.lastname@example.org.
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Etain de Valera