Insights

Insights / 29 July 2021

Evolution, not revolution: A practical discussion on closed ended structures in Ireland

Evolution, not revolution: A practical discussion on closed ended structures in Ireland

Celebrating its 30th year servicing the fund management industry in 2021, Ireland is home to many of the world’s leading alternative investment managers. In an informative and practical webinar, Crestbridge explored how Ireland has developed into one of the leading global fund domiciles, uncovering the key benefits afforded to managers who domicile their funds in Ireland. 

Andrea Lennon, Head of Fund Services - Crestbridge Ireland hosted the session and was joined by colleagues and key industry speakers: Alex Di Santo, Crestbridge Group Head of Private Equity Fund Services, Adrian Mulryan (LK Shields), Benjamin Lamping (Reframe Capital) and Brian Lavery (PWC).

So, why is Ireland so popular?

Knowledge, experience and expertise – the recipe for success.

Ireland has been a major centre for the fund management industry for some time and according to Irish Funds, it is now the domicile for 5.9% of world-wide investment funds assets, making it the 3rd largest global centre and the 2nd largest in Europe.

Ireland boasts €5.4tn of assets under administration across multiple fund structures and assets, with over 1,000 fund promoters from 54 countries. There are 16,000 people currently employed in the Irish funds space including in fund administration, transfer agency, depositary, legal, tax and audit services, stock exchange listing, compliance and consultancy services, says Irish Funds.

Net assets in Irish domiciled funds rose to €3.32tn in 2020, with the highest level of net sales in Europe and 250 of the world’s leading financial firms - including half of the world’s top 50 banks - have internationally focused operations in Ireland. 17 of the top 20 global asset managers have funds domiciled in Ireland and Irish funds are distributed in more than 90 countries worldwide, according to figures from Irish Funds.

Ireland’s reputation as a domicile has been strong amongst alternative investment managers, having been the first regulated jurisdiction to provide an investment framework specific to alternative managers.

Private Capital continues to outperform public markets, so investors are increasing allocations to illiquid alternatives. This has in turn led to a boost in demand for Ireland’s closed ended structures. According to panellists, there is certainly nothing new or novel about the use of closed ended fund structures in Ireland, it’s a well-trodden path given its affinity for alternatives, but what is significant is the amount of growth of both the number of and AuM in alternative fund structures domiciled in the jurisdiction.

Legal and regulatory excellence - established foundations for successful investments

The Irish regulatory environment for investment funds offers openness, transparency and investor protection. Ireland has therefore established an excellent reputation as a jurisdiction with robust and efficient regulation, which facilitates market and product development whilst protecting investors. 

Ireland is also a committed member of the European Union, providing full market access to the EU, benefitting from the harmonisation of EU financial services regulations offering asset managers access to the EU-wide market. 

It is regulated by the Central Bank of Ireland (CBI) with prudent rules on counterparty risk, prospectus disclosure and transparent processes with clear timelines for fund and promoter authorisations. In a practical sense, this has led to significantly faster authorisation and approval timelines compared to other EU jurisdictions.

Given the expertise it has honed over three decades, Ireland is an important contributor to compliance and legal frameworks and best practice internationally. Post Brexit, Ireland is also the only English-speaking common law jurisdiction in the Eurozone.

Tax efficiency

Ireland is recognised internationally as an open and highly tax efficient jurisdiction.

At 12.5%, Ireland has the lowest headline corporate tax rate in the OECD, it remains fully compliant with both OECD guidelines and EU law. Ireland also has tax treaties with over 90 countries, including the USA, which makes it one of the most developed tax treaty networks in the world. 

Irish regulated funds are exempt from Irish tax on income and gains derived from their investments and are not subject to any Irish tax on their net asset value. Other than in respect of certain funds which hold interests in Irish real estate (or particular types of Irish real estate related assets), non-Irish investors are not subject to Irish tax on their investment and do not incur any withholding taxes on payments from the fund.

Depending on the tax status of an investor in their home jurisdiction (for example, a tax-exempt pension fund) an Irish fund can also be structured as a tax transparent vehicle resulting in the retention of the tax benefits (e.g. reduced withholding taxes) enjoyed by investors through direct ownership.

Finally, Ireland leads the global industry in compliance with internationally agreed tax standards, further evidenced by volunteering for a peer review by the G20 and OECD countries

Distribution – from Ireland into Europe (and beyond)

Irish domiciled closed ended funds offer access to professional investors via the EU passport and is a major hub for cross-border distribution. Irish funds are sold in 90 countries across Europe, the Americas, Asia and the Pacific, the Middle East and Africa, according to the latest figures from Irish Funds.

Innovation

Ireland offers internationally recognised, innovative products catering to the widest spectrum of investment strategies. The Irish funds industry is at the forefront in preparing for and reacting to regulatory developments at the EU and national level and to a large degree, it’s Ireland’s responsiveness and adaptability that enables clients to bring innovative products to market quickly. This is supported by the most developed regulatory, product and service infrastructure available. 

With an unrivalled track-record in the alternatives space, the Irish funds industry often leads the way for the sector. Another such example is the role of technology in responding effectively to increasing regulatory, reporting and efficiency demands. Ireland boasts a total automation rate of 94.6%, leading the drive for greater efficiencies through fund processing standardisation, according to a recent EFAMA SWIFT Fund Processing Standardisation report.

Investment Limited Partnership (ILP) - the new kid on the block 

Conspicuously absent from the toolkit until very recently, the recent changes to the Irish Investment Limited Partnership, (Amendment) Act 2020, coupled with the Central Bank of Ireland’s (CBI) guidance, significantly enhanced Ireland’s offering for asset managers seeking to set up an Irish domiciled private markets fund.

The ILP is a common law, regulated partnership structure specifically designed for investment funds. The ILP accommodates a broad range of strategies and assets and will typically be used for closed-ended investing in strategies such as private equity, private credit, real assets and sustainable finance. The unique appeal of the ILP lies in it being an AIFMD-compliant, EU domiciled common law partnership with provisions within the act that allows an ILP to be established as an umbrella fund, that is, an ILP which is divided into a number of sub-funds (or series.)

For the CBI’s part, it has confirmed that an ILP must have at least one GP, whose directors must be pre-approved with them. The GP must then appoint an alternative investment fund manager (AIFM), which acts in an oversight capacity, conducts the primary business of the ILP and can delegate the asset management to a separate investment manager. Further, a CBI consultation paper issued in late 2020 indicates an intent to allow managers to properly implement a carried interest waterfall.

According to the panel, now that Ireland has made the necessary amendments to its ILP legislation, it now has  the last tool in its kit for the fund management industry, it is in a very strong place globally, akin to that of Luxembourg and we can expect some good cooperation between those two domiciles in particular, over the coming twelve to twenty-four months. 

What is also clear, is that with the growth of alternatives globally, Ireland will remain one of the premier jurisdictions alternative managers and their investors will want to domicile their funds.