The Central Bank of Ireland (the “Central Bank”) has published two documents which are significant steps towards enhancing the private equity and private credit product offerings currently available in Ireland. These documents have been published in anticipation of the update to the Investment Limited Partnerships Act, which is currently making its way through the Irish parliamentary process.
AIFMD Q&A 36th Edition – Removal of Separate Regulation of General Partners of ILPs
The Central Bank’s questions and answers on the Alternative Investment Fund Managers Directive (“AIFMD”) has been updated and now includes a clarification that the general partner of an investment limited partnership (“ILP”) is not required to be separately authorised by the Central Bank where the general partner has appointed an alternative investment fund manager (“AIFM”) (Question ID 1134).
While the general partner will be a regulated financial services provider and subject to regulatory supervision by the Central Bank, it will no longer have to maintain a separate authorisation and regulatory capital. As is envisaged by the AIFMD, the focus of management regulation will be on the AIFM, and the ILP will be authorised and supervised by the Central Bank under its Qualifying Investor Alternative Investment Fund (“QIAIF”) regulatory regime. The directors of the general partner will be subject to the Central Bank’s fitness and probity regime.
CP132 – Guidance on share class features of closed-ended QIAIFs
The Central Bank has also issued Consultation Paper 132 (“CP132”) in which it sets out its draft guidance for the operation and application of the AIF Rulebook to closed-ended QIAIFs, newly defined in CP132 as “CE QIAIFs”.
CP132 outlines the Central Bank’s general requirement that capital gains/losses and income arising from the assets of a QIAIF must be distributed and/or accrue equally. CP132 reiterates the limited instances where share classes can differ from one another, for example, share class currency hedging or the creation of side pockets. The proposed guidance is limited to those CE QIAIFs that use private equity-type strategies or invest in illiquid assets.
CP132 looks to allow CE QIAIFs flexibility with regard to the operational use of share classes in line with private equity industry norms to permit:
- The allocation of returns of an asset to a specific share class; and/or
- Participation in a share class other than on a pro rata basis.
Specifically, CP132 proposes that CE QIAIFs be permitted to issue, in another newly defined term, “Differentiated Share Classes”.
Proposed Types of Differentiated Share Classes
1. Issue shares at a price other than NAV.
Purpose
The ability to issue shares at a price other than NAV enables a CE QIAIF to ensure proportionate voting rights are maintained between first close and subsequent close investors and eases the J-curve effect, while also easing the administrative burden related to equalisation for subsequent closings.
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Proposed Central Bank Requirements
None – the Central Bank is proposing to remove the formal approval process which was costly, time consuming and which removed the advantage of the Central Bank’s 24 hour approval process for launches.
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2. Excuse and Exclude.
Purpose
The stated purpose of this proposal is to allow (a) certain investors to be excused from, and (b) CE QIAIFs to exclude certain investors from, proposed investments in order to prevent breaches of policy or regulatory provisions that apply to those investors or CE QIAIFs. The ability to include such provisions makes CE QIAIFs more marketable to investors, particularly regulated entities such as insurance companies and governmental and quasi-governmental entities which are subject to regulatory requirements meaning that they require the ability to be excused from certain investments.
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Proposed Central Bank Requirements
The ability to apply ‘excuse and exclude’ provisions will be subject to the following conditions:
(i) The ‘excuse and exclude’ provisions must be predetermined either by way of an agreement with the investor (in the case of excuse provisions) or in the fund documentation (in the case of exclude provisions);
(ii) The party invoking the ‘excuse and exclude’ provision must provide a formal legal opinion outlining the basis for so doing; and
(iii) The directors of the CE QIAIF (if relevant) and the AIFM must document their acceptance or otherwise of the legal opinion and the consequences of such action.
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3. Stage Investing or Tranching.
Purpose
Stage investing allows CE QIAIFs to open new share classes that permit new investors to participate in existing and future investments, or future investments only. It is a useful tool for managers/AIFMs seeking to establish evergreen structures or seeking new injections of cash at the later end of a CE QIAIF’s lifecycle.
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Proposed Central Bank Requirements
(i) In the event of a transfer of shares by an existing investor to a new investor, the terms of investment – including those provisions relating to stage investing – that apply to the new investor must be clearly documented upon acquisition; or
(ii) The establishment of a new share class for the investor; and
(iii) The use of capital accounting methodology for commitments paid and outstanding.
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4. Management Participation.
Purpose
CP132 proposes allowing management participation in CE QIAIFs, which would result in pay-outs, either for a pre-determined fee or a capital pay-out that is not pro rata (i.e. carried interest), through the creation of management share classes. This is a particularly important feature for private equity funds.
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Proposed Central Bank Requirements
(i) The conditions applicable to the management share class must be included in the fund documentation; and
(ii) Capital payments (both committed capital and preferred returns) must be allocated to investor classes in priority to management classes.
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Consultation
The Central Bank has requested responses to the following specific questions on the CP132 proposals.
- Do you have views on the Central Bank’s approach to limit the availability of these features to certain types of CE QIAIFs?
- Are there other aspects or requirements of the Central Bank AIF Rulebook that require clarification or consideration in operationalising these arrangements?
- Are the safeguards proposed sufficient? Are there other features which may be desirable or of benefit from an investor protection perspective?
Dechert plans to respond directly and/or through its participation on the Irish Funds AIF Product and Innovation working group1 and would welcome engagement and input from industry participants.
The Central Bank has requested responses to CP132 by 22 December 2020.
Conclusion
Dechert welcomes the Central Bank’s updated Q&A and the proposals set out in CP132. While there are elements of the proposals which may require further refinement – which is arguably why the Central Bank has launched a consultation – the advances proposed to the Central Bank’s regime for closed-ended funds will help to ensure Ireland’s continued position as a global leader in investment funds.
Footnotes
1) Lindsay Trapp is a member of the Irish Funds AIF Product and Innovation working group.
The authors would like to thank Jeff Mackey for his contributions to this OnPoint.
