A New European Fund Structure: Ireland’s Investment ILP

Kevin: Good morning, everyone, and afternoon, depending on where you are. Welcome to "A New European Fund Structure: Ireland's Investment Limited Partnership." Thanks to CSC, of course, for hosting us today. I'm Kevin Neubauer, a partner in the Investment Management Group at Seward & Kissel in New York. My practice focuses on investment fund formation generally and related U.S. regulatory work.

Today's discussion, I think, will be useful for managers and service providers both in Europe and in the U.S. From my perspective, for U.S. managers in particular, I think the discussion will demystify to a degree the process of launching an EU vehicle in an existing fund structure. And, of course, it will also give managers, I think, a good sense of the considerations involved in choosing a jurisdiction and why Ireland, particularly with this new structure, you know, maybe an attractive option.

I'm joined by an esteemed group of industry experts today. They have various experiences, and they can tackle these issues that we're going to be talking about from their various perspectives.

Before I ask each one of them to introduce themselves, a couple of housekeeping notes. So one, throughout the presentation, we encourage you to submit questions through the chat function within ON24. We'll address them live as time permits. If we run out of time and there are questions that we didn't get to, we're happy to follow up with you afterwards on a one-on-one basis to assist.

If you encounter any tech issues or you have questions about the technology throughout the presentation, feel free to send questions through that chat function and a member of the CSC team will get back to you and help you sort it out.

And then lastly, we'll be asking a few poll questions throughout the presentation, and so we'd encourage you to participate and provide your feedback to make the results more meaningful for everyone.

With that, I'll turn it over to the panelists to introduce themselves. And, Barry, we'll start with you.

Barry: Thanks, Kevin. My name is Barry O'Connor. I'm a partner in Matheson, and Matheson is Ireland's largest law firm. We're a full-service corporate law firm, and we focus on international companies doing business in and from Ireland and, in particular, in the financial services space. I'm in our Asset Management Department. We're Ireland's largest asset management department. So we have 11 partners and over 60 fee earners, and we act for 30% of the Irish market, and that goes from everything from long-only equity mutual funds, ETFs, money market funds, all the way up to illiquid, private equity, and real assets strategies for which the ILP is going to be particularly relevant. Pass it over to Michael.

Michael: Thanks, Barry. I'm Michael Humphreys. I'm from Davy, which is a large, Irish financial services company. We're one of the largest independent providers in Ireland, with a business that spans wealth management, asset management, corporate finance, institutional broking. And we've been in business for over 90 years. While we're predominantly based in Ireland and headquartered in Ireland, we also have offices in the UK, where I'm based, and in Luxembourg. And we provide fund services through our integrated asset management and fund services company, which is called Davy Global Fund Management, on a pan-European basis to funds all across the EU. And we're particularly excited about the developments in the Irish investment limited partnership, which I think is a huge addition to the Irish funds landscape. But we, on a broader basis, act as AIFM to our funds, including the ILP, and as UCITS ManCo for UCITS funds across Europe as well. Thank you.

Brian: So thanks, Michael. I'll go next. So my name is Brian Murphy. I am a tax partner with Grant Thornton in Dublin. My focus is on the financial services space. And we would, like the other panelists, have a significant presence across the financial services and, in particular, in the asset management space, with a very strong audit, advisory, and tax practice. So our practice has experienced, I think fair to say, extensive growth over the last four or five years, particularly in relation to asset management, where the firm now sits, I think, on a par with the bigger service providers across all three work streams, being across audit, advisory, and indeed tax compliance and tax advisory services. So I'll pass it over to you, Paul.

Paul: Thanks, Brian. My name is Paul Whelan. I'm Managing Director and Head of Depositary Services at CSC. I'm charged with building our business across Europe in tandem with our fund administration and capital markets business. I've worked in the industry for over 20 years, holding global roles with a number of large financial institutions.

Kevin: Great. Thanks all. Before we get started, we'll just do a quick overview of what we intend to cover today. We've covered the introductions. We're going to cover sort of at a high level an introduction to the ILP structure and where it might fit within an existing fund structure, the advantages of setting up a fund structure in Europe generally, legal and tax implications, and then, specifically, with one of these structures, the role of a depositary.

So let's start with you, Barry, if you would. If you could provide an overview of the ILP and identify what you want people to take away from this webinar in terms of the possibility that they may use an ILP going forward.

Barry: Sure, Kevin, thanks. So what I want people to take away from the webinar is actually quite simple. So Ireland is and has long been the leading domicile in Europe for regulated funds pursuing alternative strategies. The reasons for this are pretty straightforward. So we've got a flexible regulatory regime, unmatched speed to market, top-notch expert service providers, and an English-speaking, commercially-focused, solutions-driven service culture.

The one caveat we always had to say in the past to that was that while we had excellent corporate fund structure, trust fund structure, a tax-transparent contractual fund structure, we didn't have a viable partnership vehicle. We do now have that, and that's what I want people to take away from today. So Ireland's existing, leading regulated domicile in Europe now offers a partnership, and we're open for business essentially.

We spent many years trying to put the partnership in place to make sure it offered for managers, such as yourselves, the same features that you'd expect to see in a Cayman partnership, for example, or in a Luxembourg partnership. As a result, the structure chart you see here really should look relatively familiar for you.

In terms of the ILP, so the Irish version of a limited partnership, I'll just talk about a few of the provisions, which hopefully should ring true for you. So it's obviously constituted by an LPA between GP and the LPs.

The LPA in Ireland is a very flexible document. So there's very few mandatory provisions that have to go into it, and you've got kind of a carte blanche as to the types of provisions you want to include. So that's obviously a welcome and necessary piece. It's easily amendable, so you don't require investor or LP approval where the change you're making isn't prejudicial to them. Where it is prejudicial to them, you require approval of the majority of the LPs, but you get to define what constitutes majority in that case. So it's entirely possible, for example, to special LP classes that have particular voting rights.

The ILP is constituted by the GP and LPs, as I mentioned. The GP itself is not a regulated entity in Ireland, so you don't require Central Bank approval or local regulatory approval. It's easy to set up. As regards to the LPs, obviously they have limited liability. That's a key piece of them. They can maintain that liability but not participating in the management of the partnership. And the legislation that sets up the ILP in Ireland contains a white list of activities, things that the LPs can do without losing their limited liability. It's a fairly standard list, things like participating in advisory committees, voting on matters, sitting on boards of directors. All of those are acceptable activities for an LP to do without losing their limited liability.

All of that really is things you might expect to see in a partnership, you would have expected to see in a partnership. What you mightn't be familiar with is the regime, the regulatory regime that the partnership sits within. It's Ireland's existing regime, and, as I said, it is the leading regulatory regime in Europe for alternative strategies, and it's called the QIAIF regime, so the Qualifying Investor Alternative Investment Fund regime, the QIAIF regime.

A few things to note about it. It is a regulated fund, but it's not actually reviewed by the regulator, the Central Bank of Ireland, which is the regulatory body. They don't review the documentation. They rely on the law firms, such as Matheson, telling them that the documentation complies. So actually the speed to market is unrivaled. You make a filling with the Central Bank looking for regulatory approval for your fund, and you have it 24 hours later. In other countries in Europe, that's not the case. There's a lengthy regulatory approval, where the bank reviews your documentation, asks questions. That can take months on end. That's not the case in Ireland.

The other good thing about the regulatory regime in Ireland is that there's very, very few rules around what you can and can't invest it. It's a very flexible regulatory regime. Now the quid pro quo for that is you can only sell the fund or market it to professional or qualifying investors. So professional investors is a test that you may be familiar with. It's in European legislation under MiFID. Essentially credit institutions, companies as a whole, or if you're talking about natural persons, you're really talking about high-net-worth individuals.

In Ireland, you can also actually offer it to qualifying investors, which is a slightly broader tool and essentially that allows anybody who can certify that they understand the risks to invest. That's particularly useful where you want employees but then the manager who wants to invest in the fund and they may not be themselves high-net-worth.

With that piece, you can also get access to the European marketing passport, which is something that Michael is going to talk about in a second.

One other element to note there is the minimum investment rule. So you can only sell it to those professional investors, but they have to commit at least €100,000. For these of type of strategies, that's not typically been a problem.

So as I said, that Irish regulatory regime has been around for a while. It's the leading one in Europe. And people have done kind of private equity real assets strategies in Ireland before. They've definitely done them in corporate structures, which isn't perfect because most investors are looking for a partnership, but where they have done them, they worked well.

One issue in that past has been because Ireland didn't have a partnership and you didn't want to do those types of strategies, some of things you did in the past existed perhaps in a gray area in the rules, so you had to interpret the rules in a certain way to make things work. That's not the case anymore. So the rules have been clarified to make clear that the things managers, such as yourselves, want to do within these strategies work absolutely fine. So, you know, using capital accounting within the partnership, carried interest, excuse/exclude rights, stage investing, all of that has been clarified by the Central Bank as being absolutely acceptable. So that's a positive change.

If you look at the structure chart for a moment, as I said, it should be relatively familiar to you. If you look kind of at the right-hand side and down at the bottom in terms of the investments, from the Irish perspective, the partnership is incredibly flexible. You can set up whatever you want below. The partnership itself is tax-transparent, something Brian is going to talk about. And so, obviously, what you actually do set up below is incredibly important to make sure that the investors get the tax treatment that they want. But from the Irish perspective, the partnership perspective, there's complete flexibility down below. The partnership could hold the assets directly. They can have holding vehicles. They can take whatever form you want They can be essentially wherever you want it. The tax analysis can drive those, and, as I said, Brian will talk about that in a second.

On the left of the chart then, you'll see some of the service providers. So there might be some there that are unfamiliar to you. There's the AIFM. Michael is going to talk about that in a second. There's the depositary, and Paul is going to talk about that. And the investment manager typically is you guys. That will be the entity who wants to set up the partnership. From an Irish perspective, there's absolutely no problem with that manager being a U.S. manager. And as Michael will talk about in a second, having the Irish AIFM there means that you still get access to the European passport. And if you look at the fund administrator, that should be a role that you're very familiar with.

So on the whole, that's the structure chart. That's the partnership, and the message is we now have one, it works, and we're open for business.

Kevin: Cool. Thanks, Barry. Based on how you described the flexibility that these structures offer, I would expect, as a general matter, a U.S. manager that had multiple feeders, one in the EU and one in the U.S., could expect to have fairly similar partnership agreements as between the Delaware Limited Partnership and the Irish LP. Given the flexibility that both provide, I would expect you to be able to achieve a high degree of similarity between the two documents.

Barry: Yeah, absolutely. So one of the things we've been doing since this has been introduced is talking to managers, like the people on the webinar, but actually also, Kevin, talking to law firms, such as your own, to ask them that question. So we've talked to some firms we know very well and said, "Look, can you give us, you know, your template Delaware one or what your clients would typically see? We'll Irishize it for you, and you can see how many changes are there." And, as you said, there aren't that many. And the law firms we've spoken to have said, "Well, actually, if we were to put this in front of our clients, they'd be happy that there's no changes." You know, the way they want it to work will still work in Ireland.

Kevin: Yeah, understood. So with that full-throated pitch for Ireland, anything to add on why a U.S. manager or anyone else for that matter should choose Ireland?

Barry: I think, partially, it's obviously why Europe, and if you know you're going to Europe because you want to access European investors, and when you come to Europe, really the decision has long been Ireland or Luxembourg. And sometimes when you're looking at that question, there is a hard reason why you would choose one over the other.

So, for example, if you were setting up an ETF and it was going to invest and track the S&P 500, for example, you'd always choose Ireland because Ireland has a better tax treaty for ETFs, and, you know, that kind of a benefit is a hard reason to choose Ireland.

In this partnership space, in the past, the hard reason pointed you towards Luxembourg was that Ireland's partnership model didn't really work. That hard reason is now gone. And so really you're into the softer reasons, and consistently down through the years, when it comes to those soft reasons, managers have said they prefer Ireland over Lux. We have clients who have funds in both jurisdictions, and they would say time and time again, "If it weren't for X hard reason, I'd love to do this particular fund in Ireland."

And so those soft reasons, to give you a flavor of what they are, you know, Ireland and Luxembourg, are both obviously European jurisdictions, but the way in which rules are enforced and implemented can be a little bit different. So, for example, when it comes to AML, in Luxembourg, typically you have to give, you know, actual wet ink copies of documents that have been certified as true copies. You have to get documents certified in front of a Luxembourg notary. Those types of things can cause a real problem when you're trying to set up a fund under time pressure. That can pose a little bit of an execution risk when you hit those bumps on the road. After you've done a couple of your funds, they start to grate a little bit, and those soft reasons make a difference.

Other things are softer still, the fact, you know, Ireland, obviously, English is our native language. That does make a difference. I don't know what the number is, but there must be hundreds of flights between Ireland and the U.S. monthly. I think in Luxembourg, there's one every two days or something like that. It's difficult to get to. Those things make a difference.

I've heard people say to me, "The service culture in Ireland is much stronger. You know, it's an Anglo-Saxon service culture." So certainly me, you know, as a lawyer, I don't really work 9 to 5, but I had one client describe to me in Luxembourg the hours as, you know, being 10 to 4 and golf on the mornings of a Friday, so don't call. That's not what you're going to get in Ireland. If you expect a high-level service provider as standards from your law firm in the States, the CSC, people you work with there, you'll get the same in Ireland. The feedback I've received isn't quite the same in Luxembourg.

So it tends to be those softer reasons. And so if you are coming to Europe for the first time and you're weighing up Ireland or Luxembourg, I'd talk to people, peer managers who are in Europe already and get their impressions, because they've long told me that they prefer Ireland over Lux.

Kevin: Yeah, great. Thanks, Barry. So Michael, thanks for being here today. From your perspective, from the sort of in-house perspective, why would a U.S. manager specifically consider launching a fund in the EU and then, of course, specifically Ireland?

Michael: Thanks, Kevin. Yeah. So the main reason I think why U.S. managers, that I speak to, look to set up European funds is to find the best route possible to access European investors. Barry touched on this a little bit in his talk.

The European marketing passport is a facility available under AIFMD, which is the Alternative Investment Fund Managers Directive, which is the European regulatory rules that govern alternative investment funds on a pan-European basis. And that effectively provides a mechanism to, if you like, register your fund at once for distribution wide across the EU, and that is extremely attractive to all managers but particularly to non-EU managers, such as U.S. asset managers, wanting to enter the European market, which is, in the end of the day, a patchwork of different registry regimes, different legal regimes, different regulators, and different rules in each country. So it provides a level of consistency that allows U.S. managers to easily target the European market. And I'll talk just a little bit about that in a moment.

By contrast, the other ways of targeting the European market and European investors, which are sometimes used, would be things like reverse solicitation or the national private placement regimes. And each of those has limitations or drawbacks by comparison with the European marketing passport.

So reverse solicitation, I won't talk about it long, but very briefly, as everyone will know, reverse solicitation is very useful where you do have genuine inquires from potential investors coming in without prompting from the manager. But it's not a marketing strategy. In fact, the whole concept of reverse solicitation is that it's not based on marketing. So it can't really be relied on to target European investors, and if it's pushed too far, it comes with both registry risk and liability risk both in terms of regulatory sanction and investor complaints. So while you sometimes hear it referred to, I wouldn't describe it as a marketing strategy.

National private placement regimes, by contrast, have been used for a very long time for accessing EU institutional investors, but they have the drawbacks I mentioned earlier, the patchwork nature. The fact that the rules change on a periodic basis, so you have to both do your legal and regulatory due diligence on entering the market and also on an ongoing basis. You need to register with the relevant registry authority and keep on top of changes.

There is also, I suppose, a shift over time in restricting to some degree the availability of national private placement regimes in Europe and kind of a concept under AIFMD that, in an ideal world, you'd have UCITS funds for retail investors and AIFs for professional investors. And the idea of private placement of other types of funds into Europe is perhaps one that some European regulators would like to get away from, but it's still there at the moment and it is a viable route to market, particularly if you have a small number of target jurisdictions.

But the marketing passport really simplifies a lot of those issues, and it also perhaps offers better investor acceptability. Certain EU institutional investors do have a preference for onshore, European fund structures as opposed to offshore, non-European fund structures, which might be perceived as coming from, you know, lightly regulated or unregulated jurisdictions, and sometimes that's driven by their own mandate reasons or internal corporate governance reasons. So another advantage of an onshore EU fund is you maximize your attractiveness to European institutional investors.

So that's kind of in a nutshell I think why the marketing passport is important, and where that leads to your question, Kevin, about why they want to set up a European fund is that the rules for accessing the marketing passport require two things. Number one is the fund has to be a European fund. Now it could be domiciled anywhere in Europe, but as Barry said, you know, the main jurisdictions would be perhaps Ireland, which would probably be number one. The UK used to be, but, obviously, the UK is no longer a part of the EU since the transition period ended on 31 December. So that doesn't count for the point of view of the marketing passport. And then Luxembourg would be the other one.

So you need an EU domicile for your fund, and you also need an EU AIFM. And, again, Barry briefly referred to the AIFM role. And just to explain to U.S. managers what the AIFM actually is and what it does, the AIFM is the party that manages the fund in a broad sense. It does things like dealing with the regulator, posting registry capital, managing registry reporting, overseeing delegates, overseeing distribution, and so on.

And from a regulator's point of view, you group two of the main functions of the AIFM being risk management or risk oversight and portfolio management. And it's very common, where a U.S. manager appoints or sets up a European fund, that the AIFM would be a local AIFM. Like I said, that's one of the services we do. But actually, you then delegate the portfolio management back to the U.S. manager, and that's a well-tried and tested model. And what it means is that the U.S. manager can have the best of both worlds in a sense. They can have an EU fund domiciled in Ireland, like the ILP for example, with the availability of the European marketing passport and with the AIFM role filled by a local party, which means that the U.S. asset manager doesn't need boots on the ground in Ireland. So that's a huge advantage.

You can run your European fund from the U.S. with the same asset manager that runs your other fund structures. For example, you might have a Cayman or a Delaware vehicle or some other vehicles in the world to target specific investor groups. You can run all of those structures together, which are European structures, from your U.S. asset manager without boots on the ground in Europe. So hopefully that deals with that, Kevin.

Kevin: Very helpful. Yeah, very helpful. And then just before we turn it over to Brian, you know, where do you see one of these structures fitting in to a U.S. manager sort of global distribution strategy?

Michael: Yeah, I think there's a couple of issues that come into play there, and I touched on those a minute ago, that, you know, a lot of the U.S. asset managers I deal with, they already have fund structures in place or they have a series of existing funds. And you mentioned it yourself, Kevin, in terms of, you know, the similarity or otherwise of documentation across those structures.

But one important factor that U.S. asset managers need to think about is, for example, if you're in a private equity strategy or an infrastructure strategy or some other perhaps real estate strategy and you're housing it in, say, an Irish ILP, how do you manage the investments across multiple fund structures? And probably the first thing this brings to mind for a U.S. asset manager is a feeder-type approach, where the European fund feeds into the U.S. fund or the Cayman or Delaware fund and that's where the assets are held. But there's a very important restriction in the marketing passport, which denies you the access to the marketing passport if you effectively feed 100% of the European capital into the non-European structure. And, in fact, the limit is set at 85%. So if you take more than 85% or more of your European-raised capital and you invest that from the European fund into the U.S. or Delaware fund, for example, you lose benefit of the marketing passport.

So that's a challenge. There are a number of ways around it which managers work with, including reverse feeders or partial feeders or parallel funds, where the European and the U.S. fund operate in parallel, and they can work very well even for very complex, very illiquid asset strategies. But the issues that sort of the manager deals with are, you know, deal allocation, deal splitting, co-holding, trying to match the performance of the European fund and the U.S. fund, and those are all issues that can be dealt with with appropriate structuring.

Kevin: Understood. And those are sort of . . . It's a necessary evil having to deal with those investment allocation issues, but, you know, it's something that certainly is not a common issue to address for a sophisticated asset manager.

So, Brian, we'll turn it over to you. You know, from a tax perspective, how do you characterize the benefits of the ILP structure vis-à-vis other structures out there in the market?

Brian: Thanks, Kevin, and like any good lawyer, I think Barry has actually covered this already when he mentioned earlier that the structure was tax-transparent. So like Barry is a good lawyer, I'm a good tax advisor. So I'll say a little bit more than that, but essentially that's the first key point here. This is a fully tax-transparent structure from an Irish tax perspective.

So as you'd expect in a transparent structure, there should be no Irish tax on income and gains in the limited partnership or indeed on distributions that are . . . or any income flows that flow through the partnership. One obvious exception is where you have funding at the level of the partnership, there maybe Irish withholding tax considerations in that scenario. But essentially the structure is set up such that the income will flow throw the transparent structure, and the income will be deemed to be income of the partners. This probably a very important point from an investment perspective is that this generally allows the partners to retain the characteristics that the income would have had at the level of the fund should have been a corporate fund. So, for example, if you've capital gains at portfolio level and they're beneficial that the character of the gains remains intact at investor level, then that will be the outcome in a transparent structure.

The partnership itself will have to file some limited Irish tax returns, really information-type returns rather than anything else, that will effectively, in the form of a tax return, allocate income and gains to the various partners.

And then the last kind of key point, I suppose, on the basic tax features of the ILP anyway and something that is very relevant for the U.S. market is, much like the corporate structure the ICAV, the ILP, even though it's transparent, it can check the box from a U.S. perspective. So it leaves something that, again, Barry had mentioned earlier in terms of flexibility of both the structure from a legal perspective and indeed a regulatory perspective. There's also significant flexibility from a tax perspective as well, and from a U.S. market, in particular, the check-the-box selection, it is obviously something that is potentially useful. So there are the basic points Kevin.

Kevin: Great. Well, thanks, Brian, and thanks for going quickly through that since we're almost out of time. But I wanted to make sure we had a chance to hear from Paul from CSC, specifically to talk about this important issue about depositary. So could you explain the depositary function for U.S. managers, Paul, that may not be familiar with what it is and what it's all about?

Paul: Sure, sure, Kevin. No problem at all, and I'll keep this quite succinct given that we're nearly up on time. So first of all, I think it's important to recognize that the depositary is not a delegate of the GP or the AIFM. It's an independent service provider to the ILP and has a fiduciary responsibility to act in the interests of limited partners.

The depositary must be domiciled in Ireland and be authorized by the Central Bank as a full-scope or a specialized real asset depositary. AIFMD, which is an EU directive, the depositary is obliged to discharge three core duties — cash flow monitoring, asset safekeeping, and oversight. Cash flow monitoring involves reviewing all cash flows through the ILP's bank account with an aim of identifying any significant cash flows or cash flows that are inconsistent with the operation. So the ILP and the depositary has to ensure that the bank accounts are opened with appropriate institutions in the name of the ILP and that all capital contributions flow into these bank accounts.

Moving on to asset safekeeping, which covers both assets in custody and recordkeeping and ownership verification of other assets, i.e. assets that are not capable of being held in custody. And so safekeeping of assets in custody is not really relevant to ILP structure, so I'll pass over that and move on to recordkeeping and ownership verification of other assets, which involves ensuring that all non-custody assets, such as private equity, real estate, infrastructure, etc. are held in the ownership of the ILP both initially at the point of transaction and on an ongoing basis thereafter. And the depositary is required to maintain an up-to-date register of all other assets that it is satisfied or owned by the ILP.

And then the final duty is that of oversight, and the oversight duty is quite broad. It involves overseeing the AIFM and its delegates to ensure that the ILP is managed in accordance with its constitutional documents and the regulations. And the depositary generally focuses its reviews on the valuation of assets, capital activity, income distributions, investment restriction monitoring, waterfall calculations, and the settlement of investment transactions. And the depositary is required to report any material issues found or investment breaches to the Central Bank of Ireland.

Kevin: Great. Thanks, Paul, for that brief summary. We are just about out of time, you know, and we didn't really get to questions that people may have. So if you sent a question through the chat function, we'll be sure to get back to you on a one-off basis. And then certainly if any other questions come to mind as you digest the information presented today, feel free to let any of the panelists know. And we thank you for making the time here for the presentation on the new Irish ILP structure and hope you enjoy the rest of your day. Thanks all.