Despite Ireland’s Brexit-related gains in recent years, its attractiveness for private equity, real estate and other alternative asset funds was widely perceived to have fallen behind some other European jurisdictions. Specifically, Ireland was not seen as the jurisdiction of choice for Investment Limited Partnerships (ILPs), the structure favoured by alternative assets funds. Other European countries introduced new tax benefits and increased flexibility, such as the ability to adopt a variable capital structure or establish sub-funds. In contrast, Ireland’s ILP offering was not updated to reflect evolving practices and expectations in the years since its introduction in 1994.
The Irish government discussed ILP reforms and consulted with the industry for a number of years. In late November 2020, it announced that the proposed reform of Irish ILPs, which had stalled following the dissolution of the previous government, would go ahead. The Investment Limited Partnership (Amendment) Act 2020 was signed into law by the President of Ireland on 23 December 2020. The Act should make Ireland a more attractive location for private equity, venture capital, private debt and real assets investment funds operating in Europe.
The Irish government believes ILP modernisation is well timed to take advantage of efforts to accelerate Capital Markets Union in the EU.3 It hopes reform will promote investment, secure Ireland’s competitiveness, and enhance and strengthen its regulatory environment. The government also believes reform will help to attract green fund launches, which are expected to increase in number in the coming years. The Irish Funds Industry Association estimates that reform could create 3,000 jobs by 2025 while attracting up to €20 billion a year in new capital.4
What Does the ILP Act Change?
The Act introduces a number of additions and amendments to the ILP structure, including:
- Umbrella ILPs, encompassing multiple sub-funds to accommodate different strategies or investor types while segregating liabilities between sub-funds, are now permissible. This structure should enhance flexibility and operational efficiency, and facilitate economies of scale.
- Limited liability of limited partners (LPs) in an ILP structure is more clearly defined, aligning the list of actions (such as being part of an advisory committee) that LPs can undertake without losing limited liability (known as safe harbour actions) with industry standards.
- Limited partnership agreement amendments are now possible following approval by a majority of LPs (and GPs) rather than requiring the consent of all LPs. Some amendments are now possible without LP approval provided the depositary certifies that they do not prejudice LPs’ interests.
- Streamlining of withdrawals and redemptions by investors is now aligned with other Irish regulated fund structures.
- Alternative foreign names can now be officially recognised, making it easier for a manager or promoter operating in a non-English speaking country to market a fund established as an ILP.
- New beneficial ownership rules, such as a 25% threshold, for ILPs are now aligned with existing rules that apply to funds established as companies, ICAVs and unit trusts.
- A statutory process to facilitate ILP migration into and out of Ireland has been introduced to align arrangements with those in the Companies Act 2014 and the requirements for other types of funds, such as those detailed in the ICAV Act 2015.
- Alternative Investment Fund Managers Directive (AIFMD) alignment of norms and standards in relation to terminology and requirements (such as the depositary function, for example).
In addition, the ILP Act will include amendments to the ICAV 2015 Act to more closely align the ICAV structure with the Companies Act 2014 in relation to powers of attorney, intra-group loans and other matters.
Separately, the Central Bank of Ireland is consulting on changes to the AIF Rulebook in order to facilitate the ILP Act. The consultation will address permissible features for Qualifying Investor Alternative Investment Fund (QIAIFs) which invest in illiquid assets. Issues to be examined include share issuance at a price other than net asset value without prior Central Bank approval, permitting new investors to acquire shares in the QIAIF at a later stage in its life cycle, and allowing the establishment of differentiated management share classes.
The Implications of Irish ILP Reform
Ireland has a number of strengths as a jurisdiction for funds. As well as its acknowledged expertise, it has a common law system, familiar to fund promoters and managers from other common law countries, such as the US, UK, Hong Kong and Australia. Following Brexit, Ireland is both the only common law country and the only native English-speaking country in the EU. It is seen as having a robust and efficient regulatory environment while also having lower costs than some other European countries. Measures such as the Central Bank of Ireland’s CP86 provide investor comfort with Ireland as a jurisdiction.
Ireland’s amended ILP structure enhances its flexibility and brings the Irish ILP offering up to the standard of other leading European jurisdictions. Combined with Ireland’s existing favourable legal characteristics, ILP reform should make Ireland a more attractive place for alternative asset funds to raise capital over the long term. In addition, U.S. investment managers that are familiar and comfortable with the ILP structure in locations such as the Cayman Islands and Delaware will now be able to leverage Irish ILPs’ tax transparency and the large range of tax treaties that Ireland has with other countries.
“The legislative changes are a welcomed arrival aligning Ireland with other domiciles and their current approaches, giving it the opportunity to become the domicile of choice for private asset vehicles” says Dermot Finnegan, Global Head of Private Markets Administration at BNY Mellon.
Changing jurisdiction is time-consuming and costly, and the benefits of specific jurisdiction choices (at least among leading jurisdictions) can be limited. Consequently, migration is unusual in the absence of a major external stimulus, such as Brexit. Firms moving from the UK market as a result of Brexit have already made their jurisdiction choices and migrated. However, some existing private equity, real estate and other private market funds may seek to re-domicile as a result of Ireland’s ILP changes in order to take advantage of tax treaties.
“With the ILP framework, Ireland is now ideally placed to be the centre of choice for launching new alternative funds. Its unique position as the leading global administration jurisdiction, combined with its emergence as a global hub for innovation in fintech makes it the ideal location to develop new products that will be required to meet the evolving investor requirements” says Paul Kilcullen, Ireland Country Head at BNY Mellon.
Nevertheless, the establishment of new ILPs in Ireland could take some time to gain momentum, as managers tend to respond to investor sentiment towards jurisdictions, which takes time to change.
What to Consider
Selecting a jurisdiction to locate an ILP is a crucial decision for promoters and managers of private equity, venture capital, private debt and real assets investment funds. The decision to locate a fund in a jurisdiction must take into account the legal, tax and other competitive benefits offered by a country and balance these against investors’ perceptions of that location in terms of ease of doing business and the investor protection available. The reform of Ireland’s ILP structure will enhance its attractiveness to managers and investors alike, especially given capacity challenges in other jurisdictions and expectations of increasing numbers of green fund launches and the broader continued growth of the alternative assets space.
Managers and promoters must ensure they work with partners that operate to global standards and are familiar with the intricacies of Ireland’s structures and regulations. BNY Mellon is a leader in the private markets, has a global operating model, is familiar with complex industry structures such as co-investment vehicles and parallel funds, and has been active in Ireland for more than three decades. BNY Mellon can act as more than just an administrator, supporting an ILP with a range of services throughout its lifecycle.