Irish Fund Structures: Picking the Best Option for Your Investment and Distribution Goals

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Christy: Hello, everyone, and welcome to today's webinar, "Irish Fund Structures: Picking the Best Option for Your Investment and Distribution Goals." My name is Christy DeMaio Ziegler, and I will be your moderator. Joining us today is David O'Flaherty, Niall Crowley, and Sarah McNamara. David is the Head of AIFM at Intertrust Ireland, a CSC company.

David has the responsibility for providing regulatory compliance services to funds established by global managers. David is responsible for growing the alternative investment fund managers business and has successfully grown the team in recent years to match the growing business as well as the increased regulatory demands. Niall is a consultant in William Fry's Asset Management and Investment Funds Department. For over 20 years Niall has advised investment funds, fund promoters, and fund service providers on the structuring, establishment, regulatory, distribution, and management of private funds. Sarah is the Head of EMEA Sales for CSC. During her 15 years in the financial services industry, Sarah has worked with highly talented people at some of the leading financial services companies globally. She works across jurisdictions to build relationships with C-suite executives at Fortune 500 companies, asset managers, financial institutions, and professional advisory firms. Sarah and her team work with fund managers on a daily basis as they navigate the complexities of setting up a fund in Europe.

And with that, let's welcome David, Niall, and Sarah.

Sarah: Thank you, Christy. And hello, everybody. Thank you for joining us today. To dive right in, Niall, we might start with you. There's various legal structures available to fund managers in Ireland. Can you tell us a little bit about the ICAV, the investment limited partnership or ILP, and the 1907 limited partnership structures and the asset classes that best fit each of these structures?

Niall: Yeah. Thanks, Sarah. So just to start off with, the 1907 limited partnership or 1907 LP as it's known, so it's a unregulated limited partnership similar to the Luxembourg SCSp RAIF, which is used by a lot of U.S. fund sponsors. The ILP is a regulated limited partnership structure, while the ICAV is a regulated corporate fund structure. So we've prepared a structure chart for each of the 1907 LP, the ILP, and the ICAV.

So first off, just in terms of the 1907 LP, we have a structure chart there, and from the structure chart you'll see that the 1907 LP looks very much like a typical Delaware LP. But a 1907 LP must have an alternative investment fund manager or AIFM. And you'll see the AIFM is marked. It appears there to the right of the 1907 LP triangle. So there are two types of AIFM — an authorized AIFM and a registered AP. Now the registered AIFM has a much lighter compliance burden and has much lower costs. An AIFM can be a registered AIFM if its AUM is either less than €100 million or less than €500 million if the funds managed by the AIFM are unleveraged and have no redemption rights for the first five years post the initial investment. So a 1907 LP will typically have a registered AIFM as 1907 LPs tend to have assets of less than €100 million.

Then in terms of the ILP, which as I've said is a regulated structure, an ILP is an investment limited partnership, and it has limited partners and general partners as you'll see from the structure chart there. But the ILP must appoint a fully authorized AIFM. As you'll see from the ILP structure chart, LPs will have limited partnership interests in a sub-fund of the ILP as opposed to the ILP itself. Each sub-fund will have segregated liability from the other sub-fund. So it essentially is a separate fund consisting of a separate pool of assets and liabilities.

You'll see from the structure chart that an ILP must appoint a depositary to safeguard the assets of each of the sub-funds. The GP of an ILP will not be the AIFM, and instead the GP will appoint a third-party service provider, such as Intertrust, to act as AIFM. And then the AIFM itself will appoint a fund administrator. And typically the fund sponsor will act as investment manager or investment advisor.

And then lastly, for the ICAV, the structure of an ICAV very much the same as the structure for an ILP. They're both regulated funds. But the ICAV has no general partner. It does have a board, like any company. It will have an AIFM, A depositary, an administrator, an investment manager or investment advisor. But for an ICAV, the investors receive shares rather than limited partnership interests.

So each of the ICAV, the 1907 LP, and the ILP are suitable vehicles for private fund strategies, such as private equity, real estate, venture capital infrastructure, and private credit.

Sarah: Thanks, Niall. David, perhaps it would be useful to provide some examples or case studies of how you've seen these different legal structures managed.

David: Yeah. Yeah, thanks. Thanks, Sarah. Great to be here today, so appreciate the opportunity. Yeah, so there are a number of different reasons why sponsors set up certain fund vehicles in Ireland. It may be because an investor is comfortable with a certain structure that they've used previously and has requested the same again, or they're comfortable with the jurisdiction. It may be because the investor may require a regulated vehicle or not. As Niall has pointed out, there's differences between the different structures he's mentioned there. It might be because of tax considerations and the location of the assets. Regulatory considerations come into play as well, and also the cost and time of setting up different vehicles.

So we speak to a lot of different managers in the U.S. and the UK and Europe. But depending on where they are in that cycle and understanding the exposure to European investors, it does vary. The most common structure we currently see in our client base is the ICAV, which has been a really successful vehicle. It was introduced in 2015 and has attracted the world-leading asset managers and financial institutions to house their investments and raise equity across Europe. It suits managers of all sizes. And it's been around now for quite some time, where it's really built up a credible and strong track record across Europe. It accommodates liquid assets, non-liquid assets.

So again, we see that kind of it varies, of course, depending on what the manager wants. And like we've got examples where we've got large U.S. credit managers that use the ICAV structure for debt funds and loan origination. We also work closely with global PE firms as well using the ICAV for alternative investments, such as royalty streams, credit, private equity, and real estate. And then we see it on the more liquid asset side, where fixed income and equities and obviously derivatives and that you can use them within the structure.

So that's kind of the ICAV and what we've seen. It's probably the most common I suppose. Now we see some of the larger PE firms using the more recently established ILP structure that Niall spoke about. This is the most recent addition to the fund suite in Ireland, and it's mainly targeted at the private equity manager, similar to vehicles used in Luxembourg. So it facilitates common partnership allocation rules, such as excuse and exclude, and allows staged investing and permits management participation through carry. So the look and feel of the ILP is much more what the private equity managers are familiar with in other jurisdictions as well. There's been some big public transactions that have taken place as well, where we've seen fund sponsors, such as Bain and Elkstone and TrueBridge, have set up ILPs in Ireland to pursue venture capital, private equity, and private credit strategies.

So I think with the 1907, it's a little bit different to the ICAV and the ILP as it's more in the unregulated space. And the managers we deal with there are typically maybe they're not looking to raise as much. They might not have as many investors, and they don't need the regulated structure. So that's very attractive to the kind of VC firms coming in and trying to raise capital across Europe.

So we have managers from everywhere I suppose. Ireland is a strong location for U.S. managers and UK managers accessing the European investors. So yeah, that's probably where we're at now at the moment, Sarah.

Sarah: Niall, going back to the partnership structures, the 1907 limited partnership and the ILP are both limited partnership structures. But what are their key similarities and key differences between them?

Niall: Yeah. Thanks, Sarah. So I mean the ILP and the 1907 LP have many features that are similar to other limited partnership structures globally, such as limited liability of LPs and the use of capital accounting to determine investor holdings. In the Irish context, I mean, the 1907 LP is much faster to establish and significantly cheaper to run than an ILP because the 1907 LP and its general partner has a much lighter compliance burden because they're both unregulated. And the 1907 LP doesn't require a fully authorized AIFM or a depositary. So you've got lighter service provider costs there. Most fund sponsors will appoint a fund administrator for a 1907 LP, but even that's best practice rather than a regulatory requirement.

I guess one key difference also is just related to marketing and how you can market an ILP and a 1907 LP throughout Europe. Because an ILP must appoint a fully authorized AIFM, the ILP can avail of the AIFM marketing passport. So the ILP can be marketed very easily throughout the EU. But a 1907 LP can only benefit from a pan-European passport or a marketing passport if the general partner of the 1907 LP appoints a fully authorized AIFM or if the general partner is registered under what's called the EuVECA Regulation. Now we'll talk about the AIFM and EuVECA marketing passports later in the webinar.

And then I guess lastly a key difference would be that which is kind of fairly obvious from the structure charts, and it goes back to the fact that the ILP and the ICAV can be formed and typically are formed as an umbrella structure with one or more sub-funds. A 1907 LP cannot be an umbrella fund structure, but it can be established in a series utilizing the same base offering documents and contractual provisions with service providers.

Sarah: Very good, Niall. And just going back to the point on an umbrella fund structure, what would be the merits of establishing an ICAV or an ILP as an umbrella fund?

Niall: Yeah. So I mean there are considerable efficiencies from simply setting up a new sub-fund as opposed to a completely new ILP or ICAV. And fund sponsors embrace this flexibility for various reasons: to facilitate co-invest opportunities; you have the ability to assign a deal to a particular sub-fund; you have the ability to run parallel funds in the same umbrella fund; and also simply to allow some segmentation of different investor types based on geographic focus or perhaps investor status, such as an ERISA investor or U.S. tax-exempt investor.

Sarah: Very good. Thanks, Niall. David, then why would you look to set up a 1907 limited partnership rather than an ILP?

David: Yeah. Thanks, Sarah. I think that you would favor the 1907 if your investors don't need a regulated structure, you're looking to launch your fund quickly, if the AUM of your fund will be less than what the threshold Niall was talking about there. And the 1907 is not going to be as expensive either. So there's kind of merits there to setting up a 1907, but it really does depend again on the investor base and what's required. So it depends on the drivers around that structure. But I suppose between the two of them there's a scenario to fit all the different options that are out there, so.

Sarah: Yeah. Very good, David. So the 1907 limited partnership is unregulated. Can you advise our audience on how an ICAV differs from an ILP given that they are both regulated products? Niall?

Niall: Yeah. So I mean again it just goes back to the nature of the ILP as a limited partnership structure, while the ICAV is a corporate fund. Now they are both regulated, so they're both subject to authorization and regulation by the Central Bank of Ireland as qualifying investor alternative investment funds or QIAIFs. So a QIAIF is a sophisticated investor fund normally marketed to professional investors. It's subject to a €100,000 minimum initial subscription requirements. So that's an important point just in terms of the equity portion of an investor's capital commitment.

Then the customary features for close-ended private funds, like capital drawdowns, excuse and exclude LPA provisions, carried interest, distribution waterfalls, and catch-up payments, they're all permitted features for QIAIFS generally. Now the CBI, the Central Bank of Ireland's rules around QIAIFS, they do introduce some non-material product regulation, but the rules are generally just around disclosure and offering documents rather than strict parameters around fund structuring and design. And when you're fundraising from regulated channels, so insurers, private banks, pension schemes, the product regulation overlay is typically a benefit compared to unregulated structures, like the 1907 LP, particularly in relation to investment committee allocation decisions on the investor side.

Sarah: Excellent. Thanks, Niall. And why would then a fund promoter choose an ICAV over a limited partnership structure, like the 1907 LP or the ILP, or vice versa?

Niall: Yeah. I mean, there are a number of reasons. I mean, the three key reasons that we often see are the 1907 LP and the ILP are inherently more flexible in terms of ease with which investor preferences and cornerstone investor demands can be accommodated by using side letters to the limited partnership agreement. Often in the case of an ICAV, heavy lifting is required to accommodate a particular investor's demands and expectations, not least because of the principle of pari passu participation by shareholders in the income gains and losses of a sub-fund.

I suppose another important point is that shareholders in an ICAV have no right to participate in the management of the fund or to control any part of the ICAV's business. By contrast, limited partners in a 1907 LP or an ILP can sit on a limited partner advisory committee as with other limited partnership structures. And I mean I guess that does open up the possibility of an investor appointing a representative to the limited partner advisory committee or LPAC, and that's obviously very attractive to institutional investors.

That said, I mean the ICAV is typically simpler to run from an administration and tax reporting perspective because there's no capital accounting involved.

Sarah: Thanks, Niall. Speaking of tax, it's always a huge consideration. So what is the tax treatment of each of these structures?

Niall: Yeah. So the 1907 LP and the ILP are both tax transparent under Irish law. So the income gains and losses in each structure are treated as arising directly to the partners in the proportions set out in the limited partnership agreement. The ICAV is tax opaque. So that's, I suppose, the basic difference between the three.

As the ILP and the ICAV fall within the regulated fund regime in Ireland, there are no Irish withholding taxes applying to the redemption of shares or partnership interests or distributions of income or capital, no taxes payable on the transfers of limited partnership interest or shares in an ILP and ICAV respectively. And the provision of management, administration, and safekeeping services to an ILP or ICAV are VAT exempt.

Now, typically, any carried interest vehicle and beneficiaries of the vehicle will be located outside of Ireland, and they wouldn't therefore be subject to Irish tax. So just to mention that.

Sarah: Thanks, Niall. We're going to switch focus now slightly and over to the very important capital raising and marketing considerations. David, can you tell us a little bit more about the different options available to managers distributing a fund across Europe?

David: Yeah, thanks, Sarah. And this I would say, and you know this, Sarah, because we go on so many of these calls, but we so frequently speak with managers that are looking to kind of access Europe and it is that, "Well, how do we go about doing that? How do we do this with the cost involved and the time and try to really understand it?"

So probably one of the first things we kind of always say is there's merits, depending on the manager. If a manager comes in and they're very experienced, they know what they want, it's relatively straightforward. If a manager is coming in that isn't as familiar with Europe and they might be a startup, or they might have a lot of success in the U.S. but haven't accessed Europe, then we would say there are merits in pre-marketing the fund. So instead of doing the full marketing and launching the fund, you kind of go into the pre-marketing, which means you're providing information to investors around investment ideas and strategies as well as a track record as a fund sponsor, but you're not marketing a specific fund, which is important. So to comply with the rules of pre-marketing, you must not include information that could amount to an offer or a placement of shares in the fund, which it's an important one and it all needs to be documented because there's quite strict rules around the marketing of funds.

So typically what we'd say is, look, if you want to do the pre-marketing side, engage with an AIFM. The AIFM files a notification with the local regulator on behalf of the sponsor with the notification details you intend to launch a fund and wish to initiate discussion with potential investors. So there's a kind of formality around it. But ultimately, it's you haven't set up the fund yet. You haven't taken on all the cost. There is some cost associated with it, but you get a much better feel for if there's appetite for your strategy or for you as a sponsor. And then, if you feel there is, then you can look to establish a fund.

Sarah: Very good. And once the fund is established, what are the options then?

David: Yeah. So there's really two, if you want, kind of strategies, and then there's probably a third option, which I can touch on. But the strategies are really Niall mentioned the passport and the EuVECA passport earlier on. So you can avail of the full relevant passport for the fund, where it allows the sponsor of the fund to market the Irish fund across the EEA as long as you, obviously, comply with the certain notifications. Or you can also go down the private placement route. The private placement route then is a little bit you're dealing with each regulator.

So if you look at the AIFMD marketing passport, what you're doing there is the fund, and this is kind of like our most common engagement with sponsors, where they would appoint ourselves as the AIFM. So you appoint a fully authorized AIFM, and then the AIFM has access to the marketing passport, which will allow the fund to be marketed to professional investors throughout the European Economic Area.

With the EuVECA passport, slightly different, but something similar. Really it's not as well known, I suppose. Maybe it is on the venture capital side. But it really allows registered AIFMs to market EU venture capital funds to professional and other investors throughout the EU. So it's slightly different in that it includes high-net-worth individuals as well being marketed to. So a little bit different there, but very specific to venture capital.

So they would be, if you want, the most compliant, the easiest way of doing it. The other way is, as I said, private placement, and that's really where you're going to each jurisdiction and it's not necessarily the AIFM because the AIFM could be outside the jurisdiction, it could be a non-EU AIFM. And you're actually going to each jurisdiction and you're notifying each regulator of that you want to market that fund, distribute that fund within that jurisdiction. And then you've got to comply with their particular requirements. But they'll all vary, and that's the difficulty there. You're managing this kind of multiple regulators if you've got investors in multiple jurisdictions.

Where it is advantageous is maybe there's investors only in one location, and you don't need to go through the full AIFMD passport setup. And then it makes sense. But again, it comes back to the setup with the manager, the amount of investors, where the managers are located.

So there's a couple of very good options there. There is a third I'll just mention — reverse solicitation. That's something a lot of listeners would be aware of, and that's really where you're saying that the investor has approached the fund sponsor to invest in the fund without any marketing from the sponsor. And even pre-marketing, there has to be a good period of time before you can apply reverse solicitation then thereafter. So it's used. What I would say is it's becoming grayer and grayer, and Niall will probably back me up on that one as well, from the legal side. It's not an area that you would consider a marketing strategy. It might apply for one investor or maybe two. But credibly if you have a fund with a lot of investors, they all came in through reverse solicitation, it's probably not that likely. So I think if you are going into reverse solicitation, you just need to make sure it's documented. But I would really kind of focus on the passport in the private placement to be honest.

Sarah: Yeah. Thanks.

David: So yeah, that's what we'd see.

Sarah: Thanks, David. Yeah. So assuming that pre-marketing has gone well, Niall, what would then be the legal and regulatory process for setting up either a 1907 LP, an ILP, or an ICAV in Ireland?.

Niall: Yeah. So the quickest structure to establish is definitely the 1907 LP because there's no regulation applying to the 1907 LP or to the general partner of the 1907 LP. So I mean the registration process is very quick. You do need to apply to the Central Bank to register the GP as an AIFM. But the whole process in terms of getting the 1907 LP and the GP in place takes between four and six weeks. And so it's very quick. The fees involved, the legal fees will be quite low. So that's a really kind of quick way to launch a fund.

It will typically take between 8 to 10 weeks to establish an ILP or an ICAV because there are various applications that need to be made to the Central Bank. And so each prospective director of an ICAV and each prospective director of the general partner of an ILP must be approved by Central Bank. If the fund sponsor wishes to act as investment manager of an ICAV or ILP, then the fund sponsor will need to be approved by the Central Bank. There is a requirement that the ICAV and the ILP prepare an offering memorandum, and that offering memorandum must comply with mandatory disclosure rules. So there's a bit of drafting to be done there. And for a 1907 LP, it will often not have an offering memorandum at all, and it's not required to.

So then I guess the last piece is an ICAV and ILP will need to appoint or, sorry will need to select, so normally they'd go through a due diligence process and then appoint a depositary, a fully authorized AIFM, an administrator, a money laundering reporting officer. And an ICAV as a corporate fund and the general partner of an ILP will both need to appoint a company secretary. So the selection process and then negotiating contracts with each service provider, that will take time. And it is a crucial part of the setup process because obviously, from day one, you do want to be partnering with the right service providers.

Sarah: Very important indeed, Niall. Just quickly, perhaps you could just touch on the regulatory burden for each structure on an ongoing basis once the fund is launched.

Niall: Yeah. So for a 1907 LP, the regulatory burden is quite light. So the names and limited information on each limited partner, including the limited partner's capital contribution for a 1907 LP, that information needs to be filed at the Irish Companies Registration Office. And it is accessible to the public, so the public can see that information on payment of a fee. So that's an important point to know because sometimes that's an important, I guess, consideration for fund sponsors. So a 1907 LP is required to prepare financial statements every year and file them with the Companies Registration Office. The financial statements don't necessarily have to be audited. So there is an audited exemption available there, which many of our clients find very useful. And a partnership tax return also has to be filed at the Revenue Commissioners, so the IRS or the equivalent of the IRS. But again, that's more kind of an ongoing compliance piece. Costs involved aren't high in terms of the of the compliance steps that need to be taken.

By contrast, as regulated structures, the ICAV and the ILP do have a heavier regulatory burden. There are a number of periodic and ad hoc reports that need to be filed at the Central Bank. And then any changes to the board of an ICAV or of the GP of an ILP must be pre-approved by the Central Bank. Any amendments to the fund documents of an ICAV or ILP must be filed with the Central Bank for approval. And also on top of that regulatory burden, there are levies and fees that need to be paid by an ICAV and ILP. They're not a significant cost, normally between €5,000 and €10,000 per annum. But just important to mention.

Now, I mean, in terms of the regulatory piece, it is important to note that investors often take assurance from the level of regulation that's applied both to an ICAV and ILP, but also to their service providers because the service providers are themselves subject to extensive requirements under the AIFMD framework and other EU national regulation. So while the ICAV and the ILP come with extra regulatory obligations, you may actually find that this is a net positive for a successful fund raise in terms of certain investors.

Sarah: Very important. Thanks, Niall.