Irish Fund Finance in Five – Part 5

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Ireland is currently home to over 8,880 funds with over €4.9 trillion in net assets. More than 1,000 fund managers from over 50 different countries have assets administered in Ireland, including 17 of the top 20 global asset managers. As a destination for fund managers, Ireland offers access to the EU-wide marketing passport for UCITS and AIFs. Accordingly, Ireland is established as a domicile of choice for the global investment funds industry and the fund industry in Ireland continues to grow year on year.

In addition to the growth of the Irish investment funds industry, the global fund finance industry has experienced rapid growth over the last number of years. The fund finance industry has proven itself to be robust and withstood a number of external market factors and periods of volatility, such as:

• The current higher interest environment
• The exit of certain market participants, and
• Onerous capital requirements for financial institutions

As both the Irish investment funds industry and the global fund finance industry continues to grow, naturally the number of fund finance transactions involving Irish vehicles also continues to grow. Over time, Ireland has proven itself to be a convenient jurisdiction in which to conduct fund finance transactions. With its English-speaking population and its common law legal system, market participants based in other jurisdictions (such as the UK and the US) often find transactions involving an Irish nexus to be convenient and familiar.

We have prepared this “Irish Fund Finance in Five” series to act as a comprehensive overview of all things Irish law related in the fund finance market. This series will be split into five parts, consisting of:

• Part 1 – Common Irish Legal Issues in Fund Financings
• Part 2 – Irish Security Considerations
• Part 3 – Irish Legal Due Diligence Considerations
• Part 4 – Irish Subscription Documents Considerations
• Part 5 – Overview of Irish Fund Structures

The issues examined by us in this series act only as a summary and are not intended to be exhaustive. As readers will appreciate, this series should not be considered a substitute for legal advice and lenders and funds should engage legal counsel at the outset of a transaction to ensure that these issues are given appropriate consideration.

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Introduction

In Part 5 of our ‘Irish Fund Finance in Five’ series, we examine the various Irish vehicles available to investors and asset managers. In addition, we discuss why so many global investors and asset managers use Ireland as a platform for managing, holding and investing in assets globally.

As noted, Ireland is established as a domicile of choice for the global investment funds industry and the fund industry in Ireland continues to grow year on year. In addition to the fund industry, Ireland is also a leading jurisdiction for the incorporation of special purpose vehicles or SPVs used for international corporate debt, structured finance and securitisation transactions. Irish SPVs are used to issue and list debt securities and to originate or acquire a portfolio of assets. Ireland is also a popular location for listing debt securities issued by non-Irish vehicles. As of the end of Q3 2024, there were 3,522 active Irish-resident SPVs with assets of approximately €1.113 trillion. Irish securitisation SPVs include 30.2% of euro area securitisation vehicles and 27% of euro area assets.

In this article, we provide an overview of the:

• The two primary regimes applicable to Irish regulated investment funds

• The types of regulated Irish fund vehicles available, and

• The types of indirectly regulated / unregulated Irish investment vehicles available

1. Primary regimes applicable to Irish regulated investment funds

The Central Bank of Ireland (the Central Bank) is the primary domestic regulatory authority with responsibility for the oversight of funds and fund service providers in Ireland. The Department of Finance plays a key role alongside the Central Bank in drafting fund specific legislation.

The two types of Irish domiciled regulated funds are:

• Alternative Investment Funds (AIFs), and

• Undertakings for Collective Investment in Transferable Securities (UCITS)

Regulated funds in Ireland may be structured as standalone vehicles or as umbrella funds with multiple sub-funds, whereby each sub-fund holds a separate portfolio of investments and the assets and liabilities of one sub-fund are segregated from each other sub-fund. Importantly from a lender perspective, segregated liability under Irish law means that each sub-fund’s assets are ringfenced from the specific liabilities of other sub-funds in the same umbrella. While the segregated liability concept is usually provided for by statute or operation of law, it is customary for segregated liability wording to be included in the finance documentation. The wording is also typically included in any other contracts to which the fund is a party.

Regulated funds may also have different liquidity profiles and therefore, subject to the requirements of the applicable regulatory regime, can be established as open-ended funds, closed-ended funds or funds that are open-ended with limited liquidity. A fund’s redemption profile will also depend on the underlying portfolio with AIFs generally being closed ended. There is also no specific legislative requirement to distribute capital or income and therefore individual classes in regulated funds can be established as either accumulating or distributing classes.

AIFs

All AIFs must appoint an AIFM. There are two broad regimes which apply to AIFMs depending on whether or not the AIFM is designated as an ‘authorised’ AIFM or a ‘registered’ AIFM. Where an AIFM is designated as a registered AIFM (one which manages assets below certain thresholds), a light-touch regulatory regime will apply. In Ireland, it is common for AIFs to use the functions of a third-party service provider for the authorised AIFM function.

AIFs usually pursue alternative investment strategies. These are strategies involving investment in non-conventional asset classes such as private equity and private credit, which may not be permissible under the UCITS regime. AIFs can be established as:

• Qualifying Investor AIFs (QIAIFs)

• Retail Investor AIFs (RIAIFs), or

• European Long Term Investment Funds (ELTIFs)

The QIAIF has become one of Ireland’s most successful fund products, offering a flexible wrapper for alternative investments. QIAIFs are not subject to material investment restrictions that limit the range of property and investments that may be acquired. QIAIF can usually only be distributed to qualifying investors, meaning professional investors under the EU’s MiFID II regime, investors which receive an appraisal from an EU credit institution, a MiFID II firm or a UCITS management company or investors who certify they are informed investors and are generally subject to a minimum initial subscription requirement of €100,000 or its foreign currency equivalent. However, exceptions to the QIAIF qualifying investor criteria are available to certain ‘knowledgeable’ investors which include those involved in the provision of management or advisory services to the QIAIF.

To meet speed-to-market demands of the industry, QIAIFs can generally avail of a 24 hour turnaround time for approval from submission of the relevant fund documentation to the Central Bank. Another advantage for QIAIFs is the availability of a marketing passport where an authorised AIFM has been appointed. Accordingly, following the completion of a relatively straightforward registration process, QIAIFs may be publicly offered to professional investors in other jurisdictions within the EEA.

Given the success of the UCITS and QIAIF regimes, RIAIFs are less common in Ireland. A RIAIF is an AIF authorised by the Central Bank which can be marketed to retail investors. RIAIFs are not subject to minimum subscription criteria but do have certain investment and borrowing limits, as examined below. RIAIFs offer an alternative when a strategy does not fit within the diversification and concentration which are applicable to UCITS.

The ELTIF is a specialised investment fund type that provides investors with access to long-term investments. Only authorised AIFMs can manage ELTIFs. Unlike traditional QIAIFs or RIAIFs, ELTIFs have the benefit of an EEA passport for marketing to both professional and retail investors. The aim of the ELTIF regime is to encourage long-term investments in the real economy, which includes listed and unlisted private companies, infrastructure projects, and real estate. The ELTIF provides a unique channel for retail investors to access private market investments which to date has not been available.

Recent amendments made under Regulation (EU) 2023/606, commonly referred to as 'ELTIF 2.0', have made ELTIFs much more appealing to investors and asset managers. Key changes under ELTIF 2.0 include:

• A much broader scope of eligible investments
• Less prescriptive diversification requirements, and
• Simplified distribution rules for retail investors

From a financing perspective, a change of particular note is the increase in leverage thresholds permitted under ELTIF 2.0. Previously ELTIFs were subject to a limit on borrowing of 30% of the value of the capital of the ELTIF. This leverage threshold has now been increased to 50% of the net asset value of an ELTIF marketed to retail investors, and to 100% of the net asset value of an ELTIF marketed to professional investors.

Borrowing restrictions appliable to AIFs

As examined in Part 3 – ‘Irish Legal Due Diligence Considerations’ of this series, it is important to ensure that a borrower has the capacity to enter into a proposed financing. It is also important that such financing falls within any borrowing limit applicable to the relevant fund. For any proposed fund financing, lender counsel should liaise with the relevant AIFM and sponsor at an early stage to ensure all parties are aware of the relevant leverage limits and the expected leverage positions both before and after the transaction has closed.

Funds established as QIAIFs typically have few regulatory restrictions on their borrowing capabilities or capacity to incur leverage, as they are primarily made available to professional investors. One notable exception are funds which primarily invest in Irish real estate. These funds are generally subject to a restriction on incurring leverage above a level of 60% of total debt to total assets under the Central Bank’s macroprudential policy framework for Irish property funds. This restriction should be borne in mind by prospective lenders looking to lend into such a fund. As it is common for Irish real estate funds to utilise facilities to grow, lenders should obtain assurances on the level of debt in the relevant fund structure both before and after the introduction of financing. Lenders may wish to include assurances around compliance with relevant Central Bank limits on incurring leverage in the relevant facility agreement.

When calculating the leveraging ratio of an AIF, AIFMs can exclude borrowing arrangements entered into if these are temporary in nature and are fully covered by contractual capital commitments from investors in the AIF.

As outlined above, under ELTIF 2.0, ELTIFs are subject to a leverage limit of 50% of the net asset value of an ELTIF marketed to retail investors, and to 100% of the net asset value of an ELTIF marketed to professional investors.

Funds which engage in loan origination are subject to their own bespoke regime. Under Directive 2024/927, commonly referred to as AIFMD II, loan originating AIFs will be subject to a one of the following leverage limits:

• 175% where the loan originating fund is open ended, or
• 300% where the loan originating fund is closed-ended

Under AIFMD II, a loan originating AIF is one whose:

• Investment strategy is mainly to originate loans, or
• Originated loans have a notional value that represents at least 50% of its net asset value

For ELTIFs and loan originating AIFs, borrowing arrangements which are fully covered by contractual capital commitments from investors shall not be considered to constitute exposure for the purpose of calculating the borrowing ratios.

RIAIFs have a limit on borrowing of 25% of net assets which can restrict the borrowing capabilities of these funds.

UCITS

Ireland is the leading jurisdiction in the EU for the establishment of UCITS. The principal advantage of establishing UCITS in Ireland is the ability to passport UCITS to investors, including retail investors, across the EEA. Additionally, the UCITS brand is recognised globally, which is of critical importance for managers seeking non-EU distribution opportunities. Regulators in Asia, the Middle East and Latin America are familiar with UCITS which can be sold to investors in those jurisdictions subject to complying with the relevant local registration criteria.

UCITS established in Ireland are generally not subject to Irish income or capital gains taxes on their investments. In addition, non-Irish resident investors are not subject to any Irish taxes on distributions or on a redemption of shares. Accordingly, it can be efficient from a tax perspective to use Irish UCITS to acquire international investments.

Given UCITS funds can be made available to retail investors, they are generally subject to a higher level of regulatory oversight compared to products like the QIAIF which are only available to professional investors.

Borrowing restrictions applicable to UCITS

Given that UCITS can be made available to retail investors, these products have more restrictive borrowing limits compared to AIFs. UCITS may only borrow up to 10% of the net asset value of the fund and such borrowing can only be on a temporary basis. For this reason, it is more common to see QIAIFs utilised by sponsors in Irish fund finance transactions.

2. Types of regulated Irish fund vehicles

Different types of regulated fund vehicles may be used in Ireland. Sponsors operating in the Irish market may establish funds as one of the following:

• Irish collective asset-management vehicle (ICAV)
• Investment limited partnership (ILP)
• Variable capital investment company (Investment Company)
• Unit trust
• Common contractual fund (CCF)

ICAV

ICAVs are governed by the Irish Collective Asset-management Vehicles Act 2015 (ICAV Act). The ICAV Act was designed specifically to meet the operational needs of investment funds, their managers and investors. It avoids the application of certain company law legislation that is not relevant to funds.

The shareholders of an ICAV generally have limited liability which is limited to the amount of capital that is paid up or undertaken to be paid up by the shareholders.

The ICAV is an administratively efficient vehicle that has the following benefits:

• It may dispense with the requirement to have a company seal
• It may produce audited accounts per sub-fund
• It may dispense with the requirement to hold AGMs, and
• It is permitted to make non-material amendments to its constitution without the requirement for shareholder approval.

The administrative efficiency of using ICAVs has been a factor in them becoming the most common type of fund structure utilised in Ireland since the inception of the ICAV Act.

ICAVs are subject to Ireland’s favourable tax regime for investment funds. In summary, an ICAV is generally not subject to Irish income or capital gains taxes on its investments. In addition, non-Irish resident investors, and indeed certain institutional investors such as pension funds, are not subject to any taxes on dividends, distributions or on a redemption or encashment of shares paid by an ICAV. There are possible exceptions, however, particularly in circumstances where the payment arises from Irish real estate assets.

As an Irish tax resident vehicle, an ICAV can normally access Ireland’s extensive network of double tax treaty agreements, of which 78 are currently signed and 75 are in effect. These tax treaty agreements can allow the ICAV to avail of reduced rates of foreign withholding taxes on foreign sourced income.

An ICAV can elect to “check-the-box” under US tax rules. This operates to classify the ICAV as a partnership or a disregarded entity for US federal tax purposes. This feature can enhance the attractiveness of the ICAV for US taxable investors who generally prefer to invest in tax transparent vehicles.

Investment Limited Partnership

Ireland recently updated and modernised its regulatory framework governing ILPs with the passing of the Investment Limited Partnership (Amendment) Act 2020 (the ILP Act). The ILP Act was designed to meet the needs of investors and asset managers primarily in the private asset / illiquid space. The enhancements introduced by the ILP Act have helped Ireland to compete with limited partnerships in other leading jurisdictions, making Ireland a domicile of choice for the establishment of private funds. An ILP cannot be established as a UCITS.

An ILP is both a common law partnership and a regulated investment fund that is authorised by the Central Bank. As a common law partnership, an ILP is constituted under a limited partnership agreement that is entered into by at least one general partner, or GP. and one or more limited partners (LPs). An ILP is not a separate legal entity and, as such, does not have a separate legal personality, with the GP representing the ILP and usually entering into contracts on its behalf.

An ILP can use capital accounting to allow for different levels of participation in an ILP’s portfolio by LPs. For example, one category of LPs may be excluded from certain investments or, due to stage investing, another category of LPs may participate only in future investments of the ILP.

An ILP is tax transparent meaning that the partnership itself is not subject to tax on its income or gains. Under Irish tax rules, income, gains or losses of an ILP are treated as arising in the hands of the LPs, as if they own a proportionate share of the underlying investments of the ILP. Accordingly, LPs are subject to tax under the tax rules of their country of residence and the country where the investment is situated. They are also subject to any relief available under a double tax treaty between the country of residence of the LPs and the country where the investment is situated.

Investment Company

An Investment Company is a public limited liability company that is subject to the Irish Companies Act 2014 (as amended). An Investment Company is a corporate vehicle that has its own separate legal personality, which is managed and governed by its board of directors and can enter into contracts on its own behalf.

The paid-up share capital of an Investment Company must at all times equal its net asset value. Therefore, the shares of an Investment Company have no par value and as a result fluctuate in value in accordance with the value of the Investment Company’s investments. Shareholders of an Investment Company have limited liability and the investments of the fund are owned by the Investment Company itself.

Since the introduction of the ICAV Act, it has become less common for Irish domiciled funds to be constituted as Investment Companies rather than ICAVs. However, there are still a significant number of Irish domiciled funds in this cohort which existed prior to the introduction of the ICAV Act.

Unit Trust

A unit trust is constituted under trust law by a trust deed entered into between the trustee (i.e. the depositary) and the manager. Generally, under the trust deed, the manager is responsible for the management and administration of the assets of the unit trust. Investors in unit trusts receive units which represent a beneficial interest in the unit trust’s assets.

A unit trust does not have a separate legal personality. Accordingly, it can only act through its manager or, in certain circumstances, its depositary. As discussed in Part 3 – ‘Irish Legal Due Diligence Considerations’ of this series, thorough legal due diligence on the trust deed is essential. This is required to determine the appropriate party or parties to bind the unit trust in any given transaction.

Unit trusts can be popular in certain jurisdictions such as Japan where institutional investors and asset managers are very familiar with the structure.

The Irish tax regime applying to UCITS mentioned above, is similarly applicable to Investment Companies and unit trusts.

Common Contractual Fund

A CCF is constituted under contract law by way of a deed of constitution entered into between the manager and the depositary. Under the deed, the manager is responsible for the management and administration of the CCF on behalf of investors. The depositary will be appointed to safeguard the CCF’s assets under the terms of the depositary agreement entered into between the manager and the depositary.

A CCF does not have its own legal personality and usually can only act through its manager. Investors in a CCF participate and share in the property of the CCF as co-owners. As a co-owner, each investor holds an undivided co-ownership interest in the assets of the CCF as a tenant in common with the other investors.

CCFs are treated as tax transparent for Irish tax purposes, meaning investors are treated as if they own a proportionate share of the underlying investments, rather than as holders of units in an undertaking that owns the investments.

3. Types of indirectly regulated / unregulated Irish investment vehicles

In addition to the regulated structures outlined above, there are also two structures available in Ireland which are not directly regulated by the Central Bank. They are:

• 1907 Limited Partnerships
• Section 110 Companies

1907 Limited Partnerships

A 1907 Limited Partnership is a partnership structure which is established under the Limited Partnerships Act 1907. Much like an ILP, a 1907 Limited Partnership involves the execution of a limited partnership agreement between at least one GP and one LP with the GP acting on behalf of the partnership. These structures are common in the venture capital space but can also be used for investing in infrastructure. In particular, 1907 Limited Partnerships may be suitable alternatives to regulated structures where:

• Investors are comfortable investing in an indirectly regulated fund
• There is a relatively low number of investors given there is a general limit on the number of LPs of 20 which may be increased to 50 in certain circumstances involving the provision of investment and loan finance, and
• The aim is to have a cost-efficient structure in terms of initial and ongoing costs.

While the 1907 Limited Partnership itself is not regulated by the Central Bank, a regulatory layer is applied at the level of the AIFM. The GP of the partnership can also act as the AIFM.

1907 Limited Partnerships are tax transparent for Irish tax purposes, meaning there is no Irish tax charge at partnership level, and investors are treated as if they own a proportionate share of the underlying investments of the partnership.

Section 110 Companies

As noted earlier, Ireland is a leading jurisdiction globally for the incorporation of SPVs, with Irish SPVs being regularly used across a wide variety of transactions, including corporate bond issuances, structured finance transactions, securitisations, private credit / direct lending platforms, and asset / aviation finance.

Irish SPVs are typically incorporated as limited companies and are not fund structures. There are no particular limitations on the company type that should be used when incorporating an Irish SPV. Having said that, by far the most common company types utilised are (i) private limited companies and (ii) designated activity companies. Public limited companies may be used in certain more limited circumstances also. Each of these companies are managed and administered by a board of directors. In the case of Irish SPVs, the directors are often professional directors appointed by corporate service providers. These directors are typically highly experienced in complex financial transactions.

One significant benefit to using an Irish SPV is the possibility of structuring the vehicle and transaction so as to increase the bankruptcy remoteness of the SPV. This means that the SPV’s assets would be ringfenced from their sponsor entity / group. In other words, the SPV should be insulated from financial distress or bankruptcy of the sponsor group.

Two of the principal ways in which bankruptcy remoteness may be achieved are:

1. Structuring the share ownership of the SPV so as to achieve ‘orphan’ status. Orphan status means that the SPV will have no direct or indirect ownership by the sponsor. Instead, the shares of the SPV are held by a professional third-party share trustee on trust for a charitable purpose. Orphan status is an important factor in ensuring that the assets and liabilities of the SPV should not be consolidated with those of a parent or sponsor entity in the event of bankruptcy or insolvency, and
2. Inclusion of limited recourse and non-petition wording in all contractual arrangements. This means that each of the legal agreements the SPV enters into will contain specific contractual provisions which ensure that the creditors of the SPV (i) have recourse only to the specific assets owned / acquired by the SPV, and not to any other entity or group, and (ii) cannot file a petition to institute insolvency or bankruptcy proceedings against the SPV

In addition, another key reason for using Irish SPVs is the favourable tax treatment available under Ireland’s Section 110 regime. Section 110 of the Taxes Consolidation Act 1997 is a specific part of Ireland’s tax code that was originally designed for securitisations, but which now has application to a much wider range of transactions. In order to avail of this tax treatment, the SPV must elect into the Section 110 regime and satisfy certain criteria set out within Section 110 regime.

Section 110 SPVs are widely utilised to facilitate the issuance or creation of debt, asset-backed securities and other financial products in a tax-efficient manner. The Section 110 SPV typically uses the proceeds to fund the origination, or acquisition, of a portfolio of “qualifying assets”.

If the overall transaction is structured properly, using a Section 110 SPV should be extremely tax efficient and allow the SPV to pass revenues from its portfolio of Qualifying Assets up to investors as efficiently as possible.

In order to qualify under the Section 110 regime, the principal requirements are that the SPV must:

• Hold and/or manage ‘qualifying assets’
• Be an Irish tax resident and carry on its business in Ireland
• Carry on only qualifying and ancillary activities for the purposes of the Section 110 regime
• Carry on all transactions, other than regarding its profit participating debt, on arm’s length terms
• Ensure that the first qualifying assets it acquires have a total value of at least €10,000,000 on day one, and
• Notify the Irish tax authorities of its intention to make the Section 110 election within 8 weeks of its first acquisition of qualifying assets

The definition of “qualifying assets” is broad and includes financial assets such as:

• Shares, bonds and other securities
• Futures, options, swaps, derivatives and similar instruments
• Invoices and all types of receivables, and
• Obligations evidencing debt, including loans and deposits

Also included in the definition are commodities and plant and machinery, including aircraft, which is important for the aircraft leasing industry.

As well as favourable tax treatment, some additional benefits of using a Section 110 SPV are:

• Minimal capital requirements: The capital requirement for establishing a Section 110 SPV is usually minimal, making it accessible for a wide range of investors

• Regulatory compliance: Section 110 SPVs are subject to certain regulatory requirements However, they do not need to be licensed, and are not regulated, by the Central Bank of Ireland unless they engage in activities that require authorisation, such as consumer credit, and

• Reputational Integrity: The section 110 regime is long-established and is subject to OECD BEPS and EU anti-tax avoidance rules, as adopted by Ireland. Section 110 SPVs also benefit from Ireland’s extensive network of double taxation treaties (78 currently signed, with 75 in effect)

Due to these factors, Section 110 SPVs can offer significant benefits for structuring financing transactions in a tax-efficient and legally robust manner. However, proper structuring, compliance with evolving regulations, and careful tax planning are crucial to maximising their advantages while avoiding potential pitfalls.

Conclusion

Ireland is established as a domicile of choice for the global investment funds industry and a leading jurisdiction for the incorporation of SPVs used for international corporate debt, structured finance and securitisation transactions. Given the wide variety of fund and investment vehicles available in Ireland, sponsors should be able to structure their investments through Ireland in an efficient and convenient manner. Given the reforms made under the ILP Act and the recent substantial relaxation by the Central Bank of its third party guarantee restrictions, we anticipate Ireland’s presence in the global fund finance industry will continue to grow.

For more information and expert advice, please reach out to a member of our Fund Finance team.