The Irish funds industry has seen strong growth in the last decade. Total assets under administration have increased from 1.8 trillion euros to around 5 trillion euros and recent changes to the Irish Investment Limited Partnership (ILP) legislation aims to support further expansion. In 2020, we saw other hubs such as Singapore, Hong Kong and Luxembourg introduce similar corporate structures to draw fund managers away from other jurisdictions.
Background to the ILP
In recent years, Luxembourg has been through progressive legislative and fund product structuring, to provide a more compelling European fund domicile for private equity funds, private credit, infrastructure and other real assets strategies. However, recent changes to the ILP mean Ireland can now offer an attractive, efficient and purpose built alternative to the Luxembourg Société en Commandite (SCS).
The ILP is a regulated Irish fund structure, in the form of a common law partnership regulated by the Central Bank of Ireland. An ILP is transparent for Irish income tax and capital gains tax purposes under pre-existing law. The ILP structure is created by a contract and must have at least one general partner and at least one limited partner. The general partner of the ILP must create and actively maintain a register of beneficial ownership of the ILP.
ILPs can be established as an open or closed ended fund and can be set up as single funds or as umbrella funds with segregated liability. This structure is only available for alternative investment funds and as such they are particularly well-suited to private equity and real estate structures as ILPs allow the management of separate portfolios of assets under an ILP umbrella.
What are the changes?
The ILP structure was first launched in 1994; however, the intervening 25 years saw limited success and relatively few private funds were set up in Ireland under this structure. Private equity and real asset strategies did find a home in the qualifying investor alternative investment fund (QIAIF) Irish Collective Asset-management Vehicle (ICAV) structure but private equity managers continually expressed a preference for a general partnership – limited partnership true capital accounting solution.
To address this, on December 23, 2020, long awaited changes were made to the legislation to make it fit for modern purpose. The market welcomed these changes to the limited partnership legislation as a statement of intent, to strengthen Ireland’s competitive position as an attractive fund domicile in Europe.
These changes have so far been positively received by the market and include (but are not limited to): “Safe harbour” rules: The introduction of “safe harbour” rules which allow limited partnerships to participate in any board of advisory committees related to the ILP (e.g., an investment committee), vote on changes to the partnership agreement and conduct certain activities while preserving their limited liability status.
Amendments to the limited partnership agreement: Removal of the requirement for all investors to approve amendments to the partnership agreement. Instead, such amendments will require approval by a majority of investors (by reference to investor contributions).
Liability provisions: Standardising the liability provisions (including those applicable to service providers) with standards under other Irish regulated investment funds clarifying that limited partners who do not take any part in the conduct of the business of the partnership cannot be prosecuted for any offences committed in the management of the partnership.
Admission or removal of general partnerships: New provisions to make it easier to replace a general partnership. Creating a statutory vesting event whereby all assets, and liabilities can be transferred from the exiting general partnership to the incoming general partnership or remaining general partnership. In addition to these amendments, the ILP Bill introduces a number of other measures to ensure there is closer alignment with domestic and EU legislation, such as the Alternative Investment Fund Managers Directive (AIFMD):
Umbrella funds: General partnerships will have the ability to establish an ILP as an umbrella fund with multiple sub-funds, the assets and liabilities of which will be legally ring-fenced..
Dual foreign name: The ability to register a “dual foreign name” for the ILP to assist an ILP which is operating in a non-English speaking jurisdiction, (e.g., Chinese or other non-English characters) to have official recognition of a translated name.
Redomiciliation: The possibility for ILPs to be migrated into and out of Ireland by way of continuation, which provides scope to redomicile existing partnerships without significant implications or cost.
Impact of ILP changes for fund managers
The use of partnerships as fund vehicles has become increasingly popular in recent years, particularly in the private equity industry. The reason for this is that partnerships allow investors to invest in underlying assets, whilst also ensuring that liability is segregated and any income and gains from investment remain taxable at an investor level as if they had invested directly. Changes to the ILP Act increase the attractiveness of Ireland to fund managers in the private equity space as they can now benefit from increased flexibility in the choice of structures as well as greater cost efficiency by allowing multiple sub-funds within one ILP structure. Ultimately, these changes will also translate in a faster speed to market, technically with 24-hour authorization.
This new legislation provides a supportive regulatory environment, not only for new funds to flow into Ireland but also for established managers in other jurisdictions consider relocating domiciles especially for private capital asset managers currently based in the UK, United States, Europe and Asia. This author is already seeing increased interest from private equity managers looking to establish parallel European structures to their existing offshore funds (e.g., Cayman, Delaware), to distribute to European investors via the AIFMD passport.
Ireland already services in excess of 40% of the world’s alternative investment funds with a long established and sophisticated fund services and administration ecosystem. But the updated ILP is a significant development the effort to enhance Ireland’s reputation as a full-service fund management and fund domiciliation hub.
Ireland now has a partnership model, which is fit for purpose and is commercially viable for private equity and other asset classes that require a fund vehicle which is transparent for tax purposes. The fact that an ILP is regulated and adheres to international best practice is likely to appeal to certain investor types such as European institutional and sovereign wealth funds. Ireland has always been highly regarded by international investors, and as the market gains familiarity with the ILP it becomes a very strong option, particularly for private equity managers.
First published on Thomson Reuters Regulatory Intelligence on March 1, 2021
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