Originally appeared in Financier Worldwide Magazine, August 2011
Private equity firms may need to use a wide variety of legal structures and domiciles to conduct their operations efficiently. Ireland is well known as a fund domicile, and though it is perhaps better known as a domicile for UCITS funds and hedge funds, it is home to a growing number of private equity funds. It has been home to a funds industry for over 20 years and hosts or services the funds of over 850 international sponsors currently across all asset classes representing close to €2 trillion in assets.
Limited partnerships have been the historic structure of choice for private equity firms and the Irish Investment Limited Partnership Act, 1994 provides for such a structure in a regulated fund context. Unregulated structures are generally housed within the limited partnership structure established under the Limited Partnership Act, 1907. Irish variable capital investment companies provide a flexible corporate solution to fund sponsors and are the most common structure used by private equity fund sponsors in Ireland. Unit trusts and common contractual funds (a tax transparent contractual based fund based on co-ownership of the fund's assets) are also available structures.
There is a growing realisation among fund sponsors that there are very good reasons for considering a regulated European domicile for their funds, the minimisation of portfolio level withholding tax by accessing a country's double taxation treaty network being one such reason. Regulated private equity funds in Ireland are not subject to any taxes on their profits or gains. There are no Irish withholding taxes in respect of a distribution of payments to investors who are not resident or ordinarily resident in Ireland provided that the fund has been provided with an appropriate tax declaration signed by the investor. While Irish private equity funds themselves can generally not access Ireland's double-taxation treaty network, a taxable Irish acquisition vehicle can be used while the vehicle's tax bill is minimised through the use of profit equalisation securities. An additional benefit of this structure is that it should eliminate any chance of a foreign tax exposure for the fund as a result of being deemed resident and/or having a permanent establishment in another jurisdiction (where the investment manager is located) by the very reason that the Irish acquisition vehicle will be deemed to be liable to tax in Ireland and a resident thereof for purposes of the relevant treaty. These Irish vehicles can also work as part of a structure involving a non-Irish private equity fund.
Perhaps the single biggest consideration for private equity sponsors in Europe at the time of writing, is the Alternative Investment Fund Managers Directive (AIFMD) – the new law governing the operation and marketing in Europe of non-UCITS funds which has to be implemented by EU member states by July 2013. The Directive will apply to private equity managers with assets under management in excess of €100m, or €500m where the funds are unleveraged and do not offer redemption rights to investors. Once the Directive is transposed into national law in the Member States (i.e., at the latest July 2013), an EU authorised manager will have a 'passport' to freely market its EU-domiciled private equity funds to 'professional investors' in its own Member State and other EU Member States, subject to a straightforward notification process. This provides a potentially significant means of accessing this investor market without having to deal with the vagaries of national private placement rules and Ireland as a potential domicile should be factored into fund sponsors' thinking.
The basic framework of Irish fund law and regulation applies equally to private equity funds as to other funds. Given that a portfolio of private equity investments will normally be illiquid, the available Irish regulated fund structures are what are referred to as non-UCITS structures – UCITS structures are not appropriate given their focus on liquid assets and their requirement to provide at least twice monthly redemption facilities. It should be noted that non-UCITS products, unlike UCITS, do not benefit from the principle of mutual recognition within the European Economic Area and cannot be publicly marketed in most other Member States. The public marketing of true closed-ended non-UCITS within the European Economic Area is possible under Directive 2003/71/EC (the 'Prospectus Directive'), however, our experience to date is that most promoters of this type of product do not consider the Prospectus Directive regime to offer marketing advantages particularly for the sophisticated or institutional market place.
The Qualifying Investor Fund (QIF) is Ireland's flagship non-UCITS vehicle. QIFs are authorised and regulated the Central Bank of Ireland, can be marketed solely to 'Qualifying Investors' and carry a minimum initial subscription per investor of €100,000. A Qualifying Investor is: (i) an investor who is a professional client within the meaning of Annex II of European Directive 2004/39/EC (Markets in Financial Instruments Directive (MiFID)); or (ii) an investor who receives an appraisal from an EU credit institution, a MiFID firm or a management company approved for the purposes of European Directive 2001/107/EC that the investor has the appropriate expertise, experience and knowledge to adequately understand the investment in the fund; or (iii) an investor who certifies that they are an informed investor by providing the following: (a) confirmation (in writing) that the investor has such knowledge of and experience in financial and business matters as would enable the investor to properly evaluate the merits and risks of the prospective investment; or (b) confirmation (in writing) that the investor's business involves, whether for its own account or the account of others, the management, acquisition or disposal of property of the same kind as the property of the fund; (subject to any exemption therefrom permitted by the Central Bank). An exemption from the minimum subscription requirement and qualifying investor criteria is available to the fund's managers and a limited number of other persons and entities that are closely connected with the management of the fund.
The ability of a QIF private equity fund to exercise influence over the management of the issuers in which it has invested or to take legal and/or management control of the issuers is subject only to setting out the fund's policy in its offering document and there are very few other investment restrictions which apply.
Irish regulated funds must appoint a local administrator and custodian and a minimum of two local Irish directors. The principal function of the administrator is to value the fund (and it normally maintains the shareholder register as well). The custodian is responsible for safe-keeping the fund's assets and for supervising the management and administration of the fund. Irish funds must retain an independent Irish audit firm to audit the fund once each year.
It certainly appears that with the implementation of the AIFMD due in 2013, choosing an EU domicile such as Ireland is becoming increasingly relevant for private equity fund sponsors as this will position such funds optimally to be marketed to professionals within the EU.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
