Financial Services: How to set up a QIAIF and AIFM in IrelandMonday, 22 July 2019
1. How do they differ from other fund structures domiciled in Ireland?
QIAIFs are alternative investment funds (albeit they do not need to follow an “alternative” strategy, per se), and therefore adhere (or more correctly their managers adhere) to the terms of AIFMD, as opposed to the UCITS Directive and associated requirements. QIAIFs are not subject to the liquidity, risk spreading, open ended nature, and other rules applicable to funds organised as UCITS and a fund cannot be a QIAIF (or indeed any class of Alternative Investment Fund) and a UCITS. Like Retail Investor Alternative Investment Funds (each a “RIAIF”), QIAIFs are subject to the requirements detailed in AIFMD and the Central Bank of Ireland's AIF Rulebook, however, the QIAIF is not subject to the same order of limitations as the RIAIF. For example, a RIAIF is prohibited from investing more than 20 percent of its net assets in securities which are not traded in or dealt on a regulated market which operates regularly, is recognised, and open to the public, while the QIAIF is not so restricted.
Importantly, a QIAIF is, by its very nature, a regulated fund - unregulated structures are not subject to, and not can they benefit from, the rules associated with QIAIFs. Further, a number of different economic or product types can be housed within the QIAIF - everything from money market QIAIFs, to Master-Feeder, and Loan Originating QIAIFs can be established and are subject to their own particular tailored rules.
2. How does a fund become a QIAIF?
Technically, a QIAIF is a fund which applies to be authorised by the Central Bank of Ireland (the “Central Bank”) as such a scheme, and which has the Central Bank of Ireland's AIF Rulebook imposed on it and/or its manager as a condition of authorisation. In order to do so, the (yet to be authorised) QIAIF's promoters (typically with the support of their professional advisors) will select the legal structure the QIAIF should be established as - a Unit Trust, ICAV, Investment Company, Investment Limited Partnership, or Common Contractual Fund, taking into account issues such as investor preference, tax strategy, etc.
The promoter, again with the support of their advisors, will typically submit an application (technically made by the alternative investment fund manager, the fund (where it has legal personality) and the depositary in certain circumstances) to the Central Bank which, so long as it meets the requirements to be treated according to the fast track process, can be authorised and come into existence within 24 hours of application.
With the AIF Rulebook imposed as a condition on authorisation, the QIAIF (and its manager, where relevant) must take care to adhere with relevant restrictions and otherwise manage the fund in accordance with relevant rules on reporting, leverage, etc.
3. How is a QIAIF distributed?
QIAIFs can, technically (if in corporate form), handle all aspects of distribution, investment, and performance in their own right – they can contract in their own name, handle all interactions with potential investors, etc. It is much more common, however, to see such matters, and in particular distribution, handled by the promoter, often using third party distribution agents and supports, and QIAIFs can easily be incorporated into cross-regional, and even global, distribution strategies.
Since the implementation of the AIFMD regime, QIAIFs can take advantage of the EU-wide “passporting” regime which allows a QIAIF’s shares or units be marketed in EU member states outside of Ireland when adherence with a small number of requirements, in terms of submitting prior notice to the Central Bank, are adhered with. That notice must include certain information including the detail concerning the QIAIF which it is proposed will be circulated amongst potential subscribers as well as a letter from the alternative investment fund manager confirming that the QIAIF will be managed in accordance with AIFMD, So long as the relevant documentation is provided to the Central Bank at AIFMDpassportingin@centralbank.ie, the file is complete and no issue or question is raised, the Central Bank will advise the alternative investment fund manager that it may begin marketing into the other EU member state(s) within which distribution is sought within 20 working days of submission.
As an aside, fund promoters may wish to note that the EU’s AIFMD passporting regime allows for alternative investment fund managers established in one EU member state to carry out their functions in another. Thus, for example, an alternative investment fund manager established in a member state other than Ireland may manage Irish QIAIFs in the same way as Irish alternative fund managers can operate alternative investment fund structures elsewhere in the EU. Prescriptive rules are set out in terms of how these cross-border management arrangements can be established and operated and are designed to ensure that the process is fast, effective, and non-intrusive so long as the alternative investment fund manager concerned meets the minimum standards expected for management across member states.
4. How adaptable is a QIAIF as a fund structure?
QIAIFs are, by their design, flexible and robust fund structures which, generally speaking, meet the objective of providing for an attractive product for fund managers whilst also ensuring investors are protected and the fund’s affairs are conducted in an open and transparent manner. To that end, QIAIFs may adopt many of the features which are typically seen with alternative or non-retail funds, so long as certain conditions (often concerning information disclosure) are adhered to.
For example, QIAIFs can be structured to be generally liquid and open for redemption, closed ended, or to operate on a limited liquidity basis. In the case of limited liquidity QIAIFs, these need not offer redemption and/or settlement facilities on even a quarterly basis, however, such matters must be disclosed to potential investors and the QIAIF must be clearly classified as one operating on a limited-liquidity basis. Further, QIAIFs can establish side-pockets for illiquid holdings, however, such funds must be classed as operating on a limited-liquidity or closed ended basis.
QIAIFs can likewise be structured as umbrella funds, establish share classes for particular purposes, use and invest through subsidiary companies, etc., all of which have particular, tailored, and well-established rules imposed to ensure that such practices meet the goals of adaptability, effectiveness, and investor protection.
5. Who is typically interested in QIAIF structures?
All interested parties from fund managers and promoters to investors and fund service providers are interested in the QIAIF and the rules which apply to it. QIAIFs are managed, invested in, and serviced by a wide range of industry participants worldwide. That being so, entities from institutional investors (such as insurance companies), to custodians, and managers seeking to promote funds in the European Economic Area (including the EU) will often have cause to consider the rules applying to QIAIFs and their rights, obligations, and duties with respect to them.
6. How to set up an AIFM in Ireland
An AIFM requires minimum initial capital of €125,000 and ongoing own funds requirement of ¼ of the previous year’s fixed overhead requirement as calculated in compliance with the EU rules on capital requirements and insurance/own funds to cover professional liability risks.
An application for authorisation as an AIFM is made the basis of a Programme of Activity for the AIFM to include:
- The proposed management functions including Portfolio Management and Risk Management functions;
- Detailed policies and procedures on due diligence on investment selection and monitoring in line with size, portfolio structure and investment strategy of each underlying AIF;
- Effective governance of AIFM and monitoring of delegates;
- Effective monitoring of investment strategy including monitoring of underlying investments and associated risks including liquidity risks;
- Effective Conflicts of Interest policies and procedures; and
- Sound administration and accounting procedures.
7. How can ByrneWallace help?
ByrneWallace have experience in advising managers and promoters on the establishment and operation of a number of specialist types of QIAIF, such as those investing primarily in real estate, infrastructure, private equity, green energy, etc. ByrneWallace can advise and support managers and promoters, investors, and fund service providers on all aspects of QIAIFs throughout the fund’s lifecycle – from establishment, through to trading and, eventual wind-down. ByrneWallace’s unparalleled regulatory advisory and commercial experience makes the firm’s offering among the most compelling on the market for those seeking advice and assistance on QIAIFs, whatever their interest in this important part of the investment funds framework in Ireland.
For further information or advice, please contact Partner Joe Gavin of the ByrneWallace Financial Services Regulation Team