ICAVS: Vehicle of choice

As European domiciles launch new manager-led fund structures, Funds Europe examines the early success of Ireland’s Icav.

In the wake of the implementation of the Alternative Investment Fund Manager Directive (AIFMD), a number of European domiciles have launched new ‘manager-led’
fund structures in order to attract professional and institutional investors in specialist fund classes such as real estate and private equity.

These new structures are designed to offer a more flexible alternative to the stiffer regime that was imposed upon Europe’s alternatives fund market, even if the eventual rules proved to be far more accommodating than in the original draft legislation.

These ‘manager-led’ vehicles are supposed to provide a stripped-back and streamlined regulatory environment for a class of professional investor deemed to be sophisticated enough to carry out their own due diligence.

As is so often the case, Ireland was the early mover, launching the Irish Collective Asset-management Vehicle (Icav) in January 2016. Guernsey then came out with its Manager Led Product (MLP) in March, followed by Malta and the Notified Alternative Investment Funds (Naif) and Luxembourg and its Reserved Alternative Investment Fund (Raif), which was passed into local law in July.

Meanwhile Jersey is currently in the throes of developing its own manager-led fund structure, the JRAIF. According to Mike Byrne, chairman of the Jersey Funds Association, the JRAIF will make Jersey’s regime “clearer, simpler and more streamlined”.

SOLID REPUTATION
Ireland’s Icav has been active the longest and, according to the latest Central Bank figures published at the end of July, 271 Icavs have been authorised since March 2015. Included among these is the fund of fund manager Permal, which relocated $4 billion worth of assets from the British Virgin Islands to Ireland back in March 2015.

Ireland has built up a solid reputation as a fund centre for hedge funds and several features of the Icav are designed to attract US investors, such as a tick-the-box feature for tax arrangements as well as investors in real estate and private equity funds that have been put off by the bureaucracy created by the AIFMD.

The logic behind these new, so-called manager-led products is that if the manager is regulated under the likes of the AIFMD, it should not be necessary to regulate each individual fund they launch. Clearly the domiciles that have launched new fund structures are competing with each other but also with other onshore and offshore jurisdictions that have applied a light regulatory touch to private equity and real estate funds.

For example, the SEC in the US has little regulatory oversight for alternative funds, while the UK
has a rigorous process for approving fund managers but approval for funds is largely limited to ensuring compliance with the AIFMD.

The likes of the British Virgin Islands (BVI) and the Cayman Islands may feel most threatened by the new manager-led fund structures from European domiciles and the prospect of more re-domiciliations of funds akin to Permal’s move from BVI to Ireland.

Prior to the Icav, fund managers had the choice of using a corporate fund based on a PLC structure or else setting up a Unit Trust, a Common Contractual Fund or an Investment Limited Partnership. The Icav is most similar to the plc-based corporate fund but with a much more streamlined structure that does not make it subject to wider company law. “The idea was to set up a corporate structure that is bespoke to investment funds,” says Kieran Fox, director of business development at Irish Funds, the country’s industry association.

For example, it is possible for the board of directors to elect to dispense with the need for an annual general meeting (although the auditor or shareholders representing 10% of the voting rights may require an AGM be held in any year).

And changes can be made to the governing document of an Icav fund (the instrument of incorporation) without the need for shareholder approval, provided the changes are certified by the depositary as not prejudicing the interests of the shareholders.

The Icav is suitable for both Aifs, Ucits as umbrella structures with a number of sub-funds and share classes, and for the efficient establishment of Master Feeder structures. Additionally Icavs also offer an advantageous tax treatment for US investors through the ability to make a ‘check the box’ election which allows income or gains to be allocated to the shareholders of the Icav, thus avoiding possible adverse tax consequences for US-taxable investors.

But perhaps the most notable feature of the Icav is its appeal to alternative fund managers and investors. As of the end of February 2016, figures from the Central Bank of Ireland (CBI) show that 146 Icavs have been set up, with the majority being Aifs (€5.7bn AuM compared to €1.3bn AuM for Ucits funds).

MASTER STROKE
Importantly, the Icav can also cater for the growing interest in liquid alternatives by incorporating not just Aifs and Ucits funds but also the Master Feeder structure, says Fox. This is of particular interest to US or offshore managers and investors. “Prior to the Icav, Master Feeder structures were typically set up using a Unit Trust as the master, but now you can have an Irish Icav as the master, which can be either internally or externally managed, an Irish feeder Icav fund and parallel offshore (Cayman or Delaware LP) feeder funds.”

The success of the Icav is seen by some in the industry as another example of co-operation between government, regulator and the industry in order to deliver new legislation that matches investors’ demands. It is hoped that this same approach can be applied to further developing new structures for real assets such as private equity, real estate and infrastructure.

“We have looked at the demand for real assets and the preference among global investors and managers was for partnership structures,” says Peter Stapleton, partner at the law firm Maples and Calder.

Ireland has two longstanding partnership regimes – an investment limited partnership regime dating back from 1994 and even further back to a 1907 limited partnership, which is the equivalent of the tried-and-tested and immensely popular English and UK vehicle, says Stapleton.

“We looked at those partnership structures to see if we could improve them and have made submissions to the Irish government for consideration.”

For, as successful as the Icav has proven to be in its relatively short, 18-month existence, it is just one in a number of longstanding innovations, says Stapleton.

©2016 funds europe