Nicholas Pratt looks at Ireland's fund processing industry's ambition to be dominant in the regulated hedge fund operations world.
The Central Bank of Ireland’s May 15 announcement that it was ready to receive applications for fund managers to become compliant with the Alternative Investment Fund Managers Directive (AIFMD) was unmistakably another sign of Ireland’s ambitions under this new regulation.
Self-conscious of its leading position as a back-office centre for hedge funds even prior to the AIFMD, Ireland seems to feel it cannot fail – must not fail – to become the jurisdiction of choice as service provider to the new regulated business created by the directive.
So will the hedge fund community with operations in Ireland maintain this momentum and give Ireland what it really wants: the first AIFMD-recognised manager?
Some do not expect there to be a flurry of applications for early registration. According to Declan O’Sullivan, partner at law firm Dechert, there is a bit of a phoney war going on at present in that there are lots of people interested in getting AIFMD approval and making full use of the marketing passport but a reluctance among promoters to be the first “over the top”.
“There will be a number of pioneers that have very specific sales objectives in countries such as Germany or Switzerland and will be looking to launch by July. And then after the summer I will expect to see a significant uplift in people seeking authorisation, especially new promoters to whom the transition provisions will not apply.”
One of the most significant features of the regulator’s AIF Rulebook, a publication to help managers prepare for the AIFMD regime, is that applications to set up Qualified Investment Funds (QIFs) for non-EU alternative fund managers will still be accepted, says O’Sullivan. “This is significant for US managers. It allows them to stay out of the scope of full AIFMD-compliance. While they will not be able to benefit from the AIFMD passport for marketing across Europe, they will be able to rely on private placement and it appears that the regime, with regard to private placement across the EU, will be more benign than first anticipated.”
O’Sullivan admits that he has been surprised that more countries have not opted to pull down the shutters on private placement. “We will have to wait and see if an onshore trend emerges over the next few years and that will be down to investors as much as regulators.”
The AIFMD becomes effective from July 22, with a transitional period until July 2014. It was born out of market uncertainty and confusion, but it has crystalised into a new business opportunity for Ireland and Luxembourg, the two predominant cross-border fund processing centres, to service regulated hedge funds, private equity and real estate funds in Europe.
Ireland’s ambitions under AIFMD were also seen with the publication of the AIF Rulebook and a Q&A document about the regime.
All were greeted as milestones on the way to the AIFMD future.
But aside from the fanfare as AIFMD rolls into town, what are the main points for fund managers during this transitional period?
First, it is possible to achieve AIFMD compliance while maintaining continuity of existing business, says the regulator. AIFMs may rely on depositaries that do not have an AIFMD-compliant authorisation.
Further, umbrella funds structured as Ireland’s QIFs under the old regime can continue to issue sub-funds during the transitional period without having to transition to the new regime.
There are also two ways in which a non-EU alternative fund manager can benefit from the transitional period, the Q&A document says.
The current QIF regime will be replaced by a new Qualifying Investor Alternative Investment Fund (QIAIF) regime and the regulator is proposing a number of enhancements to the flexibility of the QIAIF.
These include the removal of the specific Irish prime brokerage rules and counterparty credit rating criteria. The new regime in Ireland will instead rely on the AIFMD depositary leverage and risk control requirements.
“This provides greater flexibility to differentiate between investors in the same fund through the use of share classes,” says Kate Forde, compliance officer, Apex Fund Services Ireland. “Subject to certain requirements, assets may be allocated to individual share classes and capital gains/losses and income arising from those assets may be allocated to shareholders in that class.”
Retail Investor Alternative Investment Funds (RIAIFs), an Irish proposal for non-Ucits retail investors, must have an authorised AIFM and therefore cannot have a non-EU AIFM until non-EU AIFMs are allowed to be authorised under the regulations.
In terms of the transitional arrangements, an existing EU AIFM must submit an application for authorisation within one year and, during that one-year period, they will be expected to comply to their best effort with the AIFMD as implemented by national law – and in the case of Ireland, pre-existing rules will continue to apply until the AIFM is authorised.
For registered AIFMs managing alternative investment funds with assets under the €100m threshold (or €500 million threshold for closed-ended funds that do not employ leverage) there will be no obligation to register with the regulator until July 22, 2015, but they will be afforded time to consider whether to opt into the AIFMD, in which case they must register this interest by July 21, 2014.
A final point of interest in the Central Bank of Ireland’s announcement is the definition that the regulator offers for “qualified investors”, given that it is the same criteria which will be used to define the categories of investors able to invest in QIAIFs. The AIF Rulebook states that the criteria includes investors who have been deemed to have, or who self-certify that they have the appropriate expertise, knowledge and expertise to invest.
Unsurprisingly the regulator’s announcement has been warmly received by the Irish funds industry. Michael Jackson, partner in the asset management and investment funds group at law firm Matheson, says: “The path is now clear for authorisation of Irish AIFMs enabling them to avail of a full European passport at the earliest possible opportunity. The Central Bank has also provided much needed clarity to other AIFMs who wish to avail of the transitional period afforded by the AIFMD.”
The early announcement from the regulator and the fact that it is the first EU member state to open the AIFMD application process will also help Ireland’s efforts to become a more competitive jurisdiction within the EU, says Forde, at Apex.
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