Ireland: financial appeal
25 June 2007
Promoters of Irish-domiciled investment funds can now have a qualifying investor fund (QIF) authorised on the day after the fund documentation is filed with the Irish Financial Services Regulatory Authority (IFSRA). This is a significant development for fund promoters as they grapple with a constantly changing marketplace in which investors' appetites for particular products can change quickly and values of underlying assets move even faster.
It is crucial for fund promoters' business models that the time lag between developing a fund concept and bringing it to the market be kept to a minimum, because delays mean that certain funds will not be marketable as a result of changes in market sentiment or pricing. The IFSRA has eased this dilemma for promoters of QIFs because a QIF needs less intensive regulatory scrutiny prior to authorisation.
A QIF is the vehicle of choice for fund promoters selling to 'sophisticated' investors who meet the minimum net worth and minimum subscription tests. Such investors are expected to have greater capacity to understand a fund product and its risks, including the risk of loss of all or part of their investments. Therefore QIFs are not bound by the regulatory limits relating to investment strategies or the limits on the level of leverage employed that apply to Irish-domiciled retail funds (whether Undertakings for Collective Investment in Transferable Securities (Ucits) or non-Ucits).
New regulatory process
The new QIF authorisation regime is an exciting development for the Irish funds industry and is evidence of the commitment to the sector identified in both the Irish prime minister's paper 'Building on Success - International Financial Services Industry in Ireland', which was published in September 2006 and set in train a number of initiatives to support Ireland's international financial services industry, and in the IFSRA's strategic plan for 2007-09.
As part of the introduction of the new process, the IFSRA issued a revised QIF application form and guidance note. While these documents reflect a number of existing IFSRA requirements, the application form was materially amended to reflect, inter alia, submissions made by the Irish Funds Industry Association. The guidance note also reflects a number of regulatory requirements, which while applied in practice had not previously been set out in the regulator's notices for QIF funds.
How the process works
The finalised QIF documentation must be filed with the IFSRA by 3pm on the day before authorisation. The documentation will include a fully completed IFRSA application form for fund authorisation; a dated prospectus (which may include supplements); a constitutional document (certified copy certificate of incorporation and memorandum and articles of association for an investment company, original counterpart trust deed for a unit trust, original counterpart deed of constitution for a common contractual fund or original counterpart limited partnership agreement for a limited partnership); and original counterparts of the material contracts (such as custodian agreement, administration agreement, management agreement, prime broker agreement, investment management agreement and distribution agreement). The documentation must reflect the necessary authorisation requirements detailed in the IFSRA application form.
The investment company, management company or general partner is required to certify the accuracy and completeness of the contents of the IFSRA application form and that the QIF documentation complies with the IFSRA's requirements. Various letters of confirmation are also required, depending on the type of QIF being authorised. Any derogations from the IFSRA's requirements will need to be cleared in advance of the application and the details of any derogations granted must be included in the application form and reflected where appropriate in the relevant documents. The IFSRA is continuing to encourage applicants to discuss novel or innovative proposals in advance of making a formal application to ensure that progress is made in a speedy and effective way and authorisations are not delayed.
The various parties to the QIF - which include the promoter, management company, directors, trustee or custodian and other service providers - must be deemed acceptable by the IFSRA before the application can be made.
What is a qualifying investor?
Only qualifying investors may invest in a QIF. This means:
- a natural person must have a minimum net worth (excluding main residence and household goods) in excess of E1.25m (£850,000); and
- an institution must own or invest on a discretionary basis at least E25m (£16.9m), or its beneficial owners must be qualifying investors in their own right.
A QIF has a minimum subscription of EURO250,000 (£169,000). The minimum subscription may be spread among various sub-funds of an umbrella QIF.
There are certain derogations available from these requirements for investors connected with the QIF, such as the investment manager and its employees who are involved in the management of the QIF.
Disclosure in the QIF prospectus
As with all funds, the prospectus must describe the investment objectives and investment and borrowing policies of the QIF. The IFRSA requires that these descriptions be comprehensive and accurate, readily comprehensible to investors and be sufficient to enable investors to make an informed judgement on the investment proposed to them. The description should include comprehensive information in relation to proposed investments, an indication of where these are traded and the purpose behind the investment.
The prospectus must also set quantitative parameters on the extent of leverage that the QIF will engage in. A QIF that will not be subject to any leverage limits should indicate the typical levels of leverage that may be employed.
For QIFs that will invest in private equity or property investments, the applicant QIF must confirm that the entity/person who will carry out investment management has appropriate expertise in the particular area of investment.
A QIF established as a closed-ended scheme must also comply with the approval requirements of the Prospectus Directive Regulations.
The Irish Stock Exchange
The Irish Stock Exchange (ISE) operates a limited checklist for IFRSA-regulated investment funds and is aware of the importance of speed to market for QIFs that also seek a listing on the ISE. The ISE has therefore requested that QIF documentation be submitted as early as possible in the review process and will seek to facilitate any quick turnaround requests. Listed closed-ended QIFs will have to follow the Prospectus Directive approval processes. The system will be kept under review by the ISE.
The new regime has been in place for a number of months and is working well. Developments such as this reflect the heightened awareness in Ireland of the need to continue to offer a competitive proposition as a domicile to prospective fund promoters. In jurisdictions such as Ireland, where the existence of a robust but fair regulatory regime is often used as a selling point, the balance between being able to meet the fund promoters' needs and maintaining an appropriate regulatory regime is extremely important. The new developments are evidence of the continuing efforts to refine the Irish approach.
Brian McDermott is a partner at A&L Goodbody. He was assisted by associate Nollaig Greene