Over a period of less than 20 years, Ireland has emerged as one of the leading locations for the investment funds business. Since the establishment of the International Financial Services Centre in Dublin in 1987, Ireland has experienced phenomenal growth in the funds industry. Much of this growth has been driven by the legal and regulatory environment for funds in Ireland.
This environment is typified by innovation in product offering and a commitment by the financial regulator and the government to the continued growth and development of the industry. A 2004 survey of promoters of investment funds found that the regulatory environment is the most important factor in choosing a domicile to establish an investment fund, with 92 per cent of respondents indicating they would choose Dublin or Ireland as a location again.
The investment funds industry employs nearly 7,000 staff directly, providing administration, custody, legal and accounting services to Irish domiciled funds with total assets under management, as at June 2005, of approximately E513bn (£355bn). Ireland has also established itself as a centre of excellence in the administration of non-Irish domiciled hedge funds, with 30 per cent of all hedge funds globally administered in Ireland.
Key to the success of the industry is the range of legal fund structures available, providing fund promoters with a variety of structures to choose from to suit their investor base. Since 1990, Irish domiciled funds may be established as unit trusts or investment companies, with investment limited partnerships legislated for in 1994. A more recent addition to the available legal structures is the common contractual fund (CCF). From a legal perspective, the distinguishing feature of a CCF structure is that, unlike investment companies, which are founded on statute law, and unit trusts, which are founded on trust law, the CCF structure is founded on the law of contract. The CCF does not have a separate legal personality and is a tax transparent vehicle. CCFs were originally established to facilitate pension schemes by ensuring that any favourable withholding tax treatment pension schemes are entitled to when investing directly in securities would be available to them through an investment fund. Recent legislative changes have also extended the CCF structure so that they are available to other classes of institutional investors.
In addition to choice of legal fund structure, Ireland also has a range of regulations to suit all investor types. Funds aimed at the retail investor may be established as either Ucits (undertakings for the collective investment of transferable securities) or non-Ucits retail funds. Ireland was one of the first EU member states to implement the Ucits directive into its domestic legislation and now has over 400 Ucits funds domiciled there that have been sold on a European and global basis. While all Ucits have investment and borrowing restrictions designed to protect the retail investor, many Irish Ucits funds are, in fact, sold to institutional investors. Ucits funds and their Irish management companies (and their legal advisers) are heavily involved in the process of converting to Ucits III status following recent changes to the Ucits rules.
Retail funds are also available as non-Ucits funds with rules issued by the financial regulator to safeguard the interests of retail investors investing in funds not established with Ucits status.
Funds targeted at the non-retail investor may also be established in Ireland, with two categories of funds available, professional investor funds (PIFs) and qualifying investor funds (QIFs). The usual investment and borrowing restrictions applicable to non-Ucits retail funds may be disapplied for PIFs, which have been available since 1990, and which also have a minimum initial investment level per investor of E125,000 (£86,400). Recognising the need to have a category of fund available for the more sophisticated investor, QIFs were introduced in 1996. This type of fund provides the maximum flexibility in terms of investment strategy and has a minimum initial investor level per investor of E250,000 (£172,800). Investors in a QIF must also meet a minimum net worth requirement to ensure that only the most sophisticated investor may invest in these funds. PIFs and QIFs have proved to be very attractive vehicles for fund promoters, particularly hedge fund managers looking to establish a regulated investment product.
Recent changes in Irish company law will ensure the continued attractiveness of Irish domiciled funds. The Investment Funds, Companies and Miscellaneous Provisions Act 2005 introduced, among other matters, two key legislative changes aimed at improving the environment for investment funds structured as corporate vehicles. The first of these is the provision for segregated liability between sub-funds of umbrella fund companies. Umbrella funds with different sub-funds established as companies could not, under Irish law, provide effective segregation of liability between sub-funds, until the passing of the 2005 act, because the fund company was regarded as a single legal entity.
The 2005 act addresses this problem by providing for complete segregation of liability between sub-funds of an umbrella fund company. Any liability incurred on behalf of or attributable to any sub-fund will be discharged out of the assets of that sub-fund and the assets of any other sub-fund shall not be applied in satisfaction of that liability. All umbrella fund companies established after 30 June 2005 must provide for segregated liability and many established prior to that date are now electing to convert to segregated liability status.
The second key legislative amendment introduced by the 2005 act is an amendment to provide for cross-investment by investment funds structured as umbrella companies. This change facilitates investment by one sub-fund of an umbrella fund company into another sub-fund of the same umbrella. While cross-investment was permitted in investment funds structured as unit trusts, this was not possible until the introduction of the 2005 act in investment companies.
Innovation in terms of product offering has also been a feature of Ireland’s success as an investment fund domicile. Ireland was one of the first member states to authorise money market funds and is now the lead European domicile for these funds. Ireland was also the first European country to authorise and approve exchange traded funds – an investment fund whose shares are listed and traded on a stock exchange in the same manner as the shares of any listed companies. Other areas where Ireland is seeing a recent surge of interest is in the area of regulated property funds and liability matching funds – funds aimed at meeting the future liabilities of pension schemes. Ongoing consultation with the financial regulator to develop these and other products, as well continued legislative changes, should ensure the continued success of Ireland as an attractive fund domicile.
Cormac Commins is a partner in the asset management and investment funds unit at William Fry