European private equity funds continue to grow in spite of the European debt crisis and slow economic growth in recent years. Results for 2013 and 2014 indicate an increase in both the level of fundraising into, and the level of investments made by, European private equity funds when compared to previous figures.Additionally over the past three years, the vast majority of investors surveyed indicated that their expectations had been met or exceeded.
While traditionally established as unregulated fund structures, private equity funds now fall within the scope of the European Alternative Investment Fund Managers Directive ("AIFMD") and are therefore required to comply with the relevant regulations. Most private equity managers have indicated that this has not affected their investor allocations, however they did indicate that it makes fundraising in Europe more difficult for non-EU structures. As a result, many private equity ("PE") houses are increasingly looking to Irish regulated Alternative Investment Funds (AIFs), known as Qualifying Investor AIFs (QIAIFs), as a potential solution to capital-raising issues within the European Union.
Since the implementation of AIFMD, all EU member states have changed their marketing rules and private placement regimes. As there is no harmonisation of the national private placement regimes, with some jurisdictions imposing additional requirements above those required under AIFMD, it can be a lengthy, cumbersome and expensive exercise to register for sale across Europe under the various national private placement regimes. This however, is currently the only route available to non-EU domiciled PE funds trying to access European capital.
The QIAIF offers PE managers a potential solution to this problem of fund raising within Europe. The Irish QIAIF has been able to avail of the AIFMD distribution passport since July 2013 and is therefore able to market its units to professional investors across Europe with relative ease and in a more cost efficient manner.
The Irish QIAIF can be structured as an investment company, unit trust, common contractual fund, investment partnership or an Irish Collective Asset-management Vehicle ("ICAV") (Ireland's newest investment structure which can elect to "check the box" to be treated as a partnership for US tax purposes). They can also be established with either an external alternative investment fund manager ("AIFM") or as an internally managed alternative investment fund, whereby the fund acts as both the manager and the fund, thereby placing most of the regulatory obligations on the fund and not the PE manager. The self-managed structure also permits non-EU managers to access the AIFMD passport, which they otherwise would not be able to do.
QIAIFs are targeted at sophisticated and institutional investors who meet the minimum initial subscription per investor of €100,000. The range of eligible assets open to the QIAIF to invest in is very flexible. They have few investment restrictions and no borrowing restrictions and subject to the AIFM approval, can be authorised by the Central Bank under a fast track procedure, within 24 hours of filing all documents with the Central Bank.
The Central Bank has made some positive changes to its funds regime recently to facilitate the establishment of PE funds within the Irish funds regime. PE funds in Ireland are able to:
- have different asset allocations between share classes;
- have multiple and longer initial closings;
- provide for carried interest and waterfall mechanisms;
- have unlimited amounts of borrowings or leverage;
- have both open-ended or closed ended structures;
- provide for partly paid shares, capital commitments and drawdown provisions;
- invest through wholly owned subsidiaries;
- provide for flexible valuation provisions which permit the Irish Venture Capital Association and European Venture Capital Association rules;
- to take ownership and control of limited companies; and
- have access to Ireland's extensive double taxation treaty network of over 70 treaties.
These changes, together with the introduction of the new ICAV structure, have sparked a lot of interest among PE houses looking for solutions to increasing their capital base and distribution network in Europe, which is evidenced by the number of QIAIFs established by PE and real estate houses, which include big names such as LGT KKR, Old Mutual, Kennedy Wilson and Blackstone. With Irish domiciled assets reaching a record high of USD1.8 trillion (euro 1.3 trillion) and the attractiveness of Ireland's favourable tax regime, its fast-track QIAIF authorisation process and its new ICAV structure, the Irish QIAIF is becoming an increasingly popular choice among PE managers seeking to benefit from the AIFMD passporting requirements.
Gayle Bowen, Partner, Associate, Walkers Ireland
1. 2015 Prequin Global Private Equity & Venture Capital Report 2. ibid