A Guide To Qualifying Investor Funds In Ireland

Author:Mr Andrew Bates, Donnacha O'Conner, Etain De Valera, Brian Higgins, Derbhil O'Riordan and Paul Moloney
Profession:Dillon Eustace
 
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INTRODUCTION

Ireland is one of the leading international domiciles for regulated funds, offering a variety of fund structures with differing levels of investment and borrowing restrictions, investment mechanics, minimum subscription requirements, service provider requirements and authorisation timeframes depending on the proposed portfolio composition and targeted investor profile for a particular project.

Fund Types

Ireland offers two main categories of fund types - UCITS and non-UCITS, the latter being broken down into three distinct categories - retail investors, professional investors and qualifying investors - with few investment and no borrowing limits, but minimum subscription requirements and appropriate expertise/understanding criteria, imposed on the most flexible qualifying investor fund structure.

The qualifying investor fund (or "QIF") structure is the structure used most frequently for:

hedge funds; FoHFs; pivate equity funds; real estate funds; feeder structures; and provides a high level of structuring flexibility as well as a fast track authorisation process.

This Guide focuses on the QIF structure. Other product specific Dillon Eustace guides available include:

A Guide to UCITS in Ireland A Guide to Hedge Funds in Ireland A Guide to Irish Private Equity Funds A Guide to Irish Regulated Real Estate Funds A Guide to Selling Irish Funds Regulated in Asia A Guide to Multi-Manager Funds in Ireland A Guide to Funds Listing in Ireland ETFs and the UCITS Framework These, and several other funds related publications, are all available at www.dilloneustace.ie Regulatory Regime

The Central Bank of Ireland (the "Central Bank") is the competent authority responsible for the authorisation and ongoing supervision of all regulated Irish fund structures.

The legislative basis for QIFs in Ireland is found in Part XIII of the Companies Act, 1990, in the Units Trusts Act, 1990, in the Investment Limited Partnership Act, 1994 and in the Investment Funds, Companies and Miscellaneous Provisions Act, 2005, expanded upon by a series of Non-UCITS related notices issued by the Central Bank (the "NU Notices") and with further clarification provided for in a series of Central Bank guidance notes ("Guidance Notes"), each of which - the legislation, the NU Notices and the Guidance Notes - have evolved and been amended over time.

QIFs

QIFs are subject to a minimum subscription requirement of Euro 100,000 per investor and investors must meet certain appropriate expertise/understanding tests.

An investor in a QIF must be either:

an investor who is a professional client within the meaning of Annex II of Directive 2004/39/EC (Markets in Financial Instruments Directive); or an investor who receives an appraisal from an EU credit institution, a MiFID firm or a UCITS management company that the investor has the appropriate expertise, experience and knowledge to adequately understand the investment in the QIF; or an investor who certifies that they are an informed investor by providing the following: confirmation (in writing) that the investor has such knowledge of and experience in financial and business matters as would enable the investor to properly evaluate the merits and risks of the prospective investment; or confirmation (in writing) that the investor's business involves, whether for its own account or the account of others, the management, acquisition or disposal of property of the same kind as the property of the QIF. Due to the types of exposures taken, leverage requirements and investment techniques, QIFs are established as non-UCITS schemes which do not benefit from the principle of mutual recognition within the European Economic Area. QIFs are normally private placement vehicles, offered in accordance with the relevant target jurisdictions' local private placement rules.

Fast Track Authorisation for QIFs

QIFs benefit from a fast track authorisation procedure - a self certification regime which allows for a 1 day authorisation process.

Principal Legal Structures

The legal structures within which QIFs can be housed are variable capital investment companies, unit trusts, investment limited partnerships (rarely used) and common contractual funds. The investment company and unit trust structure are those most frequently used (natural persons cannot invest in common contractual funds).

Umbrella type investment companies can be established with statutory based segregated liability between sub-funds within the umbrella. Segregated liability between funds within umbrella unit trusts is based on the concept of each fund being a separate trust.

Liquidity Options

QIFs can be structured as open-ended, open-ended with limited liquidity, limited liquidity or closed-ended schemes. Gates, deferred redemptions, holdbacks, in-kind redemptions and side pockets can all be facilitated within these types of funds.

Prime Brokers

The use of prime brokers to Irish funds is well established with most of the leading international prime brokers having been approved to act for Irish funds. The applicable rules dealing with the use of prime brokers focus on the rating/financial resources of the prime broker, the extent to which assets of a fund can be rehypothecated by the prime broker, the nature of the relationship between the fund's Irish custodian and the prime broker as well as requirements as to enforceablility of set-off /netting provisions.

Stock Exchange Listing

QIFs automatically meet the majority of the Irish Stock Exchange's ("ISE") listing criteria. As a result, their shares or units can easily be listed within the same timeframe as the fund's authorisation, if a listing is required or considered beneficial.

A listing on the ISE meets the "exchange listed" criteria of many European counterparts/investors.

REGULATORY CATEGORISATIONS

As explained in the introduction, the Central Bank sets the investment and borrowing limits for non-UCITS products based on the targeted investor profile - retail investors, professional investors and qualifying investors - with few investment and no borrowing limits, but minimum subscription requirements and appropriate expertise/understanding criteria, imposed on the most flexible qualifying investor structure.

Qualifying Investor Funds

The qualifying investor fund or QIF is the most frequently used non-UCITS vehicle due to its greater flexibility in terms of investment limits and the absence of any borrowing or leverage limits. A minimum initial subscription requirement of Euro 100,000 per investor applies and investors must meet certain appropriate expertise/understanding tests.

An investor in a QIF must be either:

an investor who is a professional client within the meaning of Annex II of Directive 2004/39/EC (Markets in Financial Instruments Directive); or an investor who receives an appraisal from an EU credit institution, a MiFID firm or a UCITS management company that the investor has the appropriate expertise, experience and knowledge to adequately understand the investment in the QIF; or an investor who certifies that they are an informed investor by providing the following: confirmation (in writing) that the investor has such knowledge of and experience in financial and business matters as would enable the investor to properly evaluate the merits and risks of the prospective investment; or confirmation (in writing) that the investor's business involves, whether for its own account or the account of others, the management, acquisition or disposal of property of the same kind as the property of the QIF. Qualifying investors must self certify in writing to the QIF that they (i) meet the minimum initial investment per investor and appropriate expertise/understanding tests; and (ii) are aware of the risk involved in the proposed investment and of the fact that inherent in such investments is the potential to lose all of the sum invested.

Where the fund is an umbrella scheme, the investor's aggregate subscriptions across the entire umbrella are taken into account. Unless otherwise provided in the relevant prospectus, the amounts of subsequent subscriptions are unrestricted.

Although institutions may not group amounts of less than Euro 100,000 for individual investors, institutions which are themselves Qualifying Investors and which are investing monies pursuant to fully discretionary mandates may group amounts of less than Euro 100,000 being managed for individual investors.

Professional Investor Funds

A minimum subscription requirement of Euro 125,000 per investor is imposed for professional investor funds or PIFs, but no appropriate expertise/understanding criteria. PIFs may provide a derogation from the minimum subscription requirement to investors who are trustees of pension plans, provided that the investors commit to invest the minimum subscription amount within a period of 12 months.

Where the fund is an umbrella scheme, the investor's aggregate subscriptions across the entire umbrella are taken into account. Unless otherwise provided in the relevant prospectus, the amounts of subsequent subscriptions are unrestricted.

Although institutions may not group amounts of less than Euro 125,000 for individual investors, institutions which are themselves professional investors and which are investing monies pursuant to fully discretionary mandates may group amounts of less than Euro 125,000 being managed for individual investors.

Retail Investor Funds

A fund which has no minimum subscription requirement or has a minimum subscription which is less than Euro 100,000 per investor will be considered to be a retail investor fund.

Knowledgeable Employee Exemption

An exemption from the minimum subscription requirement for both QIFs [and PIFs] and an exemption from the QIF qualifying investor criteria is available to the fund's promoter, managers and a limited number of other persons and entities that are closely connected with the management of the fund...

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