Irish Funds Industry Update
Notwithstanding the ongoing international economic crisis, the Irish funds industry continues to thrive with latest industry statistics highlighting that Irish domiciled fund assets have now passed the Euro 1 trillion mark. New fund launches have steadily increased, with many existing industry participants launching alternative type funds to sit alongside their long only offerings and new promoters launching Irish domiciled based products for the first time. UK and US promoters have been to the fore but it is notable that promoters from China, from Canada and from the Middle East have also launched Irish domiciled products recently.
The two dominant Irish fund products, the UCITS and the Qualifying Investor Fund (the “QIF”), are both experiencing growth across a wide spectrum of strategies and asset classes, with much of the recent focus having been on credit type strategies including loan funds; structured UCITS with formula based pay-offs; emerging market equity and fixed-income products; and many structures focusing on the distressed asset space. We have also seen a number of new products such as the first Irish UCITS CAT bond product, UCITS allowing 100% exposure to Indian government debt, actively managed ETFs as well as funds redomiciling to Ireland under the redomiciliation legislation.
Future growth is also expected from new initiatives such as the “Green IFSC”, aimed at developing new funding mechanisms for green projects as well as related funds and securitisation initiatives, as well as from regulatory changes one example being the Irish QIF which is seem as being “AIFMD ready”. On the flip side, like many of its competitor jurisdictions, Ireland continues dealing with Madoff related issues, including significant litigation before the Irish courts, the fallout from the MF Global bankruptcy as well as the significant challenges posed by the constant flow of new regulation.
Although well intentioned and in some cases offering new opportunities, the last few years have seen fund managers being in an almost perpetual state of regulatory review having to contend not only with new rules from different jurisdictions – for example AIMFD and Dodd-Frank – but also multiple regimes under UCITS, MiFID and AIFMD for what could instead have been a single one. Each of these changes absorb significant time and resources, sometimes without a clear justification.
The recently implemented UCITS IV Directive, for example, has required new MiFID like organisational and internal control changes to be adopted, new business plans to be prepared, revised contractual arrangements with service providers to be put in place and prospectus and constitutive documentation to be renewed. It has also meant having to address the implications of ESMA Guidelines which do not always seem to be in line with market reality, one example being the method of calculating leverage. Given that the asset managers of such funds are already subject to MiFID or an equivalent regime, it is questionable whether all of the changes were really necessary.
It is also clear that UCITS IV has led to the creation of a new service sector supporting managers in issuing the KIID, a new standard format investor information document. Although the objective behind the KIID is laudable, individual fund groups now find themselves issuing 100s of KIIDs for individual umbrella schemes at significant cost to investors and taking up much administrative time. Whether this will actually prove of real benefit to the end investor remains to be seen. What may however be of real benefit to investors include the much more efficient and less costly UCITS IV cross border notification processes and the opportunities for structure rationalisation through mergers and master/feeders, all of which are now being availed off.
New challenges will also be posed by AIFMD but it will also offer many opportunities, particularly due to the introduction of a harmonised regime for cross border commercialisation of non-UCITS products. Ireland is taking all the necessary steps to ensure that the Irish QIF is, and is seen to be, AIFMD ready, leveraging off the existing recognition of the QIF as an extremely flexible product with few investment restrictions and no leverage limits which can house almost any asset class and liquidity profile. The QIF is already one of the most frequently used regulated fund structures internationally for alternative products and benefits from a fast track authorisation process while at the same time being subject to a regulatory regime requiring regulated service providers (promoter, investment manager, administrator and independent custody), annual audit and prospectus disclosures.
Linked to AIFMD developments, Ireland’s introduction of re-domiciliation legislation to make it easier to move funds from offshore jurisdictions to Ireland will be of assistance to those asset management groups looking to reposition their products within onshore European regulated jurisdictions either to address current investor demands or to facilitate future investment from prospective investors looking for more regulated investment products.
A final topic of note is that of fund governance which has been very much to the fore in Ireland recently. Having only recently adopted the new organisational changes required of UCITS under UCITS IV, all Irish funds will now have to consider the implications of the new corporate governance code for funds issued at the end of last year. Although a voluntary industry code, it is expected by the Central Bank to be adopted by Irish funds. At the same time, a new fitness and probity regime for directors and senior managers of all regulated entities, including funds, came into force in Ireland at the beginning of December last year which will require directors to provide quite a significant amount of information to support their continuing relationship with funds as well as imposing a more cumbersome pre-approval regime for directors of funds and fund management groups.
It may now be time to slow down the level of regulatory change and possibly reconsider how to regulate funds by treating them properly as products and leaving the primary regulatory focus being on what is permitted to be managed within a product type (vis-à-vis the investor type permitted to invest in the product) with governance, organisational and internal control rules being applied to the asset management, distribution, administration and custody of the product and not at the product level itself.
In conclusion, we remain very optimistic for the future growth of the Irish funds industry, seeing the new opportunities as far outweighing any challenges. In many ways the industry has been re-energised by the international financial crisis and that new energy will drive us forward for many years to come.
Andrew is the head of Dillon Eustace’s financial services department. His own practice principally involves advising in relation to asset management, investment funds and insurance regulatory matters. Andrew advises a large number of privately owned and institutional fund promoters in relation to the establishment of Irish funds for the retail or institutional market. Andrew is a former Council Member of the Irish Funds Industry Association and is a member of the Investment Funds division of the IBA. Andrew can be contacted on +353 1 673 1704 or by email at firstname.lastname@example.org