Alternative Investment Management Association
Brian Kelliher and Stephen Carty
In February, 2007 a new regime for the authorisation of Qualifying Investor Funds (QIFs) with the Irish Financial Services Regulatory Authority, was introduced to facilitate the next-day authorisations of QIFs.
This is seen as a significant and welcome development for the Irish investment funds industry, likely to attract promoters of a wide range of investment funds to Ireland. The new regime and revised product parameters for the QIF are examined below.
In Ireland, outside the UCITS sphere, an investment fund (non-UCITS) may be established as an investment company, unit trust, limited partnership or common contractual fund. Such a non-UCITS fund may be structured as a retail investor fund, a professional investor fund or a QIF.
QIFs must impose a minimum subscription requirement per investor of €250,000 (or equivalent) and can be sold only to qualifying investor individuals with a minimum net worth of €1.25 million (excluding principal private residence/contents) or institutions who own or invest on a discretionary basis at least €25 million (or are themselves owned by qualifying investors).
Given their flexibility, QIFs are the vehicles which are most frequently used in the alternative investment space, for hedge funds, fund of hedge funds, venture capital/private equity and real estate funds. Hence, they give promoters the opportunity to use Irish regulated investment vehicles for a complete range of fund products, similar to those provided in the unregulated offshore jurisdictions.
In July 2006, the Irish Government issued a strategy document “Building on Success”, for the International Financial Services Industry in Ireland. One of the proposals put forward was the introduction of a regulated fund structure that does not require an approval process in order to address concerns regarding speed to market.
In order to address the speed to market and attractiveness of the QIF, the Financial Regulator approved in December 2006 a proposal to revise the process for authorisation of QIFs. Guidance Note 1/07 was then issued by the Financial Regulator on 14 February 2007. This provided that a QIF may be authorised by the Financial Regulator on a filing only basis. In practice this means that draft fund documents for a QIF are no longer reviewed by the Financial Regulator prior to launch. Should the Financial Regulator receive a completed application for the authorisation of a QIF before 3.00pm on a particular day, the QIF will be authorised the following day.
A summary of the main provisions that apply to QIFs under the new regime are set out as follows:
In order for an application to be complete, it must reflect the agreed product parameters for QIFs outlined by the Financial Regulator. Any requests for derogations from provisions of the non-UCITS Notices issued by the Financial Regulator, must be made in good time to allow these to be addressed by the Financial Regulator in advance of applications for authorisation. Details of derogations provided must be included in the application form and set out in the prospectus. QIFs with novel or other unusual features are required to raise the particular features with the Financial Regulator in advance of the submission of formal applications.
Approval of Parties
With limited exceptions, both the promoter and investment manager must be regulated by a recognised regulatory authority and, in the case of the promoter, must have net assets of not less than €635,000, or its equivalent. An Irish trustee/custodian and administrator must be appointed and there are certain prescribed minimum activities which must be carried out in Ireland which these entities will typically have responsibility for. Directors (of the QIF or its management company, as appropriate) are expected to have experience in relation to the organisation of collective investment schemes. All of the above parties must be approved or cleared in advance of the application by the Financial Regulator.
The QIF must issue a prospectus and that, together with signed material contracts, must be submitted to the Financial Regulator by the QIF’s legal advisers immediately prior to launch. The QIF’s legal advisers will also complete the Financial Regulator’s application form. The application form requires certification from the QIF or its management company, as appropriate, in relation to the contents of the form and the documentation. The trustee/custodian of the QIF is required to provide confirmation in relation to provisions of the trust deed/custodian agreement.
QIFs will be subject to review and compliance post-authorisation, as is the case with all regulated funds.
Should promoters wish to launch an additional sub-fund within an existing umbrella QIF, the same fast-track approval process will apply for such sub-funds. This also applies to QIFs authorised prior to the issue of Guidance Note 1/07.
Irish Stock Exchange Listing
Although there will be a one day turn around time by the Financial Regulator, it will also be possible to facilitate approval for listing on the Irish Stock Exchange, if required, during the time period required to draft the fund documentation, prior to the filing with the Financial Regulator.
Prospectus Disclosures – Investment Objective, Policies and Borrowing Policy
A comprehensive, accurate and comprehensible description of the QIF’s investment objective and policies and borrowing policy must be disclosed in its prospectus. 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 contain quantitative parameters on the extent of leverage which will be engaged in. A QIF, which will not be subject to leverage limits, should indicate the typical levels of leverage, or range of leverage, that may be employed.
(1) QIFs not self-described as private equity funds are not able to acquire shares carrying voting rights which would enable them to exercise significant influence over the management of their issuing bodies;
(2) when transacting over-the-counter, in circumstances where collateral is being passed by the QIF outside the Irish trustee/custodian’s custodial network, QIFs are generally required to deal with counterparties with a minimum credit rating of A2/P2 (or A1/P1 where the QIF’s exposure to such a counterparty may exceed 40% of its net asset value);
(3) QIFs which are structured as investment companies, must comply with the principle of spreading investment risk as required under section 253(2)(a) of the Companies Act, 1990 Part XIII; and
(4) QIFs generally are restricted to an investment of 40% of net asset value in a single underlying unregulated fund, although there is an exception to this for well-established institutional investment managers where the underlying unregulated fund is managed within the same group.
The name of the QIF or the sub-fund must not be misleading and where it intends to reflect the investment policy of the QIF/sub-fund, it should be consistent with the stated policy.
In the case of QIFs which will invest in private equity or property investments, the applicant must confirm that the entity/person(s) who will carry out investment management has appropriate expertise in relation to the particular area of investment.
Valuation of assets
All assets should be valued in accordance with the Financial Regulator’s guidelines (Guidance Note 1/00). Where a QIF proposes to value assets under alternative provisions, these must be cleared with the Financial Regulator in advance.
QIFs with Limited Liquidity
A QIF that offers redemption facilities on a less than quarterly basis is required to indicate on the cover of its prospectus that it is an investment fund with limited liquidity.
A QIF that provides for no redemptions throughout the life of the QIF must comply with the approval requirements of the Prospectus Directive (Directive 2003/71/EC) implementing legislation. A QIF that offers limited redemptions may constitute a closed-ended fund for the Financial Regulator’s purposes without coming within the scope of the Prospectus Directive.
A QIF or a sub-fund thereof established with separate share classes must ensure that all share classes have the same dealing procedures and frequencies.
Reporting Obligations*/Post-Authorisation Amendments
(1) QIFs must send unaudited semi-annual and audited annual accounts to the Financial Regulator and make them available to their shareholders;
(2) QIFs are required to submit monthly returns to the Financial Regulator detailing the latest gross asset value and net asset value of the QIF and certain other specific information (as outlined in NU10.4);
(3) the promoter and investment manager must submit annual audited accounts to the Financial Regulator;
(4) changes to the QIF’s prospectus or material contracts are required to be filed with the Financial Regulator one business day prior to coming into effect.
*These are regulatory reporting obligations imposed by the Financial Regulator pursuant to domestic funds legislation and does not purport to be an exhaustive list of applicable statutory or regulatory reporting requirements.
The new regime for QIFs should add to Ireland’s appeal as a fund domicile, particularly for promoters working to short delivery times for investors.