ICAV - Ireland’s new corporate fund structure
By Mark Browne, Partner, Dechert
Published: 30 September 2015
Legislation was enacted in Ireland earlier in 2015 providing for a new type of corporate fund – the Irish Collective Asset-management Vehicle or “ICAV”. This much anticipated legislation has enabled the creation of an innovative corporate structure specifically designed for use as an investment fund. The ICAV features a number of specific advantages in comparison to previously available Irish corporate structures. This article gives an overview of the key features and differentiating characteristics of the ICAV, as well as exploring the instances where it is most likely to be of assistance to fund promoters establishing funds in Ireland, one of the primary jurisdictions for domiciling both traditional and alternative funds in Europe.
Background
With almost 6,000 authorised funds currently in operation, Ireland has established itself over the past 25 years as one of the key global fund domiciles. These Irish domiciled funds include entities authorised both as Undertakings for Collective Investment in Transferable Securities (UCITS) and also constituting Alternative Investment Funds (AIFs) under the Alternative Investment Fund Managers Directive (AIFMD).
A wide range of legal structures has existed for some time which may be used to constitute funds authorised in Ireland, including the variable capital investment company (VCC), unit trust, common contractual fund (CCF) and investment limited partnership. However, the Irish Collective Asset-management Vehicles Act 2015 (the “ICAV Act”) was signed into law in March 2015 to reflect evolving industry requirements and to ensure a better fit for purpose.
Overview of the ICAV
The VCC, which is the structure used by over 70% of all Irish funds, has proven to be the most popular choice of legal structure for funds domiciled in Ireland to date. However, notwithstanding its popularity, issues with this vehicle have been identified.
As the ICAV offers a number of enhancements to the VCC as a form of corporate vehicle it is likely to replace the VCC as the structure of choice for newly established funds going forward. It is also likely that many existing funds may seek to convert into ICAVs to take advantage of the various advantages they pose, as discussed below.
Advantages of the ICAV
The VCC has its origins in general company law, rather than legislation specifically tailored to meet the needs of the funds industry. As such there are a number of provisions applicable to the structure which may seem inappropriate in the funds context. The new legislation providing for the ICAV has omitted all of the general company law provisions which were deemed inappropriate in this regard. The use of bespoke legislation aimed at funds has also eliminated the potential for any changes to general company legislation having unintended consequences for funds. It also has the benefit of ensuring that one piece of discrete and relatively straightforward legislation completely addresses the structure.
The new legislation also includes some specific changes. VCCs are subject to a requirement to ensure risk spreading or diversification under existing company law. There are therefore difficulties regarding the use of such structures in the context of single asset funds. These are relatively common in the context of property funds, for example. This concern also applies with regard to master-feeder structures (although the Central Bank has issued clarification that observance of this requirement could potentially be met by adopting a look through to the level of diversification carried on by the underlying master).
It will be possible to determine to dispense with the general requirement to hold an annual general meeting for an ICAV. This will entail providing 60 days’ notice to shareholders and be subject to a right of 10% of shareholders or the auditor to require such a meeting to be held.
No shareholder approval will be required for alterations of the Instrument of Incorporation of an ICAV provided the depositary certifies the changes are non-prejudicial to existing investors and have not been specified by the Central Bank as requiring approval.
It will be possible for an umbrella ICAV to determine to prepare separate accounts with respect to each sub-fund. Platform structures with multiple sub-investment managers will find this useful as it would permit the adoption of separate financial year ends for different sub-funds operated by different sub-investment managers, for example.
Provision has been made for the preparation of a revised Director’s report to correct errors or with respect to aspects of non-compliance. Specific statutory provisions are included which will apply to fund mergers and amalgamations.
A primary attraction of this new product for some promoters is that the ICAV will be able to “check the box” and be treated as a partnership for US tax purposes. This is addressed in detail below.
Other distinguishing features of the ICAV
Although the Companies Registration Office is the relevant authority for registration purposes of a VCC, the Central Bank of Ireland, which is the regulatory body with responsibility for funds, will be responsible for both registration and authorisation of the ICAV. Upon registration a “registration order” is issued for an ICAV rather than a “certificate of incorporation”, as would be the case for a company The constitutional document of the ICAV is the “instrument of incorporation”, rather than the memorandum and articles of association. This is similar in many respects to that of a UK OEIC. Each ICAV will feature the word “ICAV” as a suffix in its name (instead of public limited company or plc, as appropriate, for the VCC).
A corporate fund structure
It is important to note that the ICAV does not represent a re-inventing of the wheel, but rather is a form of corporate structure and accordingly does also have many similarities with existing corporate funds, such as the VCC. As such the ICAV is merely an improvement on the existing structure which investors, service providers and counterparties will be familiar with.
The following provisions apply to both by way of example in respect of the following key headings:
- Structure: the entity has legal capacity and acts in its own name. Umbrella structures comprising multiple sub-funds may be established and in such cases segregated liability will apply between sub-funds;
- Enforcement: the (Irish) Director of Corporate Enforcement may exercise powers over both structures (as well as the Central Bank);
- Regulation: both may be established as UCITS or AIFs (including Qualifying Investor Alternative Investment Funds or “QIAIFs”, the most popular type of Irish AIF);
- Listing: both may, but are not required to, be listed on a stock exchange (including but not listed to the Irish Stock Exchange which is the World’s leading stock exchange for listings of investment funds); and
- Governance: Responsibility for governance is carried by a board of directors. An external management company may be appointed or the structure may exist as a self-managed entity. Corporate directors are not permitted in either case. Most of the current company law provisions relating to the appointment, removal and conduct of directors remain. Furthermore such provisions are overlaid by the Central Bank’s fitness and probity and administrative sanctions regime.
Transparency and partnership treatment
A VCC established in Ireland is prohibited from electing to be treated as a partnership for US tax purposes. However, the ICAV will be eligible to “check the box” to be treated as a partnership for US tax purposes, at its discretion. US taxable investors will generally have a preference for investing through a partnership structure and accordingly the ICAV will be the vehicle of choice for managers seeking to target investors in this market.
The unit trust structure, which is eligible to check the box, could have been used prior to the introduction of the ICAV. However, there is a general preference for corporate master funds due to investor and counterparty familiarity with corporate entities.
Corporate structures used for funds in competing jurisdictions such as Luxembourg and the Cayman Islands (being the SICAV and exempt company, respectively) are not subject to this prohibition on electing for partnership treatment. This has allowed them to be used by US taxpayers as pass-through vehicles not subject to the more onerous "passive foreign investment company" and "controlled foreign corporation" anti-deferral regimes applicable to shareholdings in non-US corporate fund vehicles.
Master-feeder structures
ICAVs constitute an ideal vehicle to be used as corporate feeders because they are not subject to a requirement to diversify their investments (although, such a requirement may in fact apply depending on any regulatory authorisation of the ICAV post registration, such as under UCITS). It is appropriate to note that while they may elect to “check the box” to be treated as partnerships for US purposes they are not subject to a requirement in this regard and therefore a master-feeder combination involving two ICAVs could involve one checking the box and a second one refraining from doing so and hence acting as a corporate blocker.
Any decision to establish any such master-feeder would primarily be driven by the target investor base for the fund and would only be appropriate in specific circumstances.
Umbrella ICAVs are also permitted to cross-invest between sub-funds so it is possible, from an Irish perspective, to have a single ICAV comprising the feeder and master in one legal entity by having one sub-fund elect to be treated as a partnership and a second not.
Establishing an ICAV
Establishing a new ICAV will entail a two-stage process, both of which are carried out with the Central Bank:
- Registration - this is similar to the registrar role which is undertaken by the Irish Companies Registration Office with regard to all companies. The Central Bank will issue a Registration Order for a new ICAV within ten business days from the date of receipt by it of a complete application for registration. The prospectus and service provider agreements will not need to be submitted at this time. All related filings will be made to the ICAV registration section of the Central Bank.
- Authorisation - this is a separate process conducted through the funds authorisation section of the Central Bank. An ICAV may be authorised under UCITS or as an AIF (including a QIAIF) and the standard new fund authorisation process will apply. In the case of a QIAIF this includes the 24-hour approval process.
Converting to an ICAV
The ICAV Act also permits existing structures, both existing Irish VCCs and non-Irish (offshore) entities to convert into ICAVs. This is a somewhat similar process to that relating to the redomicilation of offshore companies and as such it has been tried and tested over recent years. Such a conversion will require shareholder approval and a declaration of solvency (necessitating an audit engagement, but not a full audit).
One of the most significant changes to Irish company law relating to fund vehicles in recent years was the introduction of redomiciliation provisions contained in the Companies (Miscellaneous Provisions) Act 2009 which enabled fund companies in specific offshore jurisdictions, such as the Cayman Islands, to change their domicile to Ireland from their existing domicile. Key advantages of effecting a redomicile rather than simply incorporating a new entity in Ireland are that this permits the company to preserve its track record and contractual arrangements.
The ICAV Act has removed an effective barrier preventing corporate structures targeting US taxable investors from redomiciling and we are already seeing evidence of redomciliations occurring to take advantage of this. It can be noted that a number of the first funds to be registered as ICAVs were essentially redomiciliations of existing funds from the offshore jurisdictions to Ireland.
Outlook
It is expected that the ICAV will become the standard choice for Irish fund structures in the future due to its suitability for funds and general flexibility. It is expected that, in time, many existing VCCs will elect to convert to an ICAV.
However, promoters may wish to wait before converting an existing entity to this structure until there is greater familiarity with the structure in the industry generally. It is expected that key factors for those considering converting an existing structure to an ICAV will be the extent to which it can ensure added benefits in light of their target investor base, the nature of the assets to be held, investor preference and cost.
ICAV structuring options
The flexible nature of ICAVs means that they are ideally suited to facilitate master-feeder structures. They can be used in different structuring options or combinations enabling them to be used in various scenarios targeting different investor mixes, including where:
- Investors are a combination of US taxable investors, US tax exempt investors and investors from the rest of the world;
- Investors are a combination of US taxable investors and investors from the rest of the world;
- Investors are a combination of US tax exempt investors and investors from the rest of the world.
A US disclosure wrapper and US subscription documentation are highly recommended where US sales are contemplated, and Dechert, which has 13 offices across the US, is ideally placed to assist with this.
Summary
The ICAV is a new Irish corporate structure specifically designed to be used as an investment fund. It may be authorized as a UCITS or as an AIF and has a number of specific advantages when compared to the existing fund structures previously available. It is therefore expected to become the default choice for new investment funds domiciled in Ireland going forward and is already proving popular. This is especially the case as it facilitates addressing the needs of a key investor base – US taxable investors.
