Private funds on the Irish horizon
The Irish funds industry may have some catching up to do in the private funds space, but as the government gears up to introduce a refreshed Investment Limited Partnerships Act, the jurisdiction is expected to see an influx of managers from the UK, the US and further afield choosing to set up their private funds in Ireland.
Historically, Ireland has been focused on open ended funds, including UCITS and liquid alternatives; the country did not have a viable limited partnership structure, which is the default for closed ended funds.
“Since Ireland didn’t have a viable fund limited partnership structure, private managers looking to set up their fund in Ireland had to try and wedge a closed ended fund into a corporate vehicle which is not the optimal legal structure for a closed ended fund,” explains James McKnight, Managing Associate at Simmons & Simmons.
This meant Ireland was losing out to other jurisdictions. Now however, the industry expects to have a structure which will make sense for private fund managers.
“The Investment Limited Partnerships Act is being updated at the moment. The updated act should be passed by parliament over the coming months. The Irish regulator, the Central Bank of Ireland, is also updating its rules for closed ended funds” explains McKnight, “We have been fielding lots of queries as to when the new structure will be available – the demand is certainly there.”
Luxembourg and the Cayman Islands are well established jurisdictions for private equity structures so Ireland needs to ensure its offering is airtight if it aims to compete with the incumbents.
“In addition to the legislation itself, the rules from the Central Bank will be key to Ireland’s appeal. It is critical to get those right. We need to compete with other leading private fund jurisdictions. Some managers will put up with a lesser regime given their affinity towards Ireland, but for most if it’s too far removed from what is offered in our competitor jurisdictions then we won’t compete,” McKnight advises.
McKnight sits on the industry committee which is driving the amendments to the legislation and the Central Bank rules and is confident that Ireland will have a very compelling and competitive offering in the private funds space by the end of the year.
McKnight comments: “The Investment Limited Partnership will be a regulated fund, which is somewhat unusual for a private fund. The fact that both the fund and the manager will need to be regulated adds a layer of investor protection and regulatory coverage across the structure. Although this does increase regulatory compliance requirements and associated costs, we are confident that big-ticket investors will look very kindly on the additional investor protection offered by the structure. In addition Irish regulated funds require that an independent depositary be appointed and Ireland has recently introduced a new license category for depositaries focusing solely on funds which invest in so-called “real assets” including private equity and real estate”.
The Irish industry on the whole has been considerably resilient throughout the Covid-19 pandemic. McKnight describes the change of pace just after the crisis broke out and how that has now changed significantly.
“In April, May and early June we saw a bit of a dip, which looking back with hindsight, I believe was due to key decision makers at our clients themselves having to adapt to their new, remote working environment. At first home working felt temporary so business slowed as people were expecting to go back to the office imminently and as such were working from their couch or kitchen table. Once it became obvious that this was the status quo for the longer term, many people set themselves up more permanently and started to operate at a rate closer to normal.
“A lot of projects which were delayed at the beginning of the pandemic came back in August and September. While at the same time, the projects which would have taken place in those same months are still also going ahead,” he notes.
Although the past few months have been very busy, McKnight wonders how travel restrictions will impact the industry: “Not being able to travel is a significant challenge. We’ve been lucky so far but the work we are doing now is the result of groundwork we have put in over the previous months and years, travelling to meet clients and prospective clients.”
“Although people are getting used to doing video calls, I personally I don’t think they replace meeting in person. It can be hard for some to build up a strong level of trust, strong enough to instruct someone, when you haven’t actually met in person.”
The restrictions due to the Covid-19 pandemic are also affecting the fortunes of start up managers. McKnight elaborates: “It’s hard for emerging managers to raise capital without meeting people. Asset allocators who are in control of much of the capital flow may be reluctant to add new managers to their buy list because they cannot meet them.”
“Consequently, the fund managers already on those lists are launching more funds because they are in a good position to receive new flows. The investment activity is still there but it’s with managers who are already set up and branching out into new segments. The traditional start up manager is finding it a bit more difficult which makes seed capital more and more important as a result.”
The outlook for Simmons & Simmons in Dublin is optimistic. The Dublin office has registered considerable growth and now employs 30 people after just two years of operation. Further, 25% of current staff started during lockdown, so the pandemic has not slowed its progress, adding corporate, banking, real estate and tax to its established funds and regulatory offering.
“We’re making inroads in the Irish industry and we’re competing strongly with Irish law firms after just two years of being in the market,” remarks McKnight. “The Dublin legal market is an outlier compared to other financial centres, in that the industry has traditionally been dominated by large domestic firms, with the influx of international firms in Dublin being quite a recent phenomenon.
“Although the domestic firms are large relative to the size of Ireland’s economy, it will become increasingly difficult for domestic only firms to compete in more niche areas like funds and financial services generally where the clients themselves are international and need an international service.”
Managing Associate, Simmons & Simmons
James McKnight specialises in advising asset managers on the establishment and ongoing maintenance of investment vehicles. He has significant experience assisting clients with the establishment of a variety of fund types, ranging from broadly offered retail funds to private funds aimed at small groups of sophisticated investors and family offices, across every major asset class, liquid and illiquid, and also in respect of digital assets. James has advised in relation to the establishment of funds structured as companies, unit trusts, limited partnerships, common contractual funds, as well as umbrella fund structures and master feeder structures.
He has advised in relation to the establishment of investment structures domiciled in a number of jurisdictions including Ireland, Luxembourg, the Cayman Islands, the British Virgin Islands, Bermuda and Hong Kong and has advised managers based in a variety of jurisdictions including the UK the US, Ireland, the EU, Switzerland, Latin America, Hong Kong, the People’s Republic of China, Japan, Singapore and Taiwan.