CBI Clarifies Requirements for GPs to ILPs and Consults on Share Class Features for Closed-ended QIAIFs

The Central Bank of Ireland (Central Bank) recently issued two publications that will be seen as welcome developments by the Irish funds industry, namely:

• AIFMD Q&A Update – the Central Bank clarifies that a General Partner to an Investment Limited Partnership is not required to be authorised as an AIF management company
• Consultation Paper (CP132) – the Central Bank sets out proposed guidance on the features that are permitted for share classes of closed-ended QIAIFs.

AIFMD Q&A Update – Central Bank confirms that a GP of an ILP is not required to be authorised as an AIF management company

The Central Bank released its 36^th Edition AIFMD Q&As on 23 November 2020. It includes new Q&A IDs 1134 and 1135 relating to general partners (GPs).

The Central Bank has clarified that the GP of an Investment Limited Partnership (ILP) is not required to be separately authorised by the Central Bank as an AIF management company. It is therefore not required to adhere to the AIF Rulebook nor is the GP required to maintain minimum capital of at least €125,000. However, a GP that is not designated as the AIFM, which is advised and would be normal practice for ILPs, is required to appoint an AIFM with responsibility for managing the ILP in accordance with the AIFM Regulations. The Central Bank has confirmed that the directors of the GP will be subject to Central Bank’s fitness and probity regime as part of the fund authorisation process. The Central Bank also clarified that GPs currently approved as an AIF management company can apply to the Central Bank for revocation of its approval.

CP132 - Guidance on Permitted Share Class Features of Closed Ended QIAIFs

The Central Bank is proposing changes to the requirements for share classes of closed-ended alternative investment funds (AIFs), in particular those that use private equity type strategies or invest in illiquid assets.

The guidance outlined in the Central Bank’s consultation paper (CP132) proposes to permit closed-ended qualifying investor alternative investment funds (CE QIAIFs) establish share classes that allow investors varying forms of participation in the CE QIAIF’s portfolio of investments. This is referred to in CP132 as “Differentiated Share Classes”. Such differentiation is currently prohibited by the Central Bank rules that require income, gains and losses arising on a portfolio of investments to accrue equally to each investor relative to its holding in the CE QIAIF.

In summary, the key provisions of the proposed guidance include:

• Scope - the Central Bank is proposing to allow the establishment of Differentiated Share Classes of CE QIAIFs that apply strategies relating to private equity, venture capital or real estate and which generally do not invest in assets that must be held in custody in accordance with the AIFMD or which generally invest in issuers or non-listed companies in order potentially to acquire control over such companies in accordance with the AIFMD.
• Differentiated Share Classes subject to disclosure and investor protection requirements disclosed below, a CE QIAIF may establish Differentiated Share Classes that:

(i) permit the profit, loss and capital of certain investments to be allocated to certain share classes only

(ii) excuse certain investors from participating in some of the CE QIAIF’s portfolio of investments, which will be of particular importance to institutional investors that are restricted from investing in certain industries or economic sectors

(iii) are restricted to the investment manager of the CE QIAIF and that permit the allocation of carried interest returns, provided the investment returns to the participating investors, both committed capital and preferred returns are paid in priority to the carried interest

(iv) that allow for stage investing and thereby permit the issue of share classes that provides for participation only in the future investments of the CE QIAIF.

• Investor protections - The Central Bank considers that the availability of Differentiated Share Classes should be subject to certain investor protections. The following protections will apply in order for a CE QIAIF to provide Differentiated Share Classes as described above:

♦the CE QIAIFs constitutional document permits the establishment of Differentiated Share Classes

♦CE QIAIF’s prospectus discloses the terms of the Differentiated Share Classes

♦Unitholders interest in a CE QIAIF is proportionate to capital paid, pre-determined flow of capital returns and extent of participation

♦The CE QIAIF maintains records on a per-investor basis to identify commitments paid and outstanding for each investor

♦The CE QIAIF adopts a capital accounting methodology that is consistent with the requirements of Commission Delegated Regulation (EU) 231/2013 to record the accrual of income and gains for each investor.

CP132 comprises draft guidance with the following key questions to stakeholders:

1. Do you have views on the Central Bank’s approach to limit the availability of these features to certain types of CE QIAIFs?

2. Are there other aspects or requirements of the Central Bank AIF Rulebook that require clarification or consideration in operationalising these arrangements?

3. Are the safeguards proposed sufficient? Are there other features which may be desirable or of benefit from an investor protection perspective?

Conclusion

The Central Bank’s updated AIFMD Q&A and the Central Bank’s guidance under CP132 if implemented will be viewed as a very positive enhancement to the regulatory framework for closed ended funds in Ireland. It will also be of particular interest to firms managing private equity strategies, infrastructure and sustainable investments, or other real asset investments.

If you would like to discuss the above or require further information, please contact a member of our Investment Funds team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.