The Central Bank of Ireland (Central Bank) recently issued the 44th edition of its AIFMD Questions and Answers (Q&A) on the application of the AIFMD. Among other updates, it includes a new Q&A ID 1151 clarifying the Central Bank’s expectations for non-discretionary investment advisors providing services to Irish qualifying investor alternative investment funds (QIAIFs).

The Central Bank’s Q&A clarification is solely applicable to QIAIFs operating private equity strategies or invested in physical assets, such as real estate, which do not qualify as financial instruments. We explain the impact of the disclosure requirements of the new Q&A for QIAIFs operating these strategies.

Advisors identity and services disclosure

The Central Bank expects that each investment advisor’s identity and the services provided should be comprehensively disclosed in the QIAIF’s prospectus. The advisor’s services may include identification and origination of investment proposals, due diligence and other operational activities relating to the assets or proposed investments of the QIAIF.

Fees and disclosure

The Central Bank recognises that services of this nature are not typically provided for in other investment strategies. As a result, the fees paid to non-discretionary investment advisors providing these services appear disproportionately greater than those paid to other service providers of the QIAIF.

The Central Bank confirms that QIAIFs are required to disclose in their prospectuses how fees of each service provider are accrued and paid. Where such fees are payable directly from the assets of the QIAIF, the maximum fee and the potential to pay out of pocket expenses on normal commercial terms of each of the service provider is to be disclosed in the QIAIFs prospectus. Where a single figure is disclosed in the prospectus that covers all of the fees payable out of the assets of the QIAIF, the prospectus should disclose that the investment advisor will receive a fee greater than typically paid to a non-discretionary advisor. This disclosure should cross-reference details of the services that the investment advisor is providing to the QIAIF in order to provide context for this fee.

Oversight and review of services

The Central Bank confirms that the QIAIFs prospectus should detail the role of the AIFM with respect to its ongoing oversight and review of services provided by such non-discretionary investment advisors. This should include information on how the AIFM will discharge its functions under AIFMD Level 2 , including, among other requirements, Article 75(e) and (f).

Supervisory initiatives

The Central Bank confirms that it intends to keep such arrangements under review and, depending on the evolution of the market practice in this area, may conduct additional supervisory initiatives with respect to QIAIFs. This includes the role of non-discretionary investment advisors. It is the Central Bank’s expectation that the investment advisor is only performing a role that is advisory in nature. The AIFM must be in a position to evidence this upon request from the Central Bank.

Conclusion

It is helpful that the Central Bank has recognised the distinctive nature of the services of non-discretionary advisors provided to QIAIFs investing in private equity and real assets and therefore the ability to pay those advisors a higher fee from the assets of the QIAIF.

A key advantage of establishing a QIAIF in Ireland is the Central Bank’s 24-hour fast track approval process. Since QIAIFs are not subject to limiting investment or borrowing restrictions, they remain a flexible and popular vehicle for funds targeting “qualifying” investors. Where an investment advisor acts in a non-discretionary capacity to the QIAIF, no Central Bank clearance of the advisor is required.

The Central Bank’s clarification will also be welcome news to private equity firms considering establishing QIAIFs under Ireland’s investment limited partnership (ILP) regime.

For more information, 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.