Real Asset Depositaries: A Welcome Development for Private Equity and Real Estate Funds
05 December 2018
In its Notice titled, “Notice of Intention to make provision for entities to act as depositaries to AIFs under Regulation 22(3((b) of the AIFM Regulations, the Central Bank set out its main intentions regarding real asset depositaries” (the “Notice”), contained as part of its Markets Update on 19 November 2018, the Central Bank declared its intention to update its AIF Rulebook to allow for the authorisation and regulation of real asset depositaries. The legislative power permitting the Central Bank to do this has been in existence for some time.
Applicable Types of Funds
Real Asset Depositaries would be well-suited to being appointed to funds that:
are closed-ended funds with no right of redemption for the first five years following their launch;
do not invest in assets that that must be held in custody pursuant to Regulation 22(a) of the European Union (Alternative Investment Fund Managers) Regulations, 2013 (the “AIFMD Regulations”) (the “General Custody Rule”); or
generally invest in issuers or non-listed companies in order to potentially acquire control over such companies in compliance with Regulation 27 of the AIFMD Regulations.
Typically such funds would include private equity and real estate qualifying investor alternative investment funds (“QIAIFs”).
Exception to the General Custody Rule
Despite the General Custody Rule and if it can demonstrate to the Central Bank that it has capacity to do so, a real asset depositary may be permitted to hold in safekeeping, assets:
for cash management purposes;
to facilitate an initial public offering strategy; and/or
to facilitate private equity acquisitions of publicly held companies.
If a real asset depositary is permitted to hold any of the above assets in safekeeping, then the Central Bank may impose, as a condition of authorisation, that it maintain sufficient financial resources to cover the value of any assets held in custody; unless the real asset depositary delegates the safekeeping of the assets mentioned above to a suitably qualified sub-custodian.
Qualifications and Ongoing Requirements to be Real Asset Depositary
An entity can act, and continue to act, as a real asset depositary if it satisfies the following requirements:
1. it is authorised to carry out custodial operations under the Investment Intermediaries Act 1995, as amended;
2. it demonstrates that it maintains the following:
(i) appropriate expertise and experience to carry out the role of a real asset depositary;
(ii) sufficient resources and adequate internal governance and internal organisation controls;
(iii) the ability to meet:
the capital requirement of €125,000; or 25% of total expenditure of the real asset depositary;
whichever is greater;
(iv) two Irish resident directors;
3. it complies with the safekeeping and oversight obligations of depositaries under the AIFM Regulations; and
4. it complies with Chapter 5 of the Central Bank’s AIF Rulebook, which sets out requirements around:
(ii) business continuity planning;
(iii) the obligation to report annually to unitholders on the management of the relevant alternative investment fund manager; and
(iv) reporting breaches to the Central Bank.
It has professional indemnity insurance in place. The level of cover is likely to depend on the value of portfolios of the QIAIFs to which the real asset depositary has been appointed to.
The status, and the limited nature of the activities and related liability, of real asset depositaries will need to be disclosed in the prospectus of the relevant QIAIF.
The Central Bank will accept comments from stakeholders on real asset depositaries until 19 January 2019. Depending on the outcome of the Central Bank’s review and the consultation process, the Central Bank’s AIF Rulebook may be updated to include the requirements that apply to real asset depositaries. However, the Notice invites applications to act as a real asset depositary to be made to the Central Bank on the basis of the intentions set out in the Notice.
 Regulation 22(3)(b) of the AIFMD Regulations.
If you would like to discuss the potential impact of this issue on your business, please contact a member of our Financial Regulation team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.