Ireland's Investment Limited Partnership - Waystone

      Ireland’s Investment Limited Partnership

      Waystone and A&L Goodbody discussed the enactment of the new Irish Investment Limited Partnership (ILP) legislation and what this means for private equity, real estate and credit managers from a European fund structuring perspective.

      We were delighted to be joined by our guest speaker, Catharine Dwyer from the Central Bank of Ireland, who spoke to the policy aims that the Central Bank have implemented through recent changes to the regulatory regime in Ireland which are relevant to ILPs.

      Video Transcription
      Hello, everybody, and thank you for joining us today in today’s webinar on investment limited partnership Ireland. I’m going to hand you over to my colleague, Pádraic Durkan. Thank you, Pádraic.

      Thank you for joining us this afternoon or this morning for a webinar on the new Irish investment limited partnership or ILP structure. My name is Pádraic Durkan. I’m a director in the DMS client solutions team. And I’m pleased to be joined by the following panelists. So, from the Central Bank of Ireland’s market policy division, we have Catharine Dwyer, who will be speaking on the regulatory framework being implemented to bring about the new structure.

      From DMS governance, we have Derek Delaney, the group’s CEO. From A&L Goodbody, we have Stephen Carson and Kerill O’Shaughnessy, who are both partners in the asset management and investment funds team. Also, from A&L Goodbody, we have Amelia O’Beirne, who is a partner in the tax department.

      We had originally framed this webinar as a broad presentation on the ILP and the structures of it. However, based on the multiple questions received from the registrants and participants in the webinar, we’ve largely decided to reframe it as a Q&A session, moving away from the previous PowerPoint presentation. So, all of the questions and themes we’ll be covering have been submitted by the registrants. So, thank you for sending those through.

      Ireland’s Regulatory Landscape

      So, I’ll start with you, Derek. From where we sit in DMS, most of our clients usually start out with the eager ambition to set up a structure in Ireland as their European domicile of choice. However, after a couple of rounds with their U.S. or UK-based tax and legal advisors, it usually ends up being the status quo and going to Luxembourg to get European investors into a closed-ended fund. I would appreciate if you could bring us through the regulatory landscape as it is now and indeed the commercial landscape for closed-ended funds in Europe.

      Okay.  So, if you look at our client numbers and the number of closed-ended or real asset structures that we have set up in Europe, where it comes to real assets, we are at one fund in Ireland, and that was an entity that was an SPV that converted to a fund for a particular purpose. Why is that? So, the issue that’s long stymied Ireland as a location for real assets is the fact that the older general partnership or limited partnership legislation had a number of challenges. The principle one that we came up against was the liability related to the general party. And the general partner was just generally unwilling to assume that risk.

      There were some other challenges, but that tended to be the immediate roadblock. As such, we ended up going to Luxembourg. When you look at it in a wider framework, you’re generally looking at where is the asset? Where is the asset that’s looking to be solved for? You’re then looking at, “Okay, what countries are a sensible place to hold that from?” So, you’re looking at the taxation treaties. And there’s borderline parity between Ireland and Luxembourg as you look at the majority of those. It’s then once you come up to the fund structure, you could have used an AIFM and a corporate entity, but that caused issues in terms of transparency true to the assets. So, we, almost without exception, ended up back at Luxembourg. That’s been the big challenge.

      Thanks, Derek. What, I suppose, as U.S. managers look to this new structure and indeed, UK-based managers:

      What is Attractive About Ireland as a Domicile? What Makes the ILP an Attractive Vehicle?

      If you look at the majority of our clients, they’d like to be able to look at Europe as one market and that’s their understanding of what the EU means. And they draw the parallels with the various states in the U.S. Now, I know it’s quite different from our side looking out, but from their side looking in, that’s how they want to be able to view the EU. They would prefer to always be able to pick one domicile and say, “I set up my funds, be they UCITS, ETFs, liquid alternatives, or illiquid alternatives in that one domicile. This has caused a quirk whereby Luxembourg has to come into the chain for the real assets. So that’s what, I guess, our clients and the advisors to our clients from an outside-looking-in perspective were hoping the ILP will solve.

      Opportunities Presented by the Irish Investment Limited Partnership (ILP)

      Great. Well, Steven, then moving over to you, so the ILP is representing an enhancement of the status quo. But building on the QUAIF framework that’s already in place, can you please bring us through the current regulatory landscape of QUAIFs in Ireland, qualifying investor AIFs, and indeed, the opportunity represented by the ILP?

      So, the ILP as Derek has mentioned, is a very typical common law partnership. But the distinguishing feature is it’s also a regulated AIF. And the context of a discussion about private funds formation, that would be a qualifying investor AIF or QUAIF, which is essentially an AIF that can only be sold or marketed to qualifying investors who are essentially professional investors as defined under AIFMD.

      The QUAIF regime is a very flexible regime. So QUAIFs aren’t subject to any material constraints on the asset classes they can invest in. They’re not subject any material investment restriction or diversification requirements. And they’re not subject to a limit on the leverage they can employ subject to disclosing the maximum level of leverage as required under AIFMD. So, people who have raised funds in Europe before will be aware that you also need to appoint an AIFM, which is where DMS comes in, and also appoint a depository. And we’ll touch on some of the features of that, I guess, a little later on.

      But it is by and large, aside from some additional rules which apply to loan originating QUAIFs, a very flexible regime. Now, you may ask, “Well, if it’s a regulated AIF, does that impact my ability to achieve speed to market in terms of establishing it? And we would make the point that QUAIFs in Ireland are subject to a fast-track 24-hour authorization process with the central bank. So that means that assuming you have all of your documents agreed between the parties, assuming the directors of your general partner have been cleared through the central bank’s Fitness and Probity process, and assuming you have previously authorized service providers such as DMS, as AIFM, and an authorized administrator and depository, you can benefit from that 24-hour fast-track authorization process.

      Now, some asset classes such as Irish real estate or loan origination may require some engagement with the bank in advance. But we would expect that you can have an ILP QUAIF authorized as quickly as you can have an unregulated RAIF established in Luxembourg. But the advantage of the QUAIF is that at the end of that process, you have a regulation vehicle which might provide certain advantages in terms of distribution to certain institutional investors.

      Thanks, Steven. I think you’ve started to hit the nail on the head of a team of questions that have come in from a lot of the Irish service providers being the differences from a QUAIF under ICAV and a QUAIF ILP. The two key themes we’re being asked about in terms of differences are timing to launch the vehicle, and indeed, differences in the service provider constructs and agreements.

      What are the Differences in Timing to Launch and Service Provider Constructs & Agreements?

      So, I think at the outset, I’d say there should be no material difference in timing between having an ILP QUAIF authorized and an ICAV QUAIF authorized. You know, aside from the fact that the ILP is constituted through a limited partnership agreement and an ICAV is constituted through an instrument of incorporation, the service providers and so the material contracts are largely the same. So, both will have an offering memorandum. Both will have an AIFM agreement, investment management agreement, depository and administration agreements.

      And so, the work around producing those and getting authorization should be the same. And I think the incorporation of the GP and the clearance of its directors should be similar timeframe to the registration of an ICAV and the clearance of its directors. Perhaps where there might be a difference is the process around negotiating an LPA with potential limited partners for the ILP. And there’s two potential approaches you can take to this.

      So firstly, you could get your ILP documents into an advanced form and obtain authorization from the central bank. Once you’re authorized, you can obtain a marketing passport under AIFMD to the relevant EU member states in which your target limited partners are based and then go through a negotiation process there. That would require you to file an updated limited partnership agreement with the central bank after that.

      Now, I think the central bank’s preference would be not to see large volumes of revised LPAs being filed post-authorization. So, the alternative approach would be to get your documents into a fairly advanced form, and then in advance of authorization, use what pre-marketing flexibility there is across EU member states to engage with potential limited partners, negotiate the terms of the LPA, and then go for authorization with the central bank.

      And then one of the challenges with that is that at the moment, there’s a real divergence across member states around the extent to which you can engage in pre-marketing with potential limited partners. But I think it’s worth noting that with the cross-border distribution of funds legislation that’s due to be implemented in the EU in August this year, that’ll introduce a harmonized pre-marketing regime, which will make that sort of engagement with potential LPs prior to authorization, more streamlined and actually should work much better for sponsors raising private funds in Europe.

      Thanks, Stephen. You’ve hit on a really key point that I think comes up in the comparison a lot with our clients. This vehicle has been compared a lot with the Luxembourg SCSP RAIF, which is an unregulated product. So, then they have to go down the roofs of other safes. So, in terms of speed to market for a regulated product, I think Ireland is going to be substantially faster. Thanks for that, Stephen.

      Key Elements of the ILP

      Kerill, Stephen has pointed out up until now, the vehicle used for setting up most alternative funds in Ireland has been the corporate vehicle which, as we’re kind of alluding to, hasn’t necessarily fitted with a manager and allocated demand. To that end, can you bring us through the key elements as you see them on the ILP?

      Yeah, thanks Pádraic. We’re delighted absolutely, to present Ireland as now a real option for structuring EU-based limited partnership funds. And when considering a new jurisdiction for limited partnerships, most managers want to know that the vehicle looks and feels similar to the limited partnerships that they currently use. And the good news on that front is that the ILP operates in much the same way as any typical common law limited partnership.

      As we said, it’s constituted by a limited partnership agreement that’s made between the general partner and the limited partners. And as is usual, the general partner has unlimited liability for the debts and obligations of the partnership. So, the general partner is therefore, typically a corporate vehicle, but it may also be a GP-LP structure. Where the general partner is a corporate, it’s likely to be a straightforward Irish private limited company. But the GP may also be non-Irish.

      Where the directors of the GP are not required to be Irish residents, that facilitates the non-Irish GP. However, where the GP is an Irish resident, you would typically have a majority of Irish resident directors as well as a representative of the promoter sitting on the board. To the point that Derek mentioned a little earlier, the central bank, late in 2020, introduced a streamlined regime for the general partner itself, meaning that there is no authorization or capitalization requirements for the GP, which was a really positive development.

      The directors of the GP or the partners in the GP-LP structure are subject to Fitness and Probity requirements and the same questionnaire pre-approval process as directors of an Irish regulated corporate fund. And then once your GP vehicle is established, a bank account can be opened fairly quickly, while the directors are going through their pre-approval process. So that shouldn’t hold things up.

      In terms of the limited partners, then they benefit from limited liability status, provided that they don’t engage in the conduct of the investment limited partnership’s business. So, the legislation itself sets out safe harbors for limited partners to retain that limited liability status. And they include consulting with and advising the GP on the business of the partnership, voting on approval matters. and participating in an advisory committee. And it’s helpful that the legislation in Ireland make specific provisions for advisory committees.

      There’s no maximum number of limited partners and there’s no public record of the names of those limited partners, albeit that the ILP is subject and will be subject to the same beneficial ownership requirements as other fund structures under EU anti-money laundering directives. So, amendments to the LPA, as Stephen mentioned, may be executed by the GP on behalf of limited partners under a power of attorney once those amendments are approved by the relevant majority of investors and then side letters may also be entered into.

      So, in tandem with the legislation update, I think the developments on the central bank side are, at least equally as important, the Central Bank of Ireland has introduced specific measures to facilitate key features of closed-ended funds. These new measures now clearly provide for carried interest and waterfall fee arrangements as well as capital accounting and associated features, including the ability to differentiate between classes of interest, including in terms of their participation in underlying investments.

      So, we’re really looking forward to hearing from Catharine Dwyer giving the central bank’s perspective on these developments. But first I’m going to turn to my partner, Amelia O’Beirne to mention some of the tax aspects of the ILP structure.

      Tax Aspects of the Investment Limited Partnership Structure

      Thanks, Kerill. So, the ILP is tax-transparent or look-through for Irish tax purposes. This means that no Irish tax arises at the level of the ILP itself. And limited partners are essentially taxed directly on their share of the underlying profits or gains of the partnership. And so, while there’s no reason why ILPs couldn’t invest directly in underlying portfolios, we think that…so, we think that we will likely see a holding structure sitting below the ILP.

      And this is because the ILP itself as a look-through entity doesn’t enjoy treaty access. So, it’s necessary to look to the treaty between the investor jurisdiction and the jurisdiction in which the investments are located in order to determine the availability of treaty benefits if there’s no intermediate holding structure. There are a number of Irish vehicles that can potentially be used for this purpose. And we’ll return to this topic later when we look at some structures.

      Thanks, Kerill and Amelia. Kerill, you hit on a key question asked by a number of Irish independent directors. Are there requirements to the same for the QUAIFs? So, I think they’ll be relieved to hear your confirmation on that for the GP directorships.

      Policy Aims for the Central Bank of Ireland Surrounding the ILP

      We’re again, pleased to be joined by Catharine Dwyer from the Central Bank of Ireland. For those who haven’t been keeping an eye on the ebbs and flows of Irish fund legislation, the ILP has been in development for nearly a decade. So, crossing the final hurdle in 2020 when there was enough going on was a sincerely very welcome development. Catherine, can you please bring us through the policy aims for the Central Bank of Ireland surrounding the ILP and the innovative process of industry engagement as well?

      Sure. And I think at a starting point, it’s important to note that the bank really does keep its rule books under regular review. And this is done with an aim to ensure the framework performs as appropriate, and that it’s also aligned with the bank’s mandate. So, to a certain extent, we do receive representations from industry, but we also engage very directly with fund promoters in relation to different fund features, to understand how those fit within a regulatory framework. This engagement then allows us to consider the existing regulatory framework and guidance. And where appropriate, we can then revisit or adopt that particular framework.

      In terms of the bank’s approach, we’re an integrated authority. And we have three pillars, namely, those of central banking, prudential and conduct regulation, but we’re also a macro-prudential and resolution authority. So as such, the approach to regulation of the fund sector is in light of the bank statutory mandates. In practice, that is safeguarding of monetary and financial stability, securing the proper and effective regulation of financial service providers in the markets, but also ensuring that the best interests of investors are protected.

      In our review, regulatory frameworks should be calibrated in a manner that supports adherence to high quality standards and mitigation of potential risks, but at the same time, facilitating appropriate investor choice and product innovation. In the context of PE, the bank has, for quite a period of time, been considering the features that are commonly used in PE funds. And linked, of course, to this is the European Commission’s Capital Markets Union agenda, which is seeking to provide for structures which can contribute to SME development and financing.

      In the present context, the bank, as you know, issued a consultation paper late last year, Consultation Paper 132. And we had engaged very extensively with the industry to understand the proposals that were put to the bank in relation to certain of the features that you now see in the guidance. And this really enabled us to have a detailed understanding of all the proposals, and in that way, to frame what we consider to be appropriate and proportionate investor protection safeguards, while also facilitating that choice that I mentioned.

      The outcome is guidance, which provides, I suppose, a transparent understanding of the rules and the expectations of the bank in terms of operationalizing certain share class features for QUAIFs. I think it’s important, though, to note that, while the share class features and the guidance are very often going to be used for ILPs, that this guidance is not structure specific. So, it can be used for QUAIFs as well, and provided always that they are close-ended in nature, that they have limited redemption abilities, and they are marketed to professional investors.

      Thanks, Catharine. And you’ve hinted at a couple of the constituent elements in CP 132 that came out towards the tail end of last year. As we see it, there’s a few really key elements as it relates to close-ended QUAIFs for our clients, namely, the issue of shares at a price other than NAV, the excuse and exclude provision, stage investing and management participation.

      The framework and policy objectives as it relates to those elements of CP 132

      Sure. I think it’s useful as well to note that the proposals aren’t entirely new, and that you’ll have these features in the number of existing QUAIFs. And that’s primarily because there will have been a bilateral engagement or a submission rate with the bank in the context of a particular product. But as I said, this is new guidance, which sets out the ability to establish share classes with these features generally rather than as an exception to the rule.

      And as you mentioned, the features are the ability to establish share classes of price other than NAV, which is the general approach for the bank. The guidelines outline the conditions which are applicable to excuse and exclude provisions, and they permit a tranche to a stage investing, where you can acquire interest later in the life cycle of the fund, and also the establishment of carried interest classes to facilitate portfolio management participation in the fund itself.

      The guidance outlines some additional safeguards which must be implemented in order to establish the share classes. So, these include an express provision for the ability to provide these share classes in your constitutional documents in your perspective. So essentially, pre-determination that the ability to establish these share classes is set out in advance.

      The requirement to account and to record capital commitments by way of a capital accounting methodology provided that that methodology is consistent with AIFMD requirements in terms of reliable and objective asset evaluation and proper NAV accounting. And also, the investors’ interest must be proportionate in the context of your paid-in capital, or your waterfall arrangements, or the extent to which the share class or the participation has an interest in the underlying assets of the QUAIF.

      There are additional safeguards for management classes and also for excuse and exclude provisions. In relation to management classes, the additional safeguards are that the waterfall payment structure must make a first payment to the holders of capital and preferred returns in priority to the management share classes. And then in terms of your excuse and exclude, there’s a requirement for a legal opinion to be provided by the entity that is either the investor or the QUAIF, depending on who is invoking the excuse or the exclude provision in the context.

      I think it is useful to note that the bank does keep new guidance under review. And so, you can expect that…I suppose, there will be a review process in terms of the uptake and the use of these particular features in due course.

      Thanks, Catharine. That’s really, really interesting. And Kerill, as it is now, CP 132 has fundamentally changed the conversation you can have with your clients looking to launch these kinds of vehicles. Grateful if you can, I suppose, give us your thoughts albeit, hot off the press on some of the commercial context of what Catharine just outlined.

      The Commercial Context of CP32

      Yeah. Thanks, Pádraic, and Catharine. I mean, I think that the key point here is that these new measures streamline the process for availing of these typical features of closed-ended funds. As Catharine said, they’re not necessarily new, but this makes them clearly available to everybody, which is really helpful. And in particular, I think this provides certainty to managers on crucial matters such as carried interest, and the ability to directly align the interests of the management team with those of investors. And that’s often the fundamental component of the structuring.

      This will give comfort to fund managers when considering Ireland as a potential domicile. And as Catherine also said, it’s worth bearing in mind that these features can also be used for ICAVs and other types of regulated fund structures also. So, it’s not just limited to ILPs.

      Catharine, from a service provider setting, I suppose there’s a nuance as well in terms of an emerging service provider, which is set out in the new depository framework. And the central bank has also given us a new acronym or abbreviation in DELFI. Grateful if you can bring us through the kind of key considerations in this new type of depository arrangement for these closed-ended funds.

      Key Considerations for DELFI

      Well done on the acronym usage. Yes, DELFI, so a depository of assets other than financial instruments, essentially a real asset depository for all intents and purposes. So, this is a type of depository that’s provided for under AIFMD, but we hadn’t provided for it in a domestic context. We had a process of engagement with industry by way of a consultation a couple of years ago.

      And, yes, it’s taken a long time, I suppose, to finalize the regulatory framework for authorization of these depositories. But I suppose it’s been worth it in terms of we’ve had a lot of engagement with different firms to understand their approach, and also to, I suppose, to really consider the requirements that we may have as a regulator for these types of funds.

      The depository is going to be only capable of appointment by a QUAIF. So, it can only have a QUAIF. It can only act for a QUAIF and a QUAIF where there is a limited redemption period. So, it’s very much tied in with your typical ILP structure. It has got to be authorized under the Investment Intermediaries Act as well. So that’s part of the process in terms of the bank authorization. Yeah, the guidance was then published on the 2nd of February together with the guidance for the share classes that we talked about earlier. That, together with a series of central bank questions and answers relating to the operations or some of the technical parts of the depository are also set out on our website.

      Thanks, Catharine. It’s going to be really interesting to see who the players are that emerge in this specialized depository space, in terms of being the no- traditional large custody bank. So, thank you for that update. Amelia, naturally, not to put any pressure on you, but naturally, a lot of the success is going to live or die on how the tax treatment works. And that question has been particularly borne out by our U.S. manager submissions. So, what we’ve done is we’ve prepared a structure chart of what we envisage being a typical structure. Obviously, every structure will have its nuances. But I’d be grateful if you could bring us through the main considerations from a tax perspective.

      Tax Structure Considerations

      Sure. Thanks, Pádraic. So here we have a sample ILP structure. And yeah, I guess as Pádraic said, this is very much a sample structure in this. In practice, the tax structure will be determined very much in each case by the profile of the investors and the nature of the underlying portfolio. But as we touched on earlier, we do think that in many cases, there’ll be a preference for an Irish holding structure sitting below the ILP, particularly where treaty access is a priority.

      And there are a number of Irish vehicles that would be attractive as an intermediate holding entity, in particular, the ICAV, which is our corporate regulated fund vehicle, and the Irish Section 110 Company, or in some cases, possibly even a regular Irish limited company.

      The ICAV

      So, starting with the ICAV, the ICAV, we think, is likely to be a very popular choice for a wide range of different structures. As we said, it’s a corporate fund vehicle. It’s fully tax-exempt from an Irish perspective. And because of its tax-exempt status, it’s also unaffected by upcoming interest limitation rules and anti-hybrid rules. So that ultimately means that it will be suitable for debt, equity, and a range of other investments. It’s also popular in U.S. structures because of its ability to check the box from a U.S. tax perspective.

      And the fact that it’s specifically recognized as a resident of Ireland for treaty purposes under the U.S. Ireland double tax treaty, so there’s no uncertainty about treaty eligibility under the U.S.-Ireland treaty despite its tax-exempt status. And that’s, of course, subject to meeting the limitation and benefits article in the treaty.

      Irish Section 110 Company

      Another alternative is the Irish Section 110 Company. And the 110 company, it’s a fully taxable Irish company, but it relies on tax deductions for profit-participating debt to achieve tax neutrality. So, with upcoming interest limitation rules, Section 110 companies will likely, in the future, be most suitable for debt funds where the return payable to the 110 company is in the nature of interest income only.

      Irish Limited Company

      The third option that we’ve laid out in the structure is a regular Irish holding company. And we do think that there are certain more bespoke structures where an Irish holding company may be an option. This is very much fact-dependent, but it may be suitable in the case of certain structures where the return is expected to be in the nature of, for example, capital appreciation that’s recognized on an exit, rather than an income return during the life of the investment.

      But there is, like, flexibility with the ILP. In bigger structures, because of the umbrella nature of the ILP, we can foresee a variety of these options suiting different investors. And what we may see is that if you have some investors in a good jurisdiction that have a favorable treaty with the target jurisdiction, so they don’t need an intermediate vehicle, that that investment may be allocated to a sub-fund that would invest directly in a portfolio company in the target jurisdiction.

      Then our other investors that may have a need for a blocker entity may invest in the portfolio company through a separate sub-fund that would have an intermediate entity that suits their needs sitting below. So, I guess the main takeaway is that there’s great flexibility to tailor the structure to the needs of different classes of investors, even within one ILP.

      Then just to touch briefly on feeder vehicles that would set above the ILP. Then again, the ILP allows a lot of flexibility in this regard because of the fact that it is tax-transparent. So, for U.S.-facing structures, we’d expect to see the typical feeder vehicles whereby… So, for example, U.S. taxable investors would have a preference to invest through a transparent entity, like, for example, a Delaware ILP, and then the ILP itself is transparent. So that would meet their needs in that regard. And then the U.S. tax exempts and non-U.S. investors would have a preference for a blocker entity as a feeder vehicle sitting above the transparent ILP.

      Then moving them to the left-hand side of the structure and the general partner vehicle. So, the GP in this structure is a regular Irish company. And as Kerill touched on earlier, while this doesn’t have to be the case, we do expect that in many cases, it will be the preference. And certainly, from a debt perspective, there is a trend towards there being a preference for those entities within the structure to sit in the same jurisdiction as the fund vehicle. And this also facilitates the concentration of substance in one jurisdiction. But certainly, it’s not a requirement from an Irish tax perspective.

      Where the GP is an Irish tax resident company, we’d expect a majority of the board of directors to be made up of Irish tax resident individuals, and for all of the board meetings to be held in Ireland. And then where it is an Irish tax resident corporate vehicle, it will be fully taxable in Ireland, but it will generally have outgoings we’d expect largely equivalent to the…So, just a small spread would remain in the vehicle that would be subject to tax in Ireland.

      And so, Derek, I might just stop there and see if that aligns with what you typically see in other jurisdictions or if you have any additional comments in terms of the structure.

      There’s a lot that’s common, but there’s one or two things that are actually different than I think might prove out to be quite positive. So, for example, when you’re looking at it as a U.S. firm investing into this entity, if you’re investing back into the U.S., there’s different taxations at a federal level and at a state level. That often comes down to the definition of the entity that they’re investing in and whether it’s a regulated collective investment scheme.

      Now, this structure would have the benefit of being a regulated collective investment scheme, which the Luxembourg equivalent doesn’t have it as a collective investment scheme. But it fails half of that test. So this is something that has proved a challenge for some of our U.S. investors, and should prove a benefit for U.S. taxables.

      Something that you mentioned as well that we haven’t really been seeing in Luxembourg is the ability to have some investors come into a fund and have the underlying bucket of investments be different. So, generally, everything comes into the fund, the fund goes to the whole goal. But everyone goes to that whole goal.

      Your inference that you’re able to come into the fund and have certain investors that want to take advantage of the tax treaty go to the Section 110 and some go directly into the holding. That will prove again, very advantages for certain buckets of investors. So, there isn’t anything that’s evident as missing. It looks like there’s two most likely significant benefits to us over the Luxembourg equivalent.

      I guess just a question for Amelia that might come up and I believe the answer is this. This isn’t feasible. But in the U.S., it’s quite common that a manager will earn their carry on an investment-by-investment basis. That’s something that wouldn’t be common, or largely acceptable by European investors. Is that allowed within the structure?

      Maybe from a regulatory perspective, I guess, you know, on the tax side, I don’t think that there’s anything that would necessarily preclude that from being the case. It would just be a case of structuring it and how you would structure that through the various investments. And maybe on the regulatory side, any thoughts?

      Yeah. I mean, we might just walk through, actually, just how the carried interest would work and an ILP, you know, might help frame this. So, from a fund formation perspective, carried interest is typically structured through a carried interest vehicle. And that’s typically established by the promoter. That vehicle would often be a party to the limited partnership agreement as a special category of limited partner, often called a special limited partner. So, the manager’s personnel involved in the management of the fund would then typically participate in that vehicle as investors.

      And in a typical scenario, Derek, under the LPA, the special limited partner would make a relatively minor capital commitment to the fund. And the interest that that special limited partner would have in the fund would include a right to receive a percentage of the returns of the fund after returning to investors the capital they had invested together, often with a hurdle rate of return on their capital.

      So, if that fund was set up to allow categories of limited partners to participate to varying degrees potentially in tranches of investments, you could envisage a scenario whereby a special limited partner would them equally have, you know, different participations in different tranches of assets and thereby achieving that carried interest on different tranches of those assets. So, I think so. We’ll probably work through the detail on that one, Derek, but I can’t see why not.

      Okay. And I think that’s something that’ll prove interesting because what managers are often trying to do is to be able to run their U.S. and their European vintages in the same manner or even possibly as the one common structure. So, I think that will prove very much of interest to the audience.

      Carried Interest and Tax Considerations

      And I might just touch quickly then on just some of the tax considerations related to carried interest. So here we have our structure again, and I think Kerill touched on it already. But one of the key benefits of the ILP is that you can essentially structure carried interest as you would in a Cayman or Delaware structure, whereby as Kerill described, a nominal capital contribution will be made in exchange for the limited partnership interest which would give rise to an entitlement to a percentage return in excess of a specific hurdle.

      And here you’ll see our carried interest vehicle on the right-hand-side of the structure. And the nature of the carried interest vehicle, from a tax perspective, will largely be driven by tax considerations in the manager jurisdiction, rather than Irish tax considerations. But we have the flexibility for that to be an Irish unregulated limited partnership vehicle, if that is the preference from the manager jurisdiction from a tax perspective there. So, I guess, again, quite a degree of flexibility in terms of what that could look like. But I think Irish vehicles that are capable of accommodating it. Thank you.

      Thanks, Amelia, Kerill, and Derek. And that actually rounds out the final theme of questions we’ve received around, you know, the carried interest and how it relates to the ILP. So, at the start of the webinar or this Q&A session, Derek reflected on what managers tend to do for accessing European capital or structures with all roads inevitably leading to Luxembourg.

      I think what we have set out today is that Ireland is now a legitimate alternative to Luxembourg with the LP legislation that seems to match all of the key benefits. And this is crucial with the kicker of the fund actually being a regulated entity which, for German and French investors who only allocate it to a regulated fund, I think this is going to be of keen interest.

      So, I’d like to conclude by thanking my panelists for joining us for this discussion. As a reminder from DMS, we had our CEO, Derek Delaney from A&L Goodbody. We had Amelia O’Beirne, Stephen Carson, and Kerill O’Shaughnessy. And also, a Special thanks to Catherine Dwyer for joining us from the Central Bank of Ireland. I won’t put Catherine in the position of having to deal with follow-ups, but if anyone wants to reach out to the team at A&L Goodbody, or DMS, we’re happy to deal with any follow-up queries you may have. And thanks so much for joining us today.

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