On 20 December 2021 the Central Bank of Ireland (Central Bank) published an updated version of its AIFMD Q&A (Q&A) which included, amongst other updates, the Central Bank’s expectations in respect of the appointment of a non-discretionary investment advisor (Investment Advisor) providing services to a qualifying investor alternative investment fund (QIAIF). QIAIFs are Irish alternative investment funds, regulated by the Central Bank and marketed to ‘qualifying investors’, which include sophisticated and institutional investors who meet minimum subscription requirements.
The Q&A provides welcome clarification to firms considering the establishment of a QIAIF with a private equity strategy or otherwise investing in physical assets (e.g. real estate) which do not qualify as financial instruments under MiFID. It is anticipated that this regulatory clarification will facilitate further interest in Ireland as a domicile for private market and closed-ended funds and, in particular, using the recently modernised investment limited partnership as the vehicle to house such products.
The Q&A confirms that delegation of non-discretionary activities to an Investment Advisor is permitted, including in circumstances where the Investment Advisor will receive a higher proportion of fees than other service providers to the QIAIF. Such delegation arrangements will be permitted provided that the Investment Advisor is performing a role that is advisory in nature (i.e. it has no discretionary investment management powers) and the alternative investment fund manager (AIFM) is able to evidence this position where requested by the Central Bank.
The Central Bank will also require that the prospectus/offering memorandum for the QIAIF incorporates the following disclosures regarding the role of the Investment Advisor, fees payable and oversight controls:
- Details of the Investment Advisor, and a description of the services it provides, must be appropriately disclosed in the QIAIF’s prospectus/offering memorandum. The Central Bank acknowledges in the Q&A that, where a QIAIF is operating private equity strategies or is otherwise invested in physical assets which do not qualify as financial instruments under MiFID, an Investment Advisor may provide a range of services to the AIFM - or an investment manager - in respect of that QIAIF (for example, with respect to a geographical location or asset type, which may not be required for other investment strategies). Such services may include activities relating to identification and origination of investment proposals, due diligence and other operational activities relating to the assets or proposed investments of the QIAIF.
- A description of the role of the AIFM with respect to its ongoing oversight and review of services should be provided by the Investment Advisor, including details on how the AIFM will discharge its obligations regarding delegation arrangements as set out in AIFMD Level 2.
- A description of how any fees of the Investment Advisor are accrued and paid must be disclosed in the prospectus/offering memorandum. The Central Bank recognises that the services provided by an Investment Advisor may not be required for other investment strategies and, for this reason, the fees paid to the Investment Advisor may appear disproportionately greater than those paid to other service providers of the QIAIF. The Central Bank requires that 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 are disclosed in the QIAIF’s prospectus/offering memorandum. Where a single figure is disclosed in the prospectus/offering memorandum that covers all of the fees payable out of the assets of the QIAIF, the prospectus/offering memorandum should disclose that the Investment Advisor will receive a fee greater than typically paid to a non-discretionary investment advisor. Such disclosure should also cross-reference details of the services that the Investment Advisor is providing to the QIAIF in order to provide context for its fee.
Should you wish to discuss the above update, or to discuss fund structuring and regulatory requirements in Ireland, please get in touch with the author or your regular DLA Piper contact.