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Private equity fund structures in Ireland

The type of fund structure used to invest in private equity can determine the security, regulation and taxation of your investment - you need to be aware of all available options. Here Kilroys provides an overview of private equity investment vehicles available in Ireland.

Background
The Central Bank of Ireland is the regulator for non-insurance financial institutions and businesses in Ireland, including those in the International Financial Services Centre (IFSC) in Dublin. At end December 2000, 2,355 funds (including sub-funds) were authorised in Dublin. Irish-domiciled funds managed in excess of €223bn at 30th October 2000.

Regulation and supervision
Promoters, management companies, trustees, and custodians or general partners of funds must all be approved by the Central Bank. While the Central Bank does not offer any guarantees to investors in Irish private equity vehicles, significant comfort can be taken from the level of supervision that the bank exercises over the manager and custodian to the fund. The bank also has an approval process for other non-Irish service providers. The objective is that the only risk that investors are exposed to is the risk that the investments will not perform.

The Central Bank has the power to impose supervisory and reporting requirements/conditions on private equity collective investment schemes, and has extensive powers of inspection to ensure observance of requirements. Any failure to comply with these requirements, or with conditions imposed by legislation, can result in a revocation of authorisation by the Central Bank or even a court order terminating authorisation.

The prospectus and all constitutive documents relating to a fund are approved in advance by the Central Bank, and are subject to the bank's pre-approval of any proposed amendments. Any advertising/marketing material of the fund must also comply with detailed requirements laid down by the bank and must refer to the prospectus and places where copies may be obtained. Every fund must submit monthly, half-yearly, and annual reports, together with their interim and annual financial statements. Special valuation requirements also apply to venture and development capital funds. Where an investment is sold, the profit and loss amounts must be shown for each investment in the fund reports and all assets must be valued at least twice yearly.

A fund's substantive administration and control must be in Ireland to allow the Central Bank to exercise its supervisory powers.

Management company/general partner
The fund's management company/general partner is also subject to authorisation and supervision by the Central Bank. The management company/general partner must have and maintain a minimum net worth of €125,000 or three months' expenditure, whichever is greater. Appointments to the boards of management companies/general partners must be approved by the Central Bank, which holds biannual review meetings with the management company/general partner of each fund.

Trustee/custodian
A Central Bank-approved trustee or custodian must take responsibility for safekeeping of the fund's assets. The trustee must be a bank, a subsidiary of one, or be wholly owned by a credit institution or equivalent organisation. It must have a minimum paid-up share capital equivalent to IR£5m or be guaranteed by a parent bank or credit institution with a minimum paid-up share capital of this amount. Details of the duties and obligations of a trustee/custodian are set out in Central Bank notices. The trustee of each fund must attend biannual review meetings with the Central Bank.

Legal structures
The principal legal structures available generally for funds in Ireland are UCITS established under EU-driven regulations, unit trusts established under the Unit Trust Act, 1990, investment companies established under part XIII of the Companies Act, 1990 or investment limited partnerships established under the Investment Limited Partnership Act, 1994.

UCITS funds are not suitable vehicles for private equity investment given the conservative nature of the investment restrictions that apply to them.

Private equity investment vehicles can therefore be established as corporates, unit trusts and limited partnerships.

Investment limited partnership (ILP) - Private equity limited partnerships are governed by the Investment Limited Partnership Act, 1994 and may be established as either open or closed-ended. An ILP is a partnership agreement between one or more general partners and one or more limited partners. The partnership agreement is governed by Irish law and is subject to the exclusive jurisdiction of the Irish courts.

The partnership agreement is a legal document that may be changed only in writing and signed by, or on behalf of, each of the partners. No amendment to the partnership agreement, name of the partnership, general partner or custodian may be made without the prior approval of the Central Bank. Admission of additional general partners is also subject to the Central Bank's seal of approval.

A limited partner's position is similar to that of a shareholder in a corporate fund. A limited partner is not liable for the debts or obligations of the ILP beyond the amount of their investment. An important condition is that the limited partner must remain a passive investor at all times and may not participate directly in the partnership's business. If a limited partner gets involved, they will be liable for the debts incurred during the period of their involvement if the ILP becomes insolvent.

The ILP Act specifies some activities that a limited partner can undertake without becoming liable. These include consulting and advising a general partner on ILP business. A limited partner may also be a contractor for, or an agent or employee of, the ILP or general partner. A limited partner can also act as a director, officer or shareholder of a general partner. However, the general partner is liable for the liabilities of the partnership.

A limited partner may redeem his investment in the ILP. At the time of payment, the general partner must certify the ILP as being able to pay its debts in full as they fall due and after the redemption payment is made. If this certificate is not secured, a limited partner is obliged to return the money with interest if the ILP becomes insolvent within four months of them receiving payment.

Limited partners have no control over the admission of additional limited partners. This is down to the general partner. Any provision in the ILP agreement to the contrary is not valid. Partnership interests are fully transferable in whole or in part and all standard liabilities and obligations of the limited partner are also assigned upon transfer. Liabilities arising from non-certification or from becoming involved in the conduct of business referred to above, are not relieved by assignment to another party.

There are no specific provisions in the Central Bank rules dealing with co-investment opportunities. It is probable that the Central Bank would look at any such facilities on a case-by-case basis and would, as a minimum want to be satisfied as to how the conflicts of interest that can arise in these circumstances would be addressed. In addition, it would want proof that the fund and/or its shareholders could not in any way be prejudiced by the operation of such a co-investment facility.

Unit trusts - Private equity unit trusts are governed by the Unit Trust Act, 1990. A unit trust is an unincorporated fund governed by a trust deed made between a management company and a trustee. The trust's assets are registered in the trustee's name but the beneficial ownership of the assets remains at all times with the unit-holders. Liability of unit-holders is limited to the amount of their investment in the unit trust.

Investment companies - Private equity investment companies may be formed as open or closed-ended limited companies with variable capital, under part XIII of the Companies Act, 1990. Shares in variable capital companies have no par value because their share capital is not required to be divided into shares of fixed amount. The actual value of the paid-up share capital is the net asset value of the company. The advantage of a variable capital company is that it is easy to repurchase the share capital. The company can ensure repayment of investors' capital by providing in its Articles of Association for the purchase of its own shares out of its assets.

Regulatory forms
The provisions that apply to retail funds, professional investor funds (PIFS) and qualifying investor funds (QIFS) are briefly outlined below.

Retail funds - Only private equity vehicles that are venture and development capital investors are available as retail funds. Such funds have a minimum subscription of €12,500. Up to 20 per cent of a fund's net assets may be invested in the securities of one company or group of companies and borrowing is limited to 25 per cent of a fund's net assets.

Professional investor funds (PIFs) - The general investment and borrowing restrictions that apply to retail funds do not apply to funds that market units to professional investors only. To qualify as a PIF, the fund must have a minimum subscription requirement of €125,000 or its equivalent in other currencies. The majority of private equity vehicles may be established in this category.

Qualifying investor funds (QIFs) - The Central Bank does not apply its restrictions on investment objectives, policies, and leverage for funds marketed to qualifying investors only. To be authorised as a QIF, a fund must have a minimum subscription of €250,000 or its equivalent in other currencies. A qualifying investor is

• a natural person with a minimum net worth (excluding main residence and household goods) in excess of €1.25m
• an institution that owns or invests on a discretionary basis at least €25m
• an institution whose beneficial owners are qualifying investors in their own right

QIFs are the most flexible vehicles available and allow fund promoters to pursue a wide range of private equity objectives with very limited restriction.

Closed-ended funds
Typically, private equity vehicles investing in illiquid investments will not be in a position to offer regular redemptions to shareholders. The Central Bank acknowledges this. It has set down particular requirements for closed-ended funds that address the investment needs of the fund and the liquidity requirements of investors in the fund. The fund must have a finite closed-ended period which, other than in exceptional circumstances, should not be more than 15 years. Partly paid shares are also permitted.

Private equity funds
There is a wide choice of legal and regulatory structures available to promoters of funds in general. The various investment, investor and liquidity requirements imposed by the Central Bank restrict a private equity fund promoter's vehicle options. For this reason private equity funds will usually take the form of closed-ended companies, unit trusts or ILPs. These tend to be established as venture and development capital funds or qualifying investor funds.

Taxation
A new tax regime applying to all funds was implemented on 1 April 2000. This is the regime applicable to funds that issue their first units on or after 1 April 2000.

• Collective investment undertakings have complete exemption from all forms of taxation on income and capital gains
  
• Non-resident investors have complete exemption from withholding taxes on distribution of income, gains and return of capital
  
• Collective Investment Vehicles have access to Ireland's growing Double Tax Treaty network
  
• No tax on net asset valuations
  
• No duty on the registration, issue, or transfer of shares, units, or other interests in Collective Investment Undertakings

This Article is intended to provide general information only. It does not purport to be comprehensive or to render legal advice.

Hilary Griffey joined Kilroys as a partner in June 2000 having spent the previous six years as head of investment funds in the Irish Stock Exchange. She specialises in the area of financial services with a particular focus on IFSC investment funds and fund operations. Hilary is a member of the International Bar Association and has written for financial services publications and presented at industry related seminars.

Kilroys Solicitors is a full service law firm. The investment funds team advises fund promoters and service providers on all aspects of the establishment and operation of investment funds in Dublin. Including fund structures and regulatory and tax efficiency.

For further information or general enquiries, please contact Hilary Griffey on +353 1 439 5600 or at hgriffey@kilroys.ie

© Kilroys Solicitors 2001