A Full House: Proposed Update to Investment Limited Partnership Structure to Further Enhance Ireland’s Alternative Fund Offering

On 20 June, 2019, Ireland’s government released its proposed Investment Limited Partnerships (Amendment) Bill 2019 (the “Bill”) that will update the Investment Limited Partnership (“ILP”) structure.

To date, most Irish investment funds are established as corporate structures and the introduction of the Irish Collective Asset-management Vehicles Act 2015 (the “ICAV Act”) was a significant enhancement of the product offering.

The Bill is important as partnerships, as opposed to corporate structures, are the global vehicle of choice for many important asset classes such as private equity, private debt, real estate and infrastructure.

The Irish regulated partnership legislation has not been updated since the original Investment Limited Partnerships Act 1994 (the “1994 Act”) and, by not keeping pace with developments in partnership structures in other jurisdictions, Ireland has missed out on being a leading jurisdiction for these fund products, in marked contrast to its leading position for investment products such as ETFs and money market funds.

The introduction of the Bill during 2019 was a key priority for the Irish Government’s Action Plan for Financial Services – IFS2020. The Bill, if enacted, will provide a much needed enhancement to the ILP offering and will ensure that the Irish funds industry has a full deck of fund structures to accommodate all forms of investment product.

The Bill also includes certain technical amendments to the ICAV Act.

Background

Having been established at a time before alternative strategies were a large proportion of the European funds market, the ILP never achieved market traction in the same way that other regulated fund structures such as investment companies, their ICAV successors and, to a lesser extent, unit trusts and common contractual funds did.  By the time alternative funds came to the fore, the other fund structures were well known and largely better suited for strategies of the time, including hedge funds. 

ILPs share many of the features of similar structures in other jurisdictions – a general partner that has unlimited liability; limited partners with limited liability; constitution through a limited partnership agreement and, as the structure does not have legal personality, a general partner acting on behalf of the ILP in conducting its business, subject to the delegation of any activity to the alternative investment fund manager (“AIFM”) in accordance with the Alternative Investment Fund Managers Directive (Directive 2011/61/EU) (“AIFMD”). ILPs are not capable of being regulated as a UCITS so must be regulated as either a qualifying investor alternative investment fund (“QIAIF”) or retail investor alternative investment fund1 pursuant to the Central Bank of Ireland’s (“CBI”) AIF Rulebook (the “Rulebook”).

Although part of the existing deck of structure options, ILPs have been infrequently used because the legislation has not been updated to take account of features that are now market standard nor was it updated to take account of the AIFMD, which was implemented in 2013, or other regulatory changes such as the Prospectus Directive. In addition, since the financial crisis of 2008 and the succeeding years, the market in Europe has seen a substantial increase in global private equity, private credit and real asset investing (including infrastructure and green energy technologies that form part of the development focus for both the Irish and European Union governments.) 

While these strategies can be accommodated utilising existing structures, including the ICAV, partnership structures are most commonly used for such asset categories in other major investment fund domiciles. As such, making the ILP fit for the 2020s with features expected by sponsors and investors alike is a priority of the Irish funds industry as a key component of Ireland’s globally recognised funds offering2.

Key Proposed Changes

Following consultation with Irish Funds*, the Bill includes many technical amendments required to address changes in law, including AIFMD, as well as other clarifications and new features which will make the product an attractive option for global sponsors seeking to raise funds in Europe. A high-level summary is set out below.

The Bill provides for inter alia: 

• Umbrella (Series) Structures. The Bill aligns the ILP with other existing Irish structures by providing for the ability to establish ILPs as a single legal structure with multiple sub-funds, each of which can have a different strategy and liquidity, and which are legally segregated in relation to assets and liabilities from the other sub-funds in the structure. This structure allows sponsors to bring funds to market quickly by utilising existing contracts and service providers for subsequent funds.  

• Registered Foreign Name. The Bill provides for a new feature that facilitates business in non-English speaking jurisdictions by allowing formal recognition of a translated name so that it can be used in the relevant foreign jurisdiction. This will be of particular use in jurisdictions where the language utilised does not include Latin script (e.g. Chinese or Greek).  

• Express Confirmation of Retaining Limited Liability in Certain Circumstances. The Bill provides express clarification: (i) that limited partners can participate in limited partner advisory committees and (ii) that voting to amend the limited partnership agreement (“LPA”) will not result in a limited partner losing its limited liability status.  

• Alteration by Majority Consent. Provided all limited partners have been made aware of the proposed change, the Bill provides that the LPA may be amended by majority consent.

• Categorisation of Limited Partners. As investment funds are often international offerings, the Bill provides the facility to categorise limited partners differently for regulatory purposes such as those that are subject to U.S. pension requirements (ERISA) to take account of their regulatory impact on the ILP (e.g. limiting participation if such participation would result in the ILP becoming “plan assets”).  

• Facilitative Process to Change GP. The Bill proposes a more facilitative process of dealing with the novation of assets and liabilities from one general partner to another on substitution. 

• General Housekeeping. The Bill provides for various technical amendments to bring the 1994 Act up to date. Examples include:
  • alignments with AIFMD and other European legislation, including nomenclature changes (e.g. inserting depositary for custodian) and other changes such as removing the liability standard set in the 1994 Act because it is in conflict with AIFMD and the Prospectus Directive;
  • amendments to align record keeping standards to those of other Irish fund structures and international standards;
  • amendments to provide for dissolution to default to CBI processes;
  • amendments to fix typos, and
  • updates to references to laws which have been subsequently replaced or amended.

Additional Amendments Possible

There is an expectation that additional amendments will be included in the Bill prior to its enactment. The further amendments that industry participants would like to see included are: 

• the ability to redomicile entities from other jurisdictions into ILPs;  

• clarification that the right to call capital in a capital commitment and drawdown structure is vested in the general partner,

• facilitating subscription credit facilities; 

• the ability of the LPA to allow for the non-exclusive jurisdiction of the Irish courts in relation to disputes under the LPA, which will be of benefit to sovereign wealth investors, and  

• express confirmation that an ILP can create a floating charge over its assets or a class of its assets to provide comfort to counterparties.    

Other Matters to be Addressed

As noted, the ILP is subject to the CBI’s AIF Rulebook regulatory regime. It is expected that the CBI will issue, later this year, an updated AIF Rulebook in the form of a Statutory Instrument, similar to the way the UCITS Notices were converted to a Statutory Instrument in 2015.

The CBI is expected to issue a consultation on the new Statutory Instrument in the Autumn.The CBI is expected to make certain updates to the regulatory requirements applicable to all closed-ended QIAIFs, including ILPs and all other regulated fund structures as well as the regulatory requirements applicable to the general partner of an ILP or the management company of a unit trust or common contractual fund where such entity is not also the AIFM. 

For those sponsors who are not seeking a regulated product, partnerships established under the Limited Partnerships Act 1907 are also available.

ICAV Act Changes

In addition to the amendments to the ILP, the Bill provides for technical amendments to the ICAV Act by providing inter alia: 

• majority resolutions in writing for matters that are ordinary business;  

• alignment to the Companies Act 2014 in relation to the power of the courts to grant relief in proceedings for negligence, default, breach of duty or breach of trust against an officer of an ICAV and provisions around intra-group loans;  

• changes to allow the CBI to maintain in its records the changes of names to ICAVs and provide an updated Registration Order reflecting the new name (currently only a letter is provided); and  

• allowing the ICAV’s seal (where the ICAV utilises a seal) to be affixed by persons approved by the board rather than requiring two directors or one director and the secretary. 

Conclusion

The publication of the Bill is welcome by the Irish funds industry as a step forward in further enhancing the alternative funds offering in Ireland. Having a fit-for-purpose ILP structure will round out the already well-regarded Irish regulated funds offering by providing an up-to-date partnership offering competitive with other popular jurisdictions in tandem with the well-established and globally recognised benefits of Ireland as a funds domicile.

It is anticipated that the Bill will go through the latter stages of the legislative process in the Irish Oireachtas following the summer recess with enactment later this year. Dechert LLP will continue to update clients as the Bill progresses and as further regulatory developments on the AIF Rulebook are brought forward.

* Lindsay Trapp represents Dechert as a member of the Irish Funds ILP Legislative Working Group and the AIF Product and Innovation Group and has been an active participant in the work of these groups with regard to the ILP.

Footnotes

_{1) Although possible to be regulated as a retail investor alternative investment fund, this article focuses on the use of the ILP as a QIAIF. Further information on the retail regime is available on request. 
2) Indecon Assessment of the Economic Impact of the Funds Industry on the Irish Economy, May 2019 noting that Irish domiciled investment funds are sold in over 90 countries globally.}