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Japanese institutional investors are increasingly looking to Ireland for fund structuring solutions when seeking exposure to alternative assets in Europe such as private equity, infrastructure, real estate, debt private sector and venture capital (“European alternative investments”). In Ireland, the preferred legal structure for Japanese promoters remains the trust vehicle.

An Irish mutual fund may be authorized with the Central Bank of Ireland (the “Central Bank”) as an undertaking for collective investment in transferable securities (“UCITS”) or as an accredited investor fund. alternative investment (“QIAIF”), in accordance with the Directive on Alternative Investment Fund Managers (“AIFMD”) and local implementing regulations.

Japanese institutional investors have found that an Irish mutual fund structured like a QIAIF has the ability to adapt to the range of European alternative investments to which they seek to allocate capital.

QIAIFs are generally not subject to any regulatory, investment or borrowing restrictions and can facilitate the widest range of investment strategies. They are therefore ideally suited for obtaining exposure to European alternative investments. In terms of liquidity, a QIAIF can be opened, opened with limited liquidity, or closed.

Main features of an Irish mutual fund

Mutual funds in Ireland are established under the Mutual Funds Act 1990 and are very similar in nature to the Japanese trust fund. A mutual fund is constituted by a trust deed entered into between a management company (in the case of a mutual fund structured as a QIAIF, an alternative investment fund manager (“AIFM”)) and an Irish regulated depositary which acts as trustee. The AIFM is responsible for ensuring that the mutual fund complies with the requirements of the AIFMD. Subject to compliance with certain requirements, the manager may fully delegate its investment discretion to a foreign investment manager.

Unlike traditional trust structures which confer trust powers exclusively on the trustee, the powers of the Irish trust unit are divided between the ISA and the trustee, with the ultimate management authority vested in the board of directors. of the AIFM. Accordingly, the manager and each of its directors must also be authorized and approved by the Central Bank. There are a number of service providers in the market, including the Maples Group, who are able to offer AIFM services to customers.

Invest through a subsidiary

When considering investing in European alternative investments, it may sometimes be advantageous for Japanese investors to set up an Irish company (Special Purpose Company (“SPC”)) through which the Irish mutual fund will invest. . There are a range of options for establishing such an SPC. Typically, it is established either as a limited liability company or as a designated business company and can be structured in a tax efficient manner, to act as a “liability blocker” by interposing a separate legal entity between the trust. and the underlying investments, in order to limit the manager’s personal liability. This is particularly important if the mutual fund will invest in private funds to gain exposure to European alternative assets.

A QIAIF mutual fund structure investing through an SPC is very similar in nature to the “PE Type Unit Trust,” which is a proven Cayman Islands structure and very popular among Japanese investors seeking exposure to securities. alternative assets around the world (for more details on the Cayman Islands Regime, please see our previous article1).

Tax considerations

Mutual funds also have the option of “checking the box” and being treated as a flow-through entity for US federal tax purposes.

European alternative investment asset classes

While an Irish mutual fund paired with an SPC is suited to gain exposure to the full range of European alternative investments, a particular trend we are currently seeing is the use of such a structure to gain exposure to infrastructure, particularly infrastructure debt in the form of loans, bonds, swaps and notes, which many Japanese investors consider capable of providing a stable and attractive return.

Conclusion

We are seeing a growing trend among Japanese institutional investors towards the use of Irish QIAIF mutual funds as they seek increased exposure to European alternative investments.

Footnote

1 https://maples.com/en/knowledge-centre/2019/4/riseof-the-private-equity-type-unit-trust

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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