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Matheson Update: Ireland Introduces Regulatory Framework for Loan Originating Funds
AUTHOR(S): Joe Beashel, Anne-Marie Bohan, Liam Collins, Dualta Counihan, Tara Doyle, Elizabeth Grace, Michael Jackson, Philip Lovegrove, Shay Lydon
PRACTICE AREA GROUP: Asset Management and Investment Funds
The Central Bank of Ireland (the “Central Bank”) has announced that Qualified Investor Alternative Investment Funds (“QIAIFs”) are to be permitted to engage in loan origination, subject to the fulfilment of a number of conditions.
Ireland is the first European jurisdiction to authorise a dedicated regulated fund product to facilitate loan origination by investment funds. The Central Bank’s pioneering work in this field demonstrates its commitment to engaging constructively with the funds industry in providing alternative sources of funding to small and medium sized enterprises, while simultaneously ensuring investor protection and mitigating against systemic risk.
Ireland is already a leading location for the establishment of loan funds, and this significant development will further strengthen its position as the European domicile of choice for regulated loan fund products.
The Central Bank's announcement follows on from a Consultation Paper published by the Central Bank on 28 July 2014 (the “Consultation Paper”), in which the Central Bank set out its proposed regulatory framework for loan originating QIAIFs. While the final framework broadly follows that proposed in the Consultation Paper, it also contains a number of important clarifications which take into consideration industry responses to the Consultation Paper, including that submitted by Matheson.
Most significantly, the Central Bank has confirmed that loan origination funds will also be able to engage in loan participation, as well as in hedging and efficient portfolio management techniques.
The Central Bank has also modified the requirement that loan originating QIAIFs may only acquire a loan from a credit institution if that institution retains, on an ongoing basis, a material net economic interest of at least 5% of the nominal value of the loan as measured at origination. That rule will now only apply where the loan acquired from a credit institution is a bilateral arrangement. It will not apply if the loan has been offered to multiple parties and is acquired on an arm’s length open market basis.
The Central Bank has incorporated the new regulatory framework for loan originating QIAIFs by way of an amendment to the AIF Rule Book. The Central Bank will accept applications for authorisation of loan originating QIAIFs from 1 October 2014, and will publish application forms on its website in advance of that date.
Loan originating QIAIFs will be able to avail of the AIFMD marketing passport, enabling distribution throughout the European Union to professional investors. QIAIFs also benefit from Irish regulatory process requirements which facilitate regulatory authorisation within a 24 hour period of document submission. Under proposed new legislation, which is expected to be passed shortly, it will be possible to structure a loan originating QIAIF as an Irish Collective Asset-management Vehicle, a new Irish corporate vehicle specifically designed for investment funds with the ability to “check the box” for US tax purposes.
Matheson has advised on a significant number of bank loan funds already operating in the Irish market, and we fully support the introduction of a regulatory framework by the Central Bank enabling Irish funds to originate loans directly.
Should you have any queries regarding the establishment of an Irish domiciled loan originating investment fund, we would be delighted to speak with you.