As readers will be aware, a Bill to amend The Investment Limited Partnerships Act, 1994, which governs the establishment and operation of regulated investment limited partnerships ("ILP") in Ireland, was published in September 2020. In an exciting development for the asset management industry, on 16 December, 2020, the Bill has passed all stages of the parliamentary process and is expected to be now be sent forward for signing by the President.
The Bill is intended to modernise the law governing investment limited partnerships so as to make the ILP the vehicle of choice for implementing private equity, venture capital, private debt and real assets investment strategies in Europe. As well as modernising the ILP in line with other types of Irish investment fund vehicles, the amendments to the existing ILP regime are intended to incorporate "best in class" features for this type of vehicle.
In this briefing we outline some of the key features of the ILP.
Summary of some of the key features
Formation of ILPs
The formation of ILPs is subject to the approval of the Central Bank of Ireland (the "Central Bank") and ILPs are regulated by the Central Bank in accordance with the provisions of the Central Bank's AIF Rulebook. An ILP can only be considered formed when a certificate of authorisation has been issued by the Central Bank in accordance with the requirements of ILP Act.
Regulation of ILPs as alternative investment funds
All ILPs are required by be authorised and regulated by the Central Bank. ILPs are regulated in accordance with the requirements of the Central Bank's AIF Rulebook and are categorised as either Retail Alternative Investment Funds ("RIAIFs") or Qualifying Investor Alternative Investment Funds ("QIAIFs"). For RIAIF ILPs, the main offering documents are required to be submitted to the Central Bank for prior review and comment. However QIAIF ILPs can avail of a fast-track procedure under which the constitutional documents, main offering documents and material contracts are simply filed the day before approval is required. RIAIFs and QIAIFs are capable of being open-ended, limited liquidity or closed-ended in terms their liquidity profile.
Ability to establish umbrella type ILPs
Once the Bill is enacted, it will allow umbrella type ILPs to be formed with multiple segregated liability compartments or "sub-funds". This will provide asset managers with significant structuring flexibility and allow different strategies and investor types to be accommodated within one overall architecture while at the same time preserving segregation of liability (i.e. the assets of one sub-fund will not be available to discharge the liability of other sub-funds within the same umbrella). The umbrella structure concept is well established and recognised. Umbrella structures are regularly used by asset managers. However, the ability to use an umbrella structure in an ILP will be a unique features which will provide considerable operational efficiencies and potential economies of scale.
Limited liability of limited partners
Under the Bill, the liability of limited partners is limited to the amount they contribute or agree to contribute to the ILP unless they perform certain activities related to the management and operation of the ILP.
Limited Partners performing certain functions
Typically, if an LP takes part in the management of the limited partnership structure, the LP runs the risk of losing limited liability in relation to any losses which arise as a result of such activities. The Bill, once enacted, provides a non-exhaustive list of activities which an LP can perform in relation to the ILP which will not be considered to be participating in the management of the ILP and consequently will not compromise their limited liability status. The provisions of the Bill relating to LP participation in these activities are in line with accepted industry standard i.e. service on any board or committee of the ILP; investigating, reviewing, or being advised as to the accounts or business affairs of the ILP or exercising any right conferred by the Bill; or approving changes to the limited partnership agreement ("LPA").
Amendments to the LPA
In order to provide greater flexibility and simply the process of amending the LPA of an ILP, the amendments to the legislation removes the requirement for all LPs to approve an amendment to the LPA and amendments will now be permitted by a majority of the general partners ("GPs") and a majority of LPs. In order to be consistent with other available fund structures in Ireland, the Bill also allows for certain amendments to proceed without LP approval where the depositary of the ILP certifies that the changes to the LPA do not prejudice the interests of LPs. In keeping with what is allowed for similar structures in other jurisdictions, the Bill allows for the LPA to set down the specific provisions with respect to what a "majority of limited partners" is considered to mean. Accordingly, asset managers have flexibility in determining the appropriate methodology to use.
Partner defaults and failure to perform
Critical to the operation of an ILP are the provisions of the LPA which address the issues relating to failures by LPs to perform their obligations under the LPA. The range of options available the GP in the event of a default by an LP in respect of their obligations will be set out in the LPA. The Bill specifically allows for the following consequences for an LP who fails to perform the obligations application to them under the LPA:
- reducing, eliminating or forfeiting of partnership interests:
- subordinating the partnership interest in the ILP of the defaulting partner to the interests of non-defaulting partners;
- effecting a sale or forfeiture of the defaulting partner's partnership interest.
- the issue of interests at a price other than NAV;
- Excuse and exclude provisions;
- Stage investing; and
- Management participation in specific share classes (i.e. carried interest / waterfall mechanisms).
The Bill makes it clear that provisions in the LPA relating to the consequences for defaulting investors will not be unenforceable solely on the basis that they may be penal in nature.
Return of contributions
LPs are permitted under the Bill to receive out of the capital of the ILP a payment representing the return of any part of their contribution to the ILP subject to the requirements of the LPA. In order to ensure that such payments are capable of being recalled if necessary, the LPA will have provisions addressing the issue of repayment of distributions by limited partners in specific circumstances.
Migration of limited partnerships from other jurisdictions
It is possible for limited partnerships established in other jurisdictions to migrate to Ireland. The application for migration by a migrating partnership is made to the Central Bank and follows much of the standard process for establishment and authorisation of an ILP.
Beneficial Ownership Requirements - ILPs and Common Contractual Funds
The Bill requires the GP of an ILP to establish and maintain a register of beneficial ownership of the ILP and to submit that information to the Central Bank for inclusion on the Central Bank's central register of beneficial ownership of certain financial vehicles.
A "beneficial owner" in relation to an ILP means: any individual who (a) ultimately is entitled to or controls, whether the entitlement or control is direct or indirect, more than a 25% share of the capital or profits of the partnership or more than 25% of the voting rights in the partnership, or (b) otherwise controls the partnership.
Regulation of GPs to ILPs
In November, 2020, the Central Bank issued a revised version of its Q&A on AIFMD in which it confirmed that the GP of an Irish ILP will not need a separate regulatory authorisation. However, as expected, it has also confirmed that the Directors of the GP of an Irish ILP will be required to comply with its fitness and probity regime.
Central Bank Consultation on amendments to the AIF Rulebook
In addition to the publication of the revised Q&A on AIFMD, as we detailed in a previous briefing [insert hyperlink] the Central Bank also issued a consultation paper ("Consultation Paper") on regulatory guidance which, subject to stakeholder feedback, it proposes to issue relating to the scope of permissible features for share classes of closed-ended QIAIF which pursue private equity type strategies or invest in other illiquid assets ("CE QIAIF"). The Consultation addresses the areas of:
The closing date for submissions is 22 December, 2020. The outcome of CP132 will be of particular relevance in the context of its implications for ILPs which are expected to be the preferred vehicle of choice for private market asset managers when establishing structures in Ireland and which will be predominantly closed-ended in nature.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.