Out-Law / Your Daily Need-To-Know

Central Bank of Ireland clarifies QIAIF fund rules

Out-Law Analysis | 20 Aug 2020 | 8:57 am | 2 min. read

The Central Bank of Ireland (CBI) has provided a useful update on the authorisation of funds under the Qualifying Investor Alternative Investment Fund (QIAIF) regime in a webinar for the Irish funds community.

The webinar took place on 24 June. Topics covered included QIAIF property funds and loan-originating QIAIFs, as well as director time commitments.

The CBI has authorised 2,673 QIAIFs that remain currently active since 2007, with the fund type now accounting for almost 50% of funds authorised each year. QIAIFs are marketed to institutional investors, making investor protection less of a concern for the CBI than is the case for retail funds. However, the CBI took care to stress that the QIAIF label is "a form of recognition" that it approves of the quality of the application for authorisation, and that integrity of the regulatory regime is crucial to its continued operation.

Property funds

The CBI is now requiring pre-submission for funds that invest in "unusual" asset classes, including property. Information required by the CBI at pre-submission stage includes:

  • a rationale for the proposed leverage limits;
  • information on any proposed shareholder loans - these are generally not permissible;
  • an indication of the expected number of shareholders, including details on firm expressions of interest;
  • an indication of the type of investors – pension funds or shorter-term investors, domestic or overseas, etc.;
  • explanation from the board of the timing of the proposed launch, given current volatility and uncertainty in the property market;
  • a completed model portfolio;
  • depending on redemption proposals, an assessment of liquidity over the next 12-18 months, with the intended investments in property assets over this time period assigned to specific liquidity 'buckets' or tranches; and
  • information on any bank loans and covenants. For example, is there a loan to value (LTV) threshold at which the bank can call in assets?

Funds which are not property funds should not include a general disclosure on property in fund documents, as this causes confusion for the regulator.

It is the CBI's view that a property fund should not be established as an open-ended fund. The CBI's review of this area suggests that there are not currently any open-ended daily dealing property funds, and only a small number of open-ended property funds with limited liquidity which provide for dealing once in the fund's life or, in limited circumstances, annually.

Given current market conditions, there is no evidence that would persuade the CBI that an open-ended property fund is a viable property fund. Property funds submitted for QIAIF authorisation must therefore be established as closed-ended, or open-ended with limited liquidity.

Loan originating QIAIFs

All loan originating QIAIFs (LO-QIAIFs) should be clearly identified in the relevant fund documentation.

The CBI's policy position is that QIAIFs receiving loans which originated elsewhere – for example, another fund or a special purpose vehicle (SPV) - should be treated as originated by the QIAIF, albeit indirectly.

Again, pre-submission is required for LO-QIAIFs. The CBI has no particular concerns about this form of fund, but is seeking to understand them better. Pre-submission information should include the nature of the proposed loans, the number of investors and the profile of the intended borrowers.

Director time commitments

The CBI expects proposed fund directors to comply with the time commitments set out in Part III of its 2016 guidance for fund management companies.

The guidance establishes a risk indicator for individual directors who:

  • hold more than 20 directorships; and
  • have an aggregate professional time commitment in excess of 2,000 hours.

Where either of these risk indicators is triggered, the individual is deemed to be 'high risk' and additional supervisory attention is appropriate under the CBI's risk-based approach to supervision.

Where concerns arise in relation to compliance with these requirements, the CBI will engage with the individual to request additional information on their expertise and capacity. All queries should be addressed in full, providing as much detail as possible.

Co-written by Ruth Hennessy of Pinsent Masons, the law firm behind Out-Law.