Ian Conlon and Jennifer Murphy – Maples and Calder
Limited partnership law in Ireland is to undertake significant reform in 2019. The Irish Government recently approved the drafting of the amendment to the Irish investment limited partnership (ILP) legislation and it is understood that the Investment Limited Partnerships (Amendment) Bill 2018 (the Bill) will be published shortly. This is the boost that the Irish funds industry has been looking for in its efforts to establish Ireland as a European domicile for private equity funds (PE).
The ILP is a common law partnership structure, tax transparent alternative investment fund (AIF) authorised and regulated by the Central Bank of Ireland (CBI). As with its international counterparts, the ILP is constituted pursuant to a limited partnership agreement (LPA) between its general partner and any number of limited partners.
Whilst Ireland remains one of the leading funds domiciles in Europe with assets under management (AUM) of Irish AIFs at an all-time high,1 only a small proportion of this AUM is allocated to the ILP structure. In fact, only a handful of ILPs have actually been established under the existing legislation, the Investment Limited Partnerships Act 1994 (the ILP Act). The general consensus of PE asset managers is that the ILP Act has its limitations and is currently out of synch with equivalent limited partnership structures available in other international fund domiciles.
To date, PE asset managers looking to establish private equity funds in Ireland have used the Irish collective asset management vehicle (ICAV), a corporate vehicle designed specifically for Irish investment funds. The ICAV is the default Irish funds vehicle, predominantly used for both retail funds (UCITS) and AIFs. Owing to its structuring flexibility, the ICAV is able to accommodate many PE strategies and PE-centric features (such as capital commitment / drawdown mechanisms, distribution waterfalls, carried interest and "excuse and exclude" allocation of assets). Furthermore, the ICAV may be treated as a tax transparent partnership for U.S. federal tax purposes. So, whilst the ICAV has (somewhat successfully) addressed the challenges presented by the existing ILP legislation, it nonetheless is not a partnership, which remains the default legal form for PE funds.
The international interest in a fit-for-purpose Irish partnership vehicle has grown over the past decade, particularly since the introduction of AIFMD in 2014, with global PE asset managers looking to establish parallel European structures (to their pre-existing Delaware or Cayman fund ranges) for distribution to European investors via the AIFMD passport. This, amongst other things, prompted the Irish funds' industry association to open a dialogue with the CBI and the Irish Department of Finance about addressing the limitations in the ILP Act in order to align it with international standards for PE funds, thereby enhancing its attractiveness for PE asset managers. This ongoing dialogue has culminated in the publication of the Bill.
The Bill has been placed on the Irish Government's legislative programme; as such, the proposed changes to the ILP Act set out in the Bill remain subject to the legislative process. However, it is anticipated that the key enhancements will include: (i) incorporating best practice features from other jurisdictions; (ii) features improving the operation of ILPs by clarifying the rights, obligations and status of investors, (iii) aligning the ILP structure fully with AIFMD and other Irish fund structures, (iv) the ability to establish umbrella ILPs and (v) the ability to migrate a partnership into and out of Ireland on a statutory basis.
Industry anticipates that the Bill may be enacted into legislation by the Irish Parliament in Q2/Q3 2019. However, it quite possibly could be delayed depending on the outcome of the Brexit negotiations. Should the United Kingdom leave the European Union without an agreement on 29 March 2019 (i.e., a hard Brexit), the Irish Government recently announced that it will fast-track emergency legislation to protect Ireland from any potential fallout. If that is the case, the Bill will likely find itself down the list of the Irish Government's immediate priorities.
1Irish Funds: As at September 2018, the assets under management of Irish AIFs stood at €627 billion.