The ICAV – Maples and Calder Checks the Box
16 March 2016 marks the first anniversary of the registration of the first Irish Collective Asset-management Vehicle ("ICAV") with the Central Bank of Ireland (the "Central Bank"). In the ensuing 12 months, 146 ICAVs, comprising 265 sub-funds, have been authorised by the Central Bank, establishing the ICAV as the most popular vehicle for global institutions and private fund managers forming Irish funds as either UCITS or AIFs over this period.
As noted in previous client updates, Maples and Calder advised on the very first ICAV registered and authorised by the Central Bank and also worked on a number of other innovative ICAV launches (including the first UCITS ICAV and first private client ICAV structure). Since then we have retained our position as the leading Irish counsel on ICAVs and to date have advised on 30% of all ICAV sub-funds authorised by the Central Bank, which is nearly twice as many as our nearest rival.
This role provides us with an unparralelled overview of the Irish market and enables us to track all relevant information and statistics on the ICAV. In this client upate we look at some of the significant factors which have contributed to the success of the ICAV, the key trends and our structuring experiences with the ICAV.
WHAT IS AN ICAV?
The ICAV is a corporate vehicle. It is similar to existing Irish investment companies established as PLCs but with the significant advantage that the ICAV was specifically created for the Irish funds industry, enabling it to be more flexible than the investment company.
ICAV SUCCESS - THE KEY FACTORS
Key factors to the success of the ICAV include:
Flexibility - The ICAV can accommodate a full suite of liquidity options as well as traditional and alternative investment strategies making it suitable for mutual funds, liquid alternatives, hedge, real estate, infrastructure, lending vehicles, private equity, managed accounts, funds of funds and hybrid funds.
EU Passport - The ICAV can be established as either a UCITS or an alternative investment fund ("AIF") structure. As such the ICAV can avail of the pan-European UCITS and/or AIFMD marketing passports respectively.
No Risk Spreading Rules - ICAVs are not subject to risk spreading obligations, making them extremely useful for single asset funds and funds with very concentrated positions. This has been particularly appealing to managers establishing real estate ICAVs.
Check the Box - the ICAV may elect to "check-the-box" to be treated as a tax transparent partnership or a "disregarded entity" (rather than an opaque "per se corporation") for US federal tax purposes. In addition while the ICAV may make this US check-the-box election, it will still generally be treated as a corporate vehicle in most other jurisdictions. This may allow the ICAV avail of double tax treaties that Ireland has entered into, subject to the provisions of each treaty and the rules in the relevant treaty partner country in each case.
Tax Efficiencies - The ICAV, like the investment company, is an investment undertaking for Irish tax purposes and will be subject to the same gross roll-up regime, i.e. typically any profits and gains of the ICAV are exempt from tax in Ireland and profits may be distributed to non-resident investors without a charge to Irish tax, subject in both cases to certain conditions.
Separate Sub-Fund Accounts - An umbrella ICAV can produce separate financial reports and accounts for sub-funds with differing year end dates (as opposed to one consolidated set of accounts for the entire umbrella). This has proven attractive for promoters of multi-manager or hosted platforms concerned by sensitivities in disclosing differing fee arrangements or portfolio compositions of individual managers within the same platform.
Dedicated Legislation - The ICAV legislation essentially drew upon the best and most successful aspects of Irish company law, improving it in several material respects. The advantage of this is that with its own specific legislative code, the ICAV will not be impacted by amendments to European/Irish company law (which are targeted at ordinary companies and not funds), which will protect the ICAV from any unintended consequences of such legislative changes.
ICAV – THE KEY TRENDS
To date some of the largest investment banks, traditional asset managers, hedge funds and private equity clients have established ICAVs.
The ICAV has gained significant traction with fund platform and/or managed account promoters. Approximately 63% of all authorised ICAV sub-funds have been established within umbrella platforms, taking advantage of the statutory segregated liability protections in the ICAV Act. Whilst this is a high percentage, it is not a surprising statistic. We have seen a noticeable trend towards consolidation in the alternative space since the implementation of the Alternative Investment Fund Managers Directive ("AIFMD") and the emergence of the "hosted AIFM" model. Small to mid-size managers without the scale to absorb the costs of complying with AIFMD are attracted by the "plug and play" solution offered by the hosted AIFM and hosted platforms. The manager's sub-fund, which is its own segregated cell within the umbrella, simply slots into the existing corporate architecture of the platform. The hosted AIFM model removes much of the regulatory burden from these managers, enabling them to focus solely on the management of the assets.
Whilst this trend is not as pronounced in UCITS, given the imminent implementation of the UCITS V Directive (which is largely an alignment with the requirements of AIFMD) and the greater focus on maintaining corporate substance in Ireland, we anticipate that this "flight to platform" will similarly increase in the UCITS space.
Another trend which is clearly evident from our ICAV statistics and experience is the prevalence of real estate ICAVs. Approximately 32% of the alternative ICAV sub-funds established to date are real estate focused. In our view this is largely due to the structuring flexibility and tax efficiencies of the ICAV (as outlined above) and also to the current attractiveness of Irish real estate to large institutional property investors.
ICAV – WHAT WE ARE SEEING
Maples and Calder, representing just under one third of the entire ICAV market and having formed nearly twice as many ICAV sub-funds than any other legal firm in Ireland, has gained valuable insights into how managers are utilising the ICAV structure.
The number one use of ICAV appears to be as the regulated EU fund structure of choice and it commonly emerges as the preferred structure when compared to alternatives both in Ireland or other EU jurisdictions (e.g. it has many advantages over Luxembourg's SICAV).
Across our global funds practice, we see many ICAVs being set up as parallel funds to Cayman Islands structures for managers looking to offer leading offshore and onshore fund solutions to their investors. We have advised on some pairing of onshore and offshore vehicles in combined structures.
ICAV – WHAT NEXT?
As is clear from the year one statistics, the ICAV has become the Irish fund vehicle of choice in both the retail and professional investor space. We see this trend continuing as the number of global investors, fund financing counterparties, investment managers and fund service providers get increasingly comfortable with the structuring, establishment, management and distribution of ICAVs.
While detailed legal, regulatory and tax advice is a prerequisite for the establishment of any successful investment fund, increasing market acceptance of the ICAV as the number one regulated EU fund structure and the enhanced authorisation timeframes provided by the Central Bank (in comparison to other EU competent authorities), should see the number of ICAVs significantly grow in 2016 and beyond.
In additon to new fund set-ups we also anticipate that a number of existing Irish investment companies will avail of the relatively straightforward mechanism to convert into an ICAV. To date there have only been a small number of conversions (14%), however we see this increasing as a large number of UCITS managers are in the process of converting their investment companies into an ICAV as part of the overall UCITS V implementation this month.
For further information on the ICAV and its impact for Ireland and/or hosted AIFM solutions, please contact your usual Maples and Calder contact.