A double whammy of Brexit and new legislation is fuelling a boom in the Irish private debt markets. Dublin has emerged as the favourite destination for finance firms moving jobs into the EU from London, according to EY, pulling away from Luxembourg and Frankfurt.
Meanwhile, at the end of last year, the Irish government gave parliamentary approval to a new Investment Limited Partnership bill that makes the jurisdiction even more attractive for private funds.
AUM of alternative investment funds in October 2020
James McEvoy, country executive for Ireland at Alter Domus, says: “Most private debt managers are no strangers to Ireland, which is already the number one jurisdiction for CLO issuance into Europe with a widely used regime for special purpose vehicles. We are excited about the new limited partner regime, which addresses the needs of the private debt industry and provides a strong option for managers, whether UK or US-based, looking to access the European market.”
The new funds law introduces a partnership structure tailored to the needs of private funds for the first time – Ireland has had a partnership structure for a while, but it was not ideal for the needs of the alternatives industry.
With Brexit driving a flurry of managers to Ireland, getting the legislation passed had become time-critical. McEvoy says: “There was an already substantial move of firms setting up in EU countries, including Ireland, and there was quite a bit of work to either set up AIFMs in Ireland that can distribute within the EU, or to appoint third-party AIFMs. When it comes to fund domicile, it is really important that we now have the full toolbox available to cater for managers that want to use Ireland.”
Private debt is expected to be the strongest growing asset class in 2021 and Imelda Shine, managing director, UK and Ireland, at Intertrust Group, says direct lending firms will be well-placed to capitalise on the new regime.
“Ireland is a well-established fund domicile, administering over €760 billion in alternative investment funds as of October 2020, up from €610 billion in 2018,” she says. “With the updates to the ILP, and the established regulated and unregulated structures available to managers, Ireland has seen its private debt market grow significantly in line with the demand for alternative lending solutions.”
Not only are the fundamentals now in place to attract managers in, but the local opportunity is also compelling.
Shine says: “With the growth of alternative lenders in the market, we are seeing an increase in the number of new platforms being set up. We are working with several managers establishing direct lending platforms. One of these strategies is in response to covid-19: lending directly to SMEs who had a good track record before the virus hit, but who have been adversely impacted by the effects of the pandemic.
“Equally, we do anticipate an increase in distressed situations – having previously worked with managers in the aftermath of the financial crisis, we have been through this lifecycle before. Depending on the investment structure and their unique investor requirements, we have seen both SPVs and regulated funds set up by private debt managers.”
In the past five years, the landscape has changed significantly, with a shift from traditional lenders towards alternative credit and a marked increase in the number of new debt managers establishing platforms.
Shine says: “We are seeing an increase in both alternative mortgage and corporate lending structures, with several new managers coming to market and offering consumers and corporates credit solutions, not previously available, that better fit their circumstances.”
Many fund administrators and other service providers have been expanding their capabilities in Ireland in preparation for an uptick in demand from private debt funds in particular.
Increase in funds administered since 2018
Joanne McEnteggart is the managing director of investor services group IQ-EQ in Ireland. She says: “Since the global financial crisis, the use of private debt has become more and more prevalent as a source of lending into the markets here. So, the rationale for establishing a fund in Ireland is the reach you can get from creating a European regulated fund, fundraising from European investors, as well as the local market opportunity.”
She points out that the timeframe for approval of a Qualifying Investor Alternative Investment Fund can be as short as 24 hours under the new regime, which can prove a real advantage for a manager faced with a deal opportunity.
“What’s really strong in our favour is the commerciality of the Central Bank of Ireland as regulator,” says McEnteggart. “When we come to them with a new product they really want to get under the skin of it and understand it, while removing any unnecessary obstacles. There is a really supportive, proactive approach.”
Advisors report a growing number of US managers now looking to Ireland as a launchpad into Europe post-Brexit, attracted by service providers, common law, a competitive tax environment and modernised fund structures. Everything is shaping up for a busy few years ahead.
Shine says: “We expect to see a lot of growth in the private investment market; with the new fit-for-purpose ILP and the growing demand for a variety of credit solutions, Ireland is well placed and has the infrastructure for managers to build robust platforms.”
Ireland’s new funds law
Derbhil O’Riordan, partner at Irish law firm Dillon Eustace, says clients that needed a limited partnership structure for their own distribution purposes often went to Luxembourg over Ireland in the past and will welcome the changed Investment Limited Partnerships legislation. “This new regime really overhauls what was there before and essentially replaces it with something that is the product of about 10 years’ discussion with industry, lawmakers and clients,” she says.
Some of the new features include a non-exhaustive list of functions that an LP can perform in relation to the structure without losing their limited liability. The act also introduces the concept of umbrella type ILPs, where multiple segregated liability compartments or sub-funds can be established.
All ILPs are authorised and regulated by the central bank and are either retail or qualifying investor AIFs, with the latter eligible for fast-track approval. O’Riordan says: “The final application for authorisation is done in one business day, but for a loan origination fund or a real estate fund, the central bank will want early engagement with the lawyers to ensure all of its requirements are met prior to the application being made.”
Dillon Eustace partner Shane Geraghty adds: “This is the final piece in the jigsaw for Ireland’s full suite of available fund structures. We have now got a regulated limited partner structure that is designed to look and feel very similar to structures in other jurisdictions, with the benefit of umbrella features and with regulatory certainty provided by the central bank.”