Developments in Ireland's fund servicing landscape
Kerill O'Shaughnessy
A&L Goodbody, Dublin
Brian McDermott
A&L Goodbody, Dublin
The fund servicing market in Ireland has gone through a period of change and evolution. Recent years have seen increasing levels of consolidation among international fund service providers with Irish operations. Private equity groups have also shown a keen interest in investing in fund services, in many cases, partnering with groups to fund further acquisitions, expansion into new markets, and investment in technology and infrastructure. There have been a number of recent high-profile M&A and private equity investments into groups with Irish operations, demonstrating that these trends have continued and, if anything, have gathered pace in recent months.
Increasing numbers of specialist international fund servicing groups have also announced their entry into the Irish market, with many being drawn by positive developments, such as the update of Ireland's investment limited partnership legislation, and initiatives from the Central Bank of Ireland (CBI) aimed at making specific provision for typical features of funds investing in illiquid asset classes, including private equity, venture capital and infrastructure. These include measures to facilitate features of closed-ended funds including carried interest, and features of non-unitised funds, such as capital accounting and classes with differing participations in underlying investments.
One of the key developments impacting fund service providers in Ireland was the commencement of the authorisation by the CBI of depositaries of assets other than financial instruments. The Alternative Investment Fund Managers Directive (AIFMD) left open to European Economic Area (EEA) Member States the possibility of providing for a category of depositary to alternative investment funds (AIFs) with no redemption rights exercisable within five years of the AIFs' initial investment, and which generally do not invest in financial instruments that must be held in custody as their core investment policy. Importantly, this type of depositary was not made subject to the same eligibility requirements as those applicable to a full scope depositary under the AIFMD regime. Until the recent change, the Irish regulations implementing AIFMD restricted eligibility to act as a full scope depositary to credit institutions, or certain investment firms including those owned by a credit institution or with sufficient levels of capitalisation and appropriate permissions.
The CBI recently exercised its power under the Irish regulations to create this category of depositary for certain AIFs, and began accepting applications for authorisation under the Investment Intermediaries Act 1995, with similar capitalisation requirements as those applied to fund administrators. Where AIFs to which this category of depositary are appointed invest in financial instruments, the custody of those financial instruments may be delegated, or financial resources or a guarantee may be put in place to cover the value of the financial instruments held in custody. There have been recent authorisations of this type of depositary with further authorisations expected. The CBI has recently confirmed that these entities may provide services to non-retail AIFs that are either regulated by the CBI or not regulated by the CBI. This would include non-European Union AIFs with an EU AIFM, where the AIFs are not established for the purpose of investment by retail investors.
The arrival of new entrants has diversified the pool of fund service providers operating in Ireland, and reflects a growing focus on developing Ireland's offering in the illiquid fund space, as well as a further maturing phase of the market.
With forthcoming European legislative developments on the cross-border distribution of funds expected to push firms further towards establishing an EU presence to benefit from passporting rights, and on the domestic front, with many self-managed corporate funds planning to appoint third-party management companies, the fund servicing space in Ireland is expected to continue to be a dynamic area in the near term.