By David Naughton, Partner, LK Shields Solicitors LLP & Ian Wilson, Director, EisnerAmper Ireland

Introduction

Ireland’s common law partnership, the Investment Limited Partnership (ILP), which comes into existence when it is authorized by the Central Bank of Ireland (CBI) as a regulated E.U. alternative investment fund (AIF), has recently been revamped and is now available as a partnership structure for use by international sponsors and limited partners (LPs).

In this article, we briefly consider some key messages about the ILP, which can be factored into decision-making about the domicile and structure of an AIF in the form of a partnership.

Some Key Messages

1. The ILP Is A Regulated E.U. AIF 

An ILP is an AIF whose legal structure is a common law partnership. An ILP comes into existence when it is authorised by the CBI and is then subject to a supervision regime within the legal and regulatory framework for AIFs in Ireland. An ILP is, first, an AIF and, second, a partnership.

2. International Sponsors and Limited Partners Will Be Familiar With It’s Structure 

The ILP is a common law partnership structure, which is a popular choice for structuring private equity and real estate (PE/RE) investment funds. Some key advantages of the ILP include:

2.1 Tax transparency

• An ILP is treated as tax transparent from a tax perspective in Ireland in respect of all its income, gains and losses.
• Any income, gains or losses which arise at the level of an ILP shall under tax rules in Ireland be treated as arising, or, as the case may be, accruing, to each partner of the ILP as if such income, gains or losses had arisen, or, as the case may be, accrued, to the partners without passing through the ILP.
• Therefore, the allocation of income, gains or losses should follow the commercial allocation of profits under the partnership agreement.
• Distributions can be made by an ILP to its partners free of any tax implications in Ireland as all the underlying profits of the ILP have already have been allocated to partners for tax purposes in Ireland.

2.2 Flexibility

• An ILP is not subject to legal risk-spreading obligations, making the ILP extremely useful for single asset investment funds and/or investment funds with very concentrated positions.
• The partnership offers a great deal of organizational flexibility so that the specific requirements of individual investors can be accommodated. The partners can set the rules on matters such as how the profits are shared and how the business is to be conducted.
• Consequently, it is suitable for nearly all investors, by type (tax paying or exempt, such as pension funds) and geographical region.

2.3 Limited liability for LPs

• Limiting liability for LPs is a key reason investors prefer partnerships for structuring PE/RE funds.
• PE/RE investors are typically passive investors with very little control, who are investing in relatively illiquid but high-performing asset classes and do not want to monetarily risk more than that which they have committed to the partnership.

3. The CBI’s New Regulatory Regime Compliments A Closed-Ended ILP 

An ILP can be open-ended and may be a suitable structure for certain strategies (for example, a credit strategy). However, an ILP is typically closed-ended as this structure fits in with the typical investment strategy of a PE/RE manager – to invest in, and develop, illiquid assets over the long-term, without having to factor in asset liquidity concerns owing to potential investor redemption requests.

By using a closed-ended structure, the sponsor of an ILP can now harness the CBI’s guidance issued on 2 February 2021 introducing new structuring features, which can give flexibility to a closed-ended ILP, as follows:

3.1 Interests may be issued as a fixed price throughout the life of a closed-ended ILP.

3.2 A closed-ended ILP may facilitate excuse provisions (which enable an LP to be excused from an investment that the ILP proposes to make) and/or exclude provisions (which permit the ILP to exclude an LP from a proposed investment that the ILP intends to make).

3.3 To facilitate new investors in the closed-ended ILP, the general partner (GP) of an ILP may, at a later stage in the life cycle of the ILP, permit new investors to acquire interests in the ILP, thereby facilitating stage investing.

3.4 A closed-ended ILP may establish management interest classes, which permit portfolio managers to participate in investments of the ILP. Such interest classes may participate in the ILP based on conditions which differentiate the interest class from other interest classes in the ILP (for example, to reflect a pre-determined fee arrangement or capital payout which is not pro-rata).

4. The Structure Gives Access To The Valuable AIFMD Marketing Passport 

The GP appoints the alternative investment fund manager (AIFM) to the ILP and also acts in an oversight capacity. The CBI requires pre-approval as to the fitness and probity of the directors or partners of the GP before their appointment to its board. A GP is not otherwise authorised by the CBI. In addition, the GP is not required to be located in Ireland nor is there a requirement for a minimum number of directors of the GP to be resident in Ireland.

The AIFM may be authorised in Ireland or authorised in another E.U. member state and allowed to passport its activities into Ireland or authorised outside the E.U.

A key advantage of using an authorised E.U. AIFM is access to the marketing passport, which can permit the sale of ILP interests into the E.U. market. The marketing passport is accessed by filing a notification with the CBI, to include the offering document of the ILP, for each member state of the E.U. within which the E.U. AIFM intends to market the ILP. The CBI will inform the E.U. AIFM when transmission to the relevant host member state competent authority has taken place, which typically takes up to 20 business days, and then the E.U. AIFM can start marketing.

As a result, the ILP is attractive to international sponsors with existing structures in Delaware, Cayman, British Virgin Islands, Guernsey or Jersey looking to access E.U. investors using the AIFMD marketing passport.

An ILP can also be registered for sale globally in accordance with local securities laws, e.g., into U.S. and English markets.

5. The ILP Can Slot Into Various Global Structuring Solutions 

This is an important consideration.

Partnership structures are bespoke and there is not a ‘one-size fits all’ approach. In particular, the exact structure used will depend on a number of factors including: (i) the identity of the investors (different investors will have different requirements and sometimes this requires additional parallel or feeder partnerships, with each new partnership requiring a new GP entity); or (ii) the location of the portfolio asset(s).

For example, for U.S. federal income tax purposes, it is possible to “check the box” to treat a vehicle as tax-transparent or tax-opaque. Some U.S. investors (primarily tax-exempt investors) prefer to invest through a tax-opaque structure, while others (primarily U.S. taxable investors) prefer to invest through a tax-transparent structure.

As a result, the ILP can be used where there are two parallel LPs or a master and feeder fund within the same structure to accommodate both types of investor.

6. Flexible Financial Reporting

The ILP legislators ensured that a flexible financial reporting model was made available to support the needs of the ultimate investors.

6.1 Financial reporting frameworks available:

The following financial reporting frameworks available to the ILP are the E.U. International Financial Reporting Standards (IFRS), Financial Reporting Standard 102 (FRS 102) and alternative GAAPs such as U.S., Canada and Japan.

For U.S. managers looking to Europe, it is worth noting that U.S. GAAP has not been approved by every home member state in Europe and to U.S. mangers with Luxembourg-domiciled funds that, on 20 January 2021, the Association of the Luxembourg Fund Industry (ALFI), a representative body of the Luxembourg investment fund community, updated its AIFMD FAQ. It states that Luxembourg AIFMs managing a Luxembourg AIF are required to prepare their financial statements in accordance with the accounting standards of the home member state of the AIF (Luxembourg GAAP and E.U. IFRS). This may now be factor for U.S. managers in considering their partnership’s jurisdiction.

6.2 Umbrella structure

Managers familiar with the Irish Collective Asset-Management Vehicles (ICAV) product will appreciate that the ILP provides similar benefits and flexibility in presentation of the financial statements. ILPs are permitted to have multiple sub-funds, with their assets and liabilities legally ring-fenced, and separate sub-fund managers, thus creating a cost effective product.

7. ILP Authorized As A QIAIF

As noted earlier, the ILP is an AIF which can be authorised by the CBI as either a retail investor alternative investment fund (RIAIF) or a qualifying investor alternative investment fund (QIAIF).

An ILP is not well suited to be authorised as a RIAIF due to the investment and other restrictions attaching to that category of AIF.

On that basis, an ILP is typically authorised as a QIAIF. Owing to the flexibility on investment restrictions, borrowing and related features as well as the speed-to-market, the QIAIF ILP is among one of the more popular structures for PE/RE, private credit, and environmental, social and corporate governance (ESG) investment strategies.

There is huge investor appetite for the QIAIF product, being an internationally recognised brand, with nearly 3,000 QIAIFs (including sub-funds) in the market, accounting for over €750bn in net assets.

On that basis, the decision to be made on structuring a QIAIF in Ireland has been effectively beneficial.

What’s new is that the successful QIAIF can now be housed in a world-class partnership structure, the ILP, which is very familiar to international sponsors and potential LPs as it is a common law partnership based in the EU.

Conclusion

Common law partnerships are the most popular form of investment vehicles globally for PE/RE investment strategies and are very familiar to international sponsors and LPs. The first ILP under the revamped regime, sponsored by a U.S. manager, was authorised by the CBI during March 2021. We anticipate that the stellar success of the QIAIF product to date can be further strengthened by international sponsors housing new QIAIFs in the ILP, primarily to meet the huge investor demand for exposure to illiquid asset classes.