On 23 November 2020, the Central Bank commenced a consultation process on proposed guidance for share classes of closed-ended QIAIFs with the publication of Consultation Paper 132 (CP132).  On the same date, the Central Bank released an updated version of its AIFMD Q&A document with answers to two new questions on the regulatory authorisation and revocation requirements for a general partner of an Investment Limited Partnership (ILP).  

Both CP132 and the new Q&As for general partners have been published by the Central Bank in anticipation of the finalisation of the legislative amendments to the governing regime of ILPs, the Investment Limited Partnership Act 1994 (ILP Act).  The Investment Limited Partnership (Amendment) Bill 2020, which provides for various amendments to the ILP Act (see previous briefing for details), is in the final stages of the Irish legislative adoption process and is expected to be finalised and enter into force in the coming months.

CP132

The Central Bank’s CP132 sets out draft proposed guidance on the establishment of share classes of closed-ended QIAIFs and asks for responses to the specific consultation queries and/or general observations to be submitted prior to 22 December 2020.

Establishing Share Classes with Different Characteristics

Currently, AIF regulatory rules limit a QIAIF’s ability to treat unitholders differently by restricting the level of differentiation between the features of share classes to differentiation on the basis of dealing procedures, distribution policies, charging structures, hedging policies, asset exposure or other criteria disclosed in the fund documentation of the QIAIF.   

The draft guidance proposes extending the level of permitted differentiation between share class features by allowing for the establishment of share classes by closed-ended QIAIFs with one or both of the following features:

1. the allocation of specific asset returns to the share classes and/or
2. participation by the share class in the assets of the closed-ended QIAIF other than on a pro-rata basis.

Under the draft guidance, the Central Bank would permit the establishment of share classes of a closed-ended QIAIF with the above features in order to facilitate: 

1. the issuance of shares at a price other than NAV without the prior approval of the Central Bank e.g. to recognise capital commitment and periodic drawdown processes, 
2. the use of excuse and exclude provisions,
3. stage investing, and
4. management participation.

The Central Bank expects to limit the flexibility to establish share classes with different levels of participation to closed-ended QIAIFs which the Central Bank understands to be funds which generally have strategies relating to private equity, venture capital and real estate and which generally do not invest in assets capable of being held with a depositary.

Conditions for Establishing Share Classes with Differing Participation Levels

Prior to establishing a share class(es) to facilitate one or more of (1-2) above, the draft guidance requires a closed-ended QIAIF to comply with the following core pre-conditions:

• its constitutional document includes the ability to implement (1-4) above and this must have been disclosed in advance to shareholders;
• its prospectus permits the establishment of share classes which provide for different levels of participation in the closed-ended QIAIF; 
• shareholders’ interests are proportionate to (a) the capital it has paid in at a particular point in time; and/or (b) the pre-determined flow of capital returns to the share class; and/or the extent to which the share class held by the unitholder participates in the assets of the closed-ended QIAIF;
• records of subscriptions on a capital committed or periodic drawdown basis are maintained on a per-investor basis which enable the closed-ended QIAIF to clearly identify commitments paid and outstanding for each investor (capital accounting); and
• the capital accounting methodology of the closed-ended QIAIF is consistent with AIFMD Level 2 requirements.

Excuse/Exclude Provisions, Stage Investing and Management Participation

The draft guidance also sets out specific conditions for the implementation of (1-4) above.

Conditions for Exercise of Excuse or Exclude Provisions

Excuse provisions are those which enable an investor to be excused from a proposed investment of the closed-ended QIAIF.  Exclude provisions are those which permit the closed-ended QIAIF to exclude an investor from a proposed investment.  Under the draft guidance, the adoption of such provisions by a closed-ended QIAIF would be subject to:

• pre-determination and documentation of the provision either, in the case of an excuse provision, in a pre-contractual written agreement between the investor and the closed-ended QIAIF, or, in the case of an exclude provision, in the fund prospectus or constitutional document; and
• the provision of a formal legal opinion by the unitholder or closed-ended QIAIF (depending on who is invoking the provision) as to the basis for use of the provision;
• the documentation by the Board of the closed-ended QIAIF of (i) its acceptance of, or disagreement with, the investor’s legal opinion; and (ii) the consequences of its decision to accept or disagree.

Conditions for Stage Investing 

To facilitate new investment at a later stage in the fund’s life-cycle, the draft guidance allows closed-ended QIAIFs to permit new investors to acquire shares.  The acquisition of shares, whether by way of share transfer or subscription for new shares, may be facilitated by way of establishment of a new share class which provides for participation in existing and/or future investments subject to:

• upon acquisition by way of share transfer, the terms of investment by the new investor being clearly documented;
• upon the issue of new shares, a new share class being established; and
• the commitments paid and outstanding for each investor being accounted for using a capital accounting methodology.

Conditions for Management Participation

The draft guidance provides for the establishment of management share classes in closed-ended QIAIFs which provide for participation by portfolio managers in the assets of a closed-ended QIAIF.  Management share classes may be differentiated e.g. to reflect fee arrangements or non-pro-rata capital payout, provided that:

• applicable conditions are disclosed in the prospectus; and
• capital payments (both committed capital and preferred returns are allocated to investor share classes in priority to management share classes.

New Central Bank Q&As

Simultaneous to the publication of CP132, the Central Bank released two new AIFMD Q&As for general partners which clarify:

1. the general partner of an ILP is not required to be authorised as an AIF management company.  The general partner does, however, have statutory duties under the ILP Act and will have oversight duties by virtue of its role as appointee of the AIFM of the QIAIF.  In addition, as the general partner is regarded by the Central Bank as a regulated financial service provider, it will be subject to the Fitness & Probity Regime and its directors or partners will be subject to that regime’s requirements for those performing Pre-Approval Controlled Functions or PCFs; and
2. in light of (1), any general partner currently approved by the Central Bank as an AIF management company may seek revocation of this approval by submitting the relevant application to the Central Bank. 

Next Steps

The Central Bank is requesting feedback on the draft proposed guidance outlined in CP132 by 22 December 2020.  In addition to general observations, the Central Bank has specifically asked for respondents’ views on 

• its limitation of the flexibility to establish shares classes with differing levels of participation to closed-ended QIAIFs;
• any other aspects of requirements under the AIF Rulebook which might require amendment to facilitate the introduction of the flexibility;
• the sufficiency of the proposed investor protection safeguards and any other features which may be beneficial from an investor protection perspective.

As regards the new Q&As, general partners of ILPs approved as AIF management companies may wish to consider seeking revocation of this approval and our Asset Management & investment Funds team are on hand to assist with any queries in this regard. 

Contributed by Nessa Joyce