Central Bank of Ireland provides much needed clarity for alternative investment market

Conor Durkin, investment funds specialist at Pinsent Masons, was commenting following the recent publication of the Q&As (44 pages/712 KB), with the update clarifying the ability of a qualifying investor alternative investment fund (QIAIF) to act as a guarantor for third parties. The update also provides guidance on lending activities of loan origination QIAIFs.

In relation to the ability of a QIAIF to act as guarantor for third parties, the Central Bank confirmed that a QIAIF may provide a guarantee in respect of investments or subsidiary or intermediate vehicles in which the QIAIF has a direct or indirect economic interest provided a number of conditions are satisfied. For instance, the alternative investment fund manager (AIFM) is required to be satisfied that the provisions of a guarantee by the QIAIF is in the best interests of the QIAIF and its investors. The guarantee must also be ancillary to the QIAIF’s investment strategy. Both the AIFM and the QIAIF’s depositary must confirm that the proposed transaction is at arm’s length and in the best interest of investors.

Additionally, the prospectus is required to disclose to investors the ability of the QIAIF to provide such guarantees and disclose material risks related to these arrangements. The liability of investors for any guarantees provided by a QIAIF shall be limited to the amount of their investment in the QIAIF and undrawn capital commitments.

The QIAIF must also comply with the provisions of Central Bank ID 1159, which relates to investment via a co-investment vehicle that includes other third-party investors and is not a wholly owned subsidiary of the QIAIF. The AIFM is required to comply with AIFMD requirements in relation to leverage and risk management, including regularly conducting stress tests and managing the liquidity of the QIAIF’s portfolio.

Durkin said: “Traditionally, QIAIFs were prohibited from acting as a guarantor to third parties. This caused much difficulty for QIAIFs in supporting the financing activities of intermediary vehicles used for the management of investments. The clarification by the Central Bank is a very important development and will assist QIAIFs, including their investors, in the efficient financing and structuring of real estate, private equity or infrastructure investments.”

The Central Bank has provided further guidance on loan-originating QIAIFs, and it confirmed that a loan-originating QIAIF is permitted to originate loans to a borrower that intends to acquire a controlling interest in another company. The existing prohibition on lending to persons intending to invest in equities or other traded investments or commodities only applies where the borrower intends to use the loan proceeds to facilitate a trading or speculative investment strategy.

Lastly, the Q&A clarifies the term “financial institutions” for the purposes of the scope of the prohibition on Irish loan-originating QIAIFs lending to “financial institutions”. According to the Q&A, the definition aligns with the new AIFMD II loan origination rules. The definition includes a credit institution, a financial institution or an ancillary services undertaking within the meaning of the EU CRD IV Directive, an insurance undertaking, reinsurance undertaking, or an insurance holding company within the meaning of the EU Solvency II Directive. It also applies to an investment firm within the meaning of the EU MiFID II Directive as well as a mixed financial holding company within the meaning of the EU Financial Conglomerates Directive.