The Irish Collective Asset Management Vehicle

The advantages of ICAV over investment fund companies

Originally published in the June | July 2015 issue

In the short period since the introduction of the Irish Collective Asset-management Vehicle Act on 12 March 2015, there has been strong uptake of the Irish Corporate Asset-management Vehicle (ICAV) as the vehicle of choice for Irish-domiciled investment funds structured as corporate vehicles, vindicating the joint government and industry effort to make available to promoters “a legal framework for a corporate fund structure which is not a public limited company”, as committed to by the Irish Government in its strategy for the International Financial Services Industry in Ireland 2011 – 2016.
While bearing similarities to the form of investment fund company which has for many years been available under the Irish Companies Acts, there are some key distinctions between ICAVs and investment companies, which give the ICAV advantages over investment companies. It is these ICAV’s investment fund-centric characteristics which are likely to be the key determining factors in establishing the ICAV as an even more popular vehicle than the investment company, which has itself to date been the most prevalent of the existing Irish collective investment fund vehicles.

The ICAV is not a new type of regulated fund, but is rather a new legal vehicle, being a bespoke corporate vehicle which is specifically designed for investment funds. As such, it supplements the existing range of fund structures available for Irish-domiciled funds, with promoters of Irish investment funds now having a greater choice of tax-exempt structures, namely the pre-existing structures of investment companies, unit trusts, common contractual funds, investment-limited partnerships, and now, the ICAV.

ICAVs are corporate vehicles with separate legal personality, and can be established as standalone or umbrella funds, can be open-ended or closed-ended, and may be either managed by an external management company or be internally managed. Umbrella ICAVs benefit from segregated liability between sub-funds, meaning that the assets and liabilities of each sub-fund within the umbrella will be protected and will not be available to or, conversely, negatively impact on the other sub-funds.

As a new structure, rather than a new genus of regulated fund, the ICAV is available for both undertakings for collective investment in transferrable securities (UCITS) and alternative investment funds (AIFs). Accordingly, no new investment related rules will apply as a result of the use of an ICAV structure, and applicable investment objective and policy restrictions will be dictated by the regulated nature of the investment fund i.e., as a UCITS or an AIF.

The advantages that an ICAV has over an investment company start with the fundamental legislative position. The ICAV benefits from a bespoke legislative regime, whereas the investment company is subject to both European and domestic companies legislation, which is generally designed with trading companies rather than investment funds in mind. As amendments to companies legislation will not automatically apply to the ICAV, there will be no requirement to consider the potential impact, and/or disapplication, of amendments to companies legislation which are targeted at trading companies and which may not make sense in the context of investment funds, thereby diminishing the risk of inappropriate and unintended consequences for investment funds. In addition, and in contrast to an investment company, the ICAV is not required by legislation to have the aim of spreading investment risk.

The ICAV also has the ability to elect its classification under US “check the box” taxation rules, an option not available to investment companies. Investment companies are treated for US tax purposes as separate entities, subject to two levels of tax; firstly at the corporate level where the income is earned and then secondly at the shareholder level when distributions are made. In contrast, the ICAV’s ability to check the box enables it to opt to avail of more favourable tax treatment, which means that fund promoters wishing to market European funds to US investors and having a preference for doing so through a corporate vehicle, have greater flexibility if structuring through an ICAV.

A number of operational benefits have also been considered in the ICAV’s design. These include the ability to dispense with an annual general meeting in certain circumstances (subject to the right of the auditors or members with 10% of the voting rights to call an AGM), and to produce audited accounts at a sub-fund level. Importantly, there is flexibility in relation to changes to the constitutional documents of the ICAV, which will not require prior approval of members where the depositary certifies in writing that the relevant changes do not prejudice the interests of the members and the Central Bank of Ireland has not otherwise mandated that the change is of a type which must be approved by the members.

The Central Bank is the sole regulatory body for ICAVs, acting as both the registration and authorisation body, and the process for establishing an ICAV is a straightforward two stage process. The first-stage registration process, which is in essence the incorporation process, is quite simple, with the same process applying for all ICAVs, irrespective of intended nature of the authorised ICAV as a UCITS or as an AIF.

The authorisation process, which follows registration, will vary depending on whether the ICAV is seeking to be regulated as a UCITS or an AIF. As with all fund vehicles, the nature and contents of the ICAV’s documentation, as well as the timeframe and requirements for authorisation, will reflect the nature of the authorisation being sought. In that regard, a UCITS or retail investor AIF authorisation will typically take between four to six weeks, while there is a 24 hour approval process for qualifying investor AIFs (QIAIFs). The Central Bank has been accepting applications for registration since 16 March 2015, which was within two business days of the commencement of the Act. The first ICAVs were registered on 18 March, with the first QIAIF ICAV authorisation issuing on 30 March 2015.

Once authorised and launched, the investors in the ICAV own shares in the ICAV. Open-ended ICAVs issue and redeem shares on investor demand and according to disclosed-dealing frequencies. It is also possible to establish closed-ended ICAV schemes, subject to compliance with Central Bank requirements relating to closed-ended funds.

Many of the corporate governance rules applicable to companies incorporated under the Irish Companies Acts apply to ICAVs. ICAVs are required to have a board of directors, to whom primary responsibility for management of the body corporate is delegated, and the roles and duties of ICAV directors will not differ from those of the directors of companies. The fitness and probity requirements of the Central Bank, which require pre-approval by the Central Bank of the directors, apply to ICAV directors. In addition, the principal fiduciary duties of ICAV directors are codified in the Act, mirroring the codification introduced under Irish law, for the first time, in the Companies Act 2014.

The Act provides a straightforward process that allows for conversion of existing investment companies to ICAV status, irrespective of whether the investment company in question is authorised as a UCITS or an AIF. The conversion operates by way of continuation, allowing the fund and manager to continue to rely on past performance data and existing contracts. The Act also addresses the issue of fund migrations into Ireland through a migration and conversion process, which is broadly similar to the conversion process. This allows for the re-domiciliation of certain non-Irish investment companies to Ireland as ICAVs by way of continuation, again with the facility for continued reliance on past performance data and existing contracts. Mergers between ICAVs, and between ICAVs and other types of fund structure, are also possible.

While set-up costs of an ICAV will be roughly equivalent to those for an investment company, the operational benefits of the ICAV structure, and the bespoke legislative regime, should result in lower ongoing operational costs. Regardless of the domicile of the investor base or the regulatory status of the fund, the practical balance between organisational and operational flexibility, and investor protection, which was a cornerstone of the ICAV project, means that the ICAV is expected to become the vehicle of choice for Irish domiciled investment funds. Based on its first two months of existence, there is no reason to doubt that this will be the case.

Anne-Marie Bohan is a partner in both the Information Technology Law Group and the Asset Management and Investment Funds Group at Matheson, and is head of our Outsourcing Group. She advises on all aspects of outsourcing, information technology law and e-commerce law, with specific focus on the requirements of financial institutions and financial services providers in these areas.