The continuing low rate environment and ongoing depressed yields in traditional asset classes represent significant challenges for investors. Institutional investors are no exception, and, as a result, are increasingly considering new avenues to achieve the returns they need to meet their liabilities.
A report published by Mckinsey & Co in 2014 estimated that three-quarters of investors expect to maintain or increase their investments in alternatives over the next three years. This trend is expected to create significant opportunities for alternative investment providers, and has been accompanied by a boon in new vehicles and structures which can provide the “hygiene factor” institutional investors need when moving into unchartered investment areas.
Ireland is already one of the principal domiciles for alternative investments in Europe and the landscape continues to evolve to remain attractive for private equity and real estate managers, driven by the variety of structures in place in the domicile to support them.
One of the latest is the Irish Collective Asset Management Vehicle Bill (ICAV), allowing a regulated fund to be set up as a corporate vehicle. The ICAV Act was signed into law on 4th March 2015, and AIFs looking to use the ICAV structure will be authorized by the Central Bank of Ireland (CBI).
The CBI is acting as registrar for all ICAVs, with applications available from their website from 10th March and accepted from 16th March. Both managers and service providers will keep a close watch on application levels over the first few months as ICAV is widely expected to become an attractive vehicle, especially for US-managed Collective Investment Schemes, due to the option for fund managers to elect classification under the US double taxation rules.
Wider European legislation is also having an effect on the appeal of alternatives. Following the implementation of the Alternative Investment Fund Managers Directive (AIFMD), Qualifying Investor Alternative Investment Funds (QIAIFs) were introduced as an Irish regulated fund structure and are becoming the vehicle of choice for many private and institutional investors undertaking large-scale investments in real estate and other alternative asset classes.
The QIAIF offers a high level of structuring flexibility as well as expedited Central Bank authorisation. Open to sophisticated professional investors only, a QIAIF has considerable advantages in liquidity and tax efficiency; and is not subject to Irish tax on either rental income or gains made on the disposal of Irish property.
Real Estate Investment Trusts (REITs) are growing in popularity since their introduction in 2013, and subsequently accounted for more than 30% (€1.5 billion) of the total Irish real estate transactions last year, according to Jones Lang Lasalle. Irish REITs offer a number of tax and other incentives for managers and their underlying investors.
First introduced in 1994 for Irish funds, Investment Limited Partnerships (ILPs) were adjusted under the Irish Finance Act in 2013 to make them tax transparent vehicles. Tax is imposed on the relevant income and gains of ILP partners in proportion to the value of their investment. This has the effect of removing a layer of taxation that had previously applied.
In addition to the introduction of these flexible investment structures, more broadly tax implications are becoming increasingly favourable in Ireland. The country has signed comprehensive double taxation agreements in 72 countries, of which 68 are in effect, according to Irish Tax and Customs.
Ireland’s tax efficient and innovative funds industry looks set to continue its growth through 2015 and beyond. With the implementation of AIFMD enhancing the accessibility of the alternatives sector for investors, new products and vehicles in Ireland may well grow the appeal for institutional investors seeking to dip their toe in the alternatives pool.
Dirk Holz is director, Real Estate and Private Equity at RBC Investor & Treasury Services