ICAVs offer UK funds route to Europe after Brexit

Self-managed Irish Collective Asset Management Vehicles can offer AIFMD or UCITS passporting for UK managers stranded outside EU

Whilst it is too early to predict the eventual impact of Brexit on UK fund managers, it seems unlikely that any withdrawal agreement would allow for the unaltered continuation of the current passporting rights under EU legislation. For many UK-based investment managers therefore, a self-managed Irish Collective Asset Management Vehicle

(ICAV), with the portfolio management function delegated to the UK-based investment manager, must be a useful option to consider in this period of uncertainty. This arrangement would make the fund fully compliant with EU law and allow it to avail itself of the AIFMD and/or UCITS passport.

The ICAV Act came into operation in March 2015 and was conceived to provide a tailored, corporate solution designed to meet the specific needs of investment funds whilst avoiding certain general provisions of company legislation that are inappropriate or irrelevant to investment funds.

In the 18 months since the legislation creating it was passed into law, the ICAV has seen inflows of €8.4 billion across 157 funds. The ICAV co-exists alongside the investment company, which has been the most successful and popular of the existing Irish collective investment vehicles to date. From a regulatory perspective, an ICAV can be structured to suit all major investment strategies and can be established as either an AIF or a UCITS.

Advantages of ICAVS

The ICAV offers specific advantages as compared to the existing public limited company (“Irish PLC”), which has been the most successful and popular of the existing Irish fund structures to date. Principally, it has its own legislative code, which means it will not be impacted by amendments to certain pieces of European and Irish company legislation that are targeted at ordinary companies rather than investment funds.

Another key advantage is that the ICAV can ‘check the box’ for US taxation purposes, whereas the Irish PLC cannot. Such an election allows US tax payers the benefit of a pass-through vehicle that is not subject to the more onerous PFIC regime applicable to shareholdings in non-US corporate fund vehicles. The ability of a fund to check the box represents a significant advantage to managers wishing to market European funds to US investors.

An ICAV may be established as either a single fund or an umbrella structure with a number of sub-funds and share classes. It can also form part of a master feeder structure with other entities established in, for example, the Cayman Islands or Delaware, USA. The ICAV Act specifically provides for robust segregation of liability between sub-funds in umbrella structures, as well as the preparation of different sets of accounts for each sub-fund. This is an important feature for managed accounts, as it avoids the requirement for a single consolidated set of annual accounts to be produced at the umbrella structure level, facilitates flexibility as to financial year-end dates for sub-funds and delivers portfolio data only to the relevant sub-fund investors.

Furthermore, the ICAV, unlike an investment company, is not subject to the principle of risk spreading, which makes it ideal for facilitating single asset funds and funds with concentrated positions.

Finally, in the case of changes to the ICAV’s instrument of incorporation (IOI), there is no requirement to obtain prior investor approval if the depositary certifies that changes to the IOI do not prejudice the interests of investors.

Looking forward, it is likely that, given the uncertainty caused by Brexit, the ICAV is well placed to become an appealing option for managers looking for an efficient solution to establishing a regulated fund in Europe.

Citco Fund Services (Ireland) Limited offers a full suite of services to ICAVs across all hedge fund, private equity and real estate strategies. It currently acts as administrator and depositary to ICAVs with assets in excess of $7bn.

9th September 2016