On 7th March 2025, the Central Bank of Ireland (CBI) published the 50th edition of its AIFMD Questions and Answers (the Q&A), which provides important clarifications on the application of the prohibition under the CBI’s AIF Rulebook on QIAIFs (including ICAVs and ILPs) acting as guarantors and providing security for third parties (other than wholly owned subsidiaries). Because “guarantor” was not defined in the AIF Rulebook, the term had been interpreted widely in the Irish market to include the provision of any type of security. This prohibition had resulted in the need for more complex security structuring on fund finance transactions, frequently including cascading pledge arrangements in the case of Irish upper-tier feeder funds being required to provide security in connection with the borrowing of a lower-tier master fund (a common feature of subscription-line funding, in particular).
The CBI has clarified that, subject to compliance with certain criteria, a QIAIF can provide guarantees in respect of investments and / or intermediate vehicles for such investments in which the QIAIF has a direct or indirect economic interest, even where such vehicles are not wholly owned subsidiaries.
The criteria to be satisfied, which comprise a mixture of commercial and regulatory considerations, are as follows:
- the arrangements are determined by the alternative investment fund manager (AIFM) to be in the best interests of both the QIAIF and its investors and are ancillary to the QIAIF’s predominant investment strategy;
- the AIFM and the QIAIF’s depositary confirm that the proposed transaction is at arm’s length and in the best interest of investors;
- the prospectus discloses to investors that the QIAIF can provide a guarantee in respect of investments and/or intermediate vehicles in which the QIAIF has a direct or indirect economic interest, along with any associated material risks;
- the liability of investors in the QIAIF under such arrangements (above the value of their current holdings in the QIAIF) shall be limited to the amount, if any, unpaid on the shares or other interests held by them;
- the QIAIF complies with the Central Bank’s requirements in relation to investing through a co-investment vehicle that includes other third-party investors and is not a wholly owned subsidiary of the QIAIF - ownership / control of the co-investment vehicle must reflect the actual economic interest that the QIAIF has in that vehicle while the QIAIF must demonstrate that the arrangements reflect the true economic interests of the parties holding shares in that vehicle; and
- the AIFM must comply with the relevant requirements under the AIFMD, as applicable, in relation to leverage and risk management, including regularly conducting stress tests and other applicable requirements which shall cover market risks and any resulting impact, including on margin calls, collateral requirements and credit lines.
The practical effect of the change is that it will allow QIAIFs to grant direct security for the obligations of third parties, which should reduce both the complexity and cost of fund finance transactions. This marks a welcome development for the industry and will operate to simplify structuring arrangements on various type of transactions, including those involving master-feeder structures and others commonly seen in fund finance. This clarification will serve to enhance Ireland’s reputation as a pre-eminent jurisdiction for the establishment of fund structures.
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