Practical Considerations In Choosing A UCITS Or Non-UCITS Fund - Fund Management/ REITs - Ireland (2024)

Ireland is a world-class EU location of choice for fundpromoters to domicile and service investment funds. Irelandcomplies with international standards in financial servicesregulation, and is the largest hedge fund administration centre inthe world. The regulatory environment represents international''best practice'' and provides for independent,regulated administration and trustee/custodian functions.

For non-resident investors, Irish investment funds are exemptfrom Irish tax on income and gains, and no withholding taxes applyon income distributions or redemption payments.

This article summarises some of the key considerations involvedin deciding, firstly, whether or not to opt for a UCITS fund or anon-UCITS fund (such as the Qualifying Investment Fund, or QIF)and, secondly, the key elements in obtaining authorisation for afund.

1. UCITS or non-UCITS

Key Issue No 1: Is EU or Wider DistributionRequired?

If EU distribution is required, only a UCITS fund qualifies foran EU retail passport, meaning that once authorised in one EUMember State, the fund can be sold in all other Member Stateswithout further authorisation. If private placement only isplanned, as is the case with many private equity vehicles, then anon-UCITS such as the QIF should be considered. Both UCITS andnon-UCITS vehicles can be listed on the Irish Stock Exchange andcan also be migrated to the London Stock Exchange. There are noinvestor qualification or minimum investment criteria forinvestment in UCITS, whereas in general non-UCITS such as QIF areavailable to certified ''professional investors''with a minimum subscription of €100,000 per investor.

Key Issue No 2: Which Legal Structure isAppropriate?

Both UCITS and non-UCITS funds are usually set up as variablecapital investment companies, but circ*mstances may determine thata unit trust or common contractual fund (CCF) may be moreappropriate. Both types of fund permit umbrella structures. UCITSgenerally do not permit subsidiaries to be used. Non-UCITS such asQIFs may utilise underlying subsidiaries to improve access toDouble Taxation Agreements.

Key Issue No 3: What Investments are Intended for theFund?

Non-UCITS funds such as the QIF have in general very fewlimitations on investment policy (which is why they are so popularworldwide as private equity vehicles). On the other hand, UCITS arelimited in general to transferable securities or money marketinstruments traded on regulated markets, cash, currencies, otherUCITS and exchange traded or over-the-counter derivatives withindefined parameters. To date, QIFs have invested not only ininvestments permitted for UCITS, but also derivatives, unregulatedfunds, property, movable assets, precious metals and many otherasset classes.

Key Issue No 4: What are the Intended LiquidityRequirements in the Fund?

The key difference is that liquidity is a key requirement of aUCITS fund, with full redemption facilities to be provided at leastonce every two weeks, whereas non-UCITS such as the QIF permit afull range of options from liquid to semi-liquid, to illiquid withno redemptions permitted.

Key Issue No 5: What Borrowing and Leverage is Required inthe Fund?

The non-UCITS QIF has no borrowing limit, whereas a UCITS canonly borrow up to a maximum of 10 per cent of assets and even thenonly on a temporary basis. The QIF has no leverage limit, whereasin general in a UCITS fund the global exposure cannot exceed theNet Asset Value.

Key Issue No 6: What Governance Requirements Apply to UCITSand non-UCITS?

Selection of the following parties is required for both UCITSand non-UCITS (QIF) funds, all of which require pre-approval by theregulator (the Central Bank) :-

• Promoter, which must be in possession of minimum€635,000 in shareholder funds, with a verifiable trackrecord in the promotion of funds
• Directors
• Discretionary Investment Manager, which must be recognised inan EU jurisdiction
• Custodian/Administrator/Trustee (must be authorised to carryout business in Ireland)

In addition, Irish legal advisors and registered auditors to thefund must be appointed.

The governance requirements for UCITS are much more onerous,notwithstanding the existence of a voluntary general FundGovernance Code applicable to all funds, including:-

• Requirement for a detailed business plan (not required fornon-UCITS)
• Detailed Derivatives Risk Management Process (RMP), also notrequired for a non-UCITS
• The UCITS Directive imposes strict rules on custodianliability, whereas a non-UCITS can exclude liability forsub-custodians
• UCITS must submit annual audited accounts plus semi-annualunaudited accounts, while non-UCITS require submission only ofannual audited accounts.

2. Fund Authorisation Process

The authorisation process for a regulated fund will normallyrequire the following:

• Pre-approval of promoter and investment manager for both UCITSand non-UCITS
• For UCITS the process is necessarily thorough and willfrequently take up to 3 months from initial filing of anapplication with draft documents including fund Prospectus,Business Plan, custody agreement and derivatives RMP. There followsa round of reviews of the application by the Central Bank and thiswill often result in further queries to be addressed.
• Provided the promoter and other parties are pre-approved by theCentral Bank, and that confirmation is supplied confirmingcompliance with the authorisation criteria, a non-UCITS QIFapplication is fast tracked: it is normally authorised by theCentral Bank within 24 hours of receipt of completed documentation.An application must be filed by 3pm on the day before the proposeddate of authorisation. From the time of initial client meeting, thetimeframe for the assembly of information, the filing of theapplication itself and obtaining the necessary pre-approvals ofparties to the fund, is usually only one month. This is followed byapproval within 24 hours of submission of the application.

How Verfides Can Assist

Verfides acts as experienced and trusted Project Manager forclients in the establishment of Irish domiciled UCITS and non-UCITSvehicles, assisting in the selection of some or all of theprofessional parties needed (legal adviser, investment manager,custodian/depository bank; administrator, auditor and directors),according to each client's requirements. We have strongrelationships with many of the leading professionals in this fieldand as such are able to secure competitive rates. After approval,we offer a menu of bespoke services in the ongoing administrationof a fund, including company secretarial services and taxcompliance services.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.

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