According to asset management sources, regulators’ recent streamlining of the authorisation and post-authorisation processes in Ireland for undertakings for collective investment in transferable securities (Ucits) have been successful. The growth rate of the country’s funds industry is now significantly higher than global leader Luxembourg’s.
Because of the amendments, the filing process in Ireland is now perceived to be much quicker than other jurisdictions, including Luxembourg.
CIFC Asset Management launched its Ucits fund at the end of January, and told IFLR that it chose Ireland to domicile the fund for this reason.
Changes in November 2018, including that the Central Bank of Ireland (CBI) will no longer conduct prior reviews of depositary agreements, prospectuses and Ucits financial indices, have significantly accelerated the process. The CBI also published a Ucits merger application form, which intended to shorten the process.
"Secondary liquidity in CLOs has matured and developed to a point where we feel comfortable "
According to Jay Huang, managing director and head of structured credit investments at CIFC, the fact approval is much quicker and the maturation of secondary liquidity in collateralised loan obligations (CLOs) means CIFC is now comfortable launching its first Ucits fund.
“Secondary liquidity in CLOs has matured and developed to a point where we feel comfortable offering weekly liquidity on a fund investing in CLO securities,” he said.
In addition, the substantial pick-up and yield of CLOs is said to be another reason why now is the time to launch a Ucits fund.
One challenge, however, is persuading the investor base that a CLO is different to the infamous collateralised debt obligations (CDO), a market that imploded during the 2008 financial crisis. In contrast to CDOs, CLOs are backed by senior secured loans made to large corporations, as opposed to residential mortgages from subprime borrowers.
“CLOs actually proved robust enough to survive the crisis,” said Huang. “In fact, out of approximately 10,000 CLO tranches issued to date, fewer than 30 of them have ever incurred a loss.”
Huang added that while the mass marketing of CLO risk retention products from various asset managers has already educated the market on this, they are still working to provide clients with further research and data to back it up.
Regardless, CLOs remain a risky investment. In order to mitigate the credit risk, CIFC has not purchased the most subordinated piece: the equity tranches of CLOs. Huang said that with respect to the lowest rated tranche in this fund, BB-rated CLO bonds, the underlying loans of the fund’s CLO investments could suffer credit losses equal to those incurred during the financial crisis. Those investments would still be protected as to principal and interest.
Ireland, together with Luxembourg and France, is a global leader in exporting fund domiciles. Luxembourg and Ireland are the largest for funds predominately sold outside of their jurisdiction. Yet as a result of the recent changes, Ireland could separate itself from the pack.
Donnacha O’Connor, partner at Dillon Eustace, said that there is a perception that Irish service providers are stronger than their Luxembourg counterparts for alternative or esoteric investment strategies.
“Ireland’s tax treaty with the US gives Irish exchange-traded funds (ETFs) a significant advantage over their Luxembourg counterparts,” said O’Connor. “Irish ETFs can access the US-Ireland double tax treaty, whereas Luxembourg ETFs cannot.”
The Ireland-US Double Tax Treaty 1997 allows residents of either country to avoid double taxation for federal income tax and federal excise taxes in the US, and income, corporate and capital gains tax in Ireland. This provides a significant advantage over jurisdictions that do not have a similar agreement.
Alan Keating, chief executive at MUFG Alternative Fund Services, said that Ireland’s old model was very different to Luxembourg’s approach. The new rules bring it in line with Luxembourg, but Ireland has the advantage of both the tax treaty and stronger service providers.
The changes were aimed at exploiting investors’ concern about the Brexit uncertainty across the Irish Sea. In making the changes, Ireland currently has the fastest growing funds industry.
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