Loan origination and credit strategies using Irish fund structures

As an asset class, private credit, also known as private debt, has broken into the mainstream. It has been a stand-out performer, typically offering investors stability of returns and regular cashflows, floating rate returns (which is a natural inflation hedge) and seniority in the capital stack.

Global private credit assets under management (AUM) across all credit strategies has grown from US$300 billion in 2010 to US$1.6 trillion at end of 2023 and, according to Prequin, is forecast to grow to US$2.8 trillion by 2028.

With direct lending forecast to be the main growth engine for private debt, the global AUM for direct lending funds is predicted to double from around US$750 billion at the end 2023 to US$1.5 trillion by the end of 2028. Most of that growth is expected to be in North America and Europe.

The appeal of Irish structures

European institutional investors continue to have a strong appetite for private credit and generally have a preference for European onshore fund structures. The harmonisation of direct lending rules for European loan origination funds comes at a welcome time for managers, including US managers who continue to use Ireland, one of the world's leading fund domiciles, as their gateway to Europe.

North American managers have typically used Delaware and Cayman structures for their master funds, but we are seeing an increasing number of US managers using Irish vehicles for treaty based structures which can provide a more tax robust structure than the traditional “season and sell” model. The Irish collective asset management vehicle (ICAV) structure is specifically mentioned in the US / Ireland double tax treaty and has proven popular with US managers as a go-to treaty based fund structure.

Ireland benefits from a robust ecosystem, regulatory certainty and a favourable tax regime. In this guide, we will explore the options available for delivering loan origination and credit strategies through Irish fund structures.

Why choose Ireland for credit funds?

Ireland has emerged as a leading global fund domicile and offers a range of attractive benefits.

Expertise and capacity: Ireland boasts significant expertise in managing and servicing private credit, with US$169 billion AUM in credit funds and US$1.1 trillion of debt instruments held in Irish SPVs. Ireland's year-on-year AUM growth is widely expected to make Ireland the largest fund domicile in Europe before 2030. Currently, the AUM of Irish domiciled funds is €5 trillion.

Service providers: Ireland has a highly evolved ecosystem of administrators, depositaries, third party managers and other service providers, all highly experienced in servicing credit strategies for the world's largest and most complex asset managers. More than 580 global fund promoters establish Irish funds which are distributed in over 90 countries. The Irish financial services sector has a large pool of skilled labour to draw on to underpin future growth.

Regulatory certainty: Ireland offers a 24-hour fund authorisation process, providing speed to market. The 24-hour authorisation process is also available to professional investor ELTIFs, which is unique to Europe.

Tax efficiency: there is no Irish tax on AUM, income or gains within an Irish regulated fund. Treaty fund tax benefits for US credit strategies.

EU harmonised rules: credit strategies can be managed uniformly across the EU under the new AIFMD II loan origination framework or the enhanced ELTIF regime.

International connectivity: Dublin's international connectivity includes direct flights to 19 US cities.

Irish fund structures

Ireland offers a variety of flexible and fast-to-market fund structures.

Qualifying investor AIF (QIAIF)

The most frequently used fund structure, a QIAIF can be established as an ICAV, a corporate fund structure approved by the Central Bank of Ireland (CBI), with a streamlined 24-hour approval process.

Investment Limited Partnership (ILP)

A fast to market and flexible limited partnership structure offering features expected of a limited partnership structure, including no limit on the number of limited partnerships (LP), limited liability and flexible capital accounting. A wide variety of LP default provisions may be built into the structure and excuse and exclude provisions, carried interest and stage investing are all provided for. It also has a streamlined 24-hour regulatory approval process.

A unique feature of the Irish ILP is that the GP to an ILP may be located outside Ireland. Other than requiring that the directors of the GP are cleared from a fitness and probity perspective by the CBI, a non-Irish GP is not subject to any form of CBI oversight or approval process or any form of minimum capital requirements.

AIFMD passporting

QIAIFs, whether structured as ICAVs or ILPs, are subject to the Alternative Investment Fund Managers Directive (AIFMD). If seeking to avail of pan-European distribution using the AIFMD passporting mechanism, QIAIFs must appoint an EU AIFM.

It is important to note that the AIFMD passport is not available to an EU feeder fund (85% threshold to fall within the feeder definition) into a non-EU master fund. For example, an Irish fund investing in excess of 85% of NAV into a Cayman master may not take advantage of the AIFMD passport but may be sold across the EU, subject to each EU country's application of the national private placement regime (NPPR). However, not all EU countries permit NPPR based distribution.

Fund managers frequently make use of third party management companies when setting up Irish fund ranges to facilitate cost-effective distribution in Europe.

Non-EU managers may establish an Irish fund without appointing an EU AIFM if the EU distribution passport is not required. In that scenario, a US or UK manager is designated as the non-EU AIFM to the fund. This designation does not subject the US or UK manager to compliance with the requirements of the AIFMD an EU AIFM is subject to, but facilitates a cost-effective and fast fund launch process for managers not requiring pan-European passporting.

Lending strategies through Irish fund structures 

Many of the world's most significant managers active in the loan origination and credit space operate Irish fund structures.

AIFs pursuing loan origination or credit strategies may be structured as QIAIFs, loan origination QIAIFs (L-QIAIFs) or European long-term investment funds (ELTIFs). Each of these structures may be authorised by the CBI within 24-hours provided they are sold only to professional investors.

Primary loan origination: funds engaging in primary lending are currently governed by the CBI's L-QIAIF regime, soon to be replaced by the new pan-European AIFMD II loan origination regime, or the ELTIF 2.0 regime.

L-QIAIFs

The current L-QIAIF regime will soon be replaced in full by the new pan-European AIFMD II loan origination regime. Until such time (April 2026 at the latest), Irish funds which engage in direct lending and which are not ELTIFs are subject to the following requirements:

• The L-QIAIF may only engage in loan origination, participation in loans or lending, investment in credit and debt, and related operations

• 25% exposure limit to any one issuer or group

• 200% leverage limit

• No origination to natural persons, other funds or financial institutions

• Closed-ended but may facilitate periodic redemptions at discretion of fund

• L-QIAIF must appoint an EU AIFM

AIFMD II

Each EU member state is required to implement AIFMD II by April 2026. As noted above, the AIFMD II loan origination requirements will supersede the current Irish L-QIAIF requirements in full and impose the same requirements on all European funds engaging in direct lending.

Although AIFMD II will not be in force until early 2026, it cannot be ignored today. Any European loan origination fund established since April 2024 may not avail of the transitional provisions in AIFMD II and will be required to comply in full once AIFMD II is in force. It is therefore necessary to factor the AIFMD II loan origination requirements into any new loan origination fund launch.

The main AIFMD II loan origination requirements applicable to directly lending funds are:

• Funds are in scope if the main investment strategy is to originate loans or have originated loans the notional value of which represents at least 50% of NAV

• Closed-ended by default but open-ended is permitted if certain liquidity management tools are demonstrated

• Leverage limits of 300% for closed-ended funds and 175% for open-ended funds

• Any originated loan which is transferred to a third party is subject to a 5% retention requirement for the lesser of 8 years or until the maturity of the loan

ELTIF 2.0

The ELTIF is a European long-term investment fund product substantially updated in 2024 (ELTIF 2.0). ELTIF 2.0 funds may engage in direct loan origination and are not subject to either the CBI's L-QIAIF requirements or the AIFMD II loan origination requirements.

The ELTIF 2.0 may be sold widely across the EU to retail and professional investors under a pan-European marketing passport and may be fully closed ended or offer limited liquidity to investors.

An ELTIF 2.0 is subject to a number of investment and concentration restrictions, including a requirement to gain exposure (by way of equity, debt or lending) of at least 55% of NAV to eligible investment assets. Eligible investment assets include undertakings with a market capitalisation of less than €1.5 billion which are not financial undertakings. An ELTIF 2.0 is subject to a 20% cap on lending to any single qualifying portfolio undertaking.

European insurance entities investing in ELTIF 2.0 funds may avail of beneficial Solvency II capital weighting treatment, namely 22% capital weighting instead of 39%, in certain circumstances. 

Uniquely in Europe, an Irish professional investor ELTIF 2.0 is subject to a very efficient 24-hour authorisation process, enabling promoters to bring investment strategies to market without any regulatory delays.

Another unique feature of the ELTIF 2.0 is the ability to lend to corporate entities in certain European jurisdictions, including France and Denmark, without requiring any further lending licence from the local regulatory authorities in those jurisdictions.

Non-directly lending AIFs

AIFs engaging in secondary lending exposure only and not directly originating loans are governed by the CBI's AIF regime and are not subject to the lending specific requirements of the CBI's L-QIAIF regime or the pan-European AIFMD II or ELTIF 2.0 loan origination regimes. The CBI's AIF regime applies to all AIFs and imposes no additional regulatory obligations or investment restrictions in relation to any secondary loan exposure strategy.

How can Ogier help

With a team of experienced Investment Fund experts in Ireland, Ogier is well-placed to provide seamless cross-border legal expertise to managers and institutional investors in Europe and North America. Reach out to one of our contacts for more information.

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

Regulatory information can be found under Legal Notice