The Irish Funds (IF) UK Symposium took place in London last month. During the one-day event, experts tackled a number of pressing issues facing the funds industry, including the ongoing ascendency of private markets, the abundance of fund structuring options in Ireland, the growing role of Artificial Intelligence (AI), and the potential impact of asset tokenisation on alternatives.
JTC Group looks back at some of the main talking points to emerge from the Symposium.
No stopping private markets
Private markets are on an absolute roll.
This comes as Carne Group published research forecasting that assets managed by private market managers could swell from $13.01 trillion today to $21.08 trillion by 2030, corresponding to a 62% jump in AUM. [1]
According to the study, allocators are rushing into private markets because they offer better risk-adjusted returns. Despite being illiquid in nature, private market assets are inclined to suffer less from volatility because their long-term nature means they are better positioned than public markets to deal with sudden shocks or price movements.
A number of US, UK and EU fund manager, wealth manager and pension scheme institutions also advised that their private market exposures allow them to have more of a positive Environment, Social, Governance (ESG) impact on businesses, at least relative to public market investors.[2]
Although a minority shareholder can shape how a publicly listed company approaches ESG to an extent, private market managers are prone to have more influence as they have a deeper involvement with their portfolio companies. In addition, most private market managers will also be invested for longer periods in their companies, versus investors in the public markets, so the former are usually more focused on issues like sustainability and ESG.
ELTIFs and LTAFs are making a difference
The emergence of innovative fund structures is also expediting flows into private markets.
The study noted that 88% of wealth managers said they would increase their allocations into private markets because of the opportunities available to them through the EU’s recently updated European Long-Term Investment Fund (ELTIF) and the UK’s Long Term Asset Fund (LTAF).[3]
Both fund wrappers are attractive to retail investors because they have lower minimum investment thresholds and offer more flexible redemption terms than traditional private market funds.
“The original ELTIF structure was a far from perfect creation, but ELTIF 2.0 has removed a lot of the barriers to entry. Under ELTIF 2.0, asset eligibility rules have been broadened, the rules around diversification and concentration risk have been eased, and there are fewer restrictions facing retail investors when accessing these funds,” said Jon Masters, Head of Business Development at INDOS Financial, a JTC Group company.
The changes are having their intended effect. ELTIF assets have since ballooned from €2.4 billion [4] in 2021 to €13.6 billion [5], and optimists predict AUM could rise even further to €30 billion by 2026[6] and €50 billion by 2028 [7].
While Luxembourg is the biggest domicile for ELTIFs, Ireland is also seeing lots of interest and activity after the Central Bank of Ireland (CBI) updated its regulatory framework for ELTIFs earlier in 2024. According to an expert speaker at the symposium, there are now seven ELTIFs domiciled in Ireland, whereas there were none at the beginning of the year.
In the UK, the LTAF is also beginning to gain momentum, although their numbers are still on the low side. A panellist at the Symposium said the UK’s Financial Conduct Authority (FCA) was not expecting a sudden deluge of LTAF launches, but rather a steady stream. Several high-profile managers have since rolled out LTAFs, including Schroders, which recently gained regulatory approval to launch its third LTAF, with this one focusing on UK venture capital. [8]
As allocators become more familiar with ELTIFs and LTAFs and how they work, assets in private markets will continue to grow, commented Masters.
Ireland as a fund hub
Private market managers are spoilt for choice for fund structures in Ireland.
This comes as data from Irish Funds shows that Ireland is home to six percent of worldwide investment fund assets, making it the third largest fund centre in the world, and the second in Europe, with the total number of Irish domiciled funds now at 8,853, and collectively running €4.3 trillion.[9]
In addition to its deep pool of service provider talent and Common Law legal framework, Anthony O’Hanlon, Partner at Mason, Hayes & Curran LLP, said there are plenty of regulated and flexible fund structures available in Ireland for private market managers.
Examples here include the Irish Collective Asset-management Vehicle (ICAV), a structure which is available to UCITS, Retail Investor Alternative Investment Funds (RAIFs) and Qualifying Investor Alternative Investment Funds (QIAIFs). “The ICAV is popular because it can check the box under US taxation rules,” said O’Hanlon.
Another option is the Irish Limited Partnership (ILP) model. Proponents of the ILP say that it offers many of the same benefits as a Cayman Islands or Luxembourg-domiciled structure, but within an Irish tax, regulatory and service provider framework. Among the ILP’s strengths, added O’Hanlon, is that it is tax transparent, while regulatory approvals can – in most circumstances – be completed within 24 hours.
Elsewhere, cost-conscious start-ups or smaller managers can make use of the 1907 LP vehicle, said Lloyd Collier, Senior Director, ICS UK & Ireland, JTC Group.
The 1907 LP offers private market managers and their investors a fairly standardised GP-LP structure, but unlike the ILP and ICAV, it is unregulated. “The 1907 LP is aimed at new entrants to the market and it has gained popularity. 1907 LPs also do not need to obtain regulatory authorisation from the CBI, which makes it quite appealing for some smaller managers who may be in the early stages of capital raising or who are yet to build up a proper investment track record,” said Collier.
Owing to its extensive fund structuring options, Ireland is rapidly catching up with Luxembourg as the domicile of choice for private market funds.
Private markets and the coming technology revolution
As with many industries, private markets are going through something of a digital transformation.
During the Symposium, experts highlighted that AI could usher in some sweeping changes for private markets. “By interrogating data, AI can help managers identify patterns and investment trends, leading to some major opportunities. At an operational level, the technology could help managers populate reports – such as client reports or even the AIFMD’s Annex IV,” said Masters.
This comes as research from Deloitte shows that 10% of private investment firms are already using AI to handle activities, including identifying investment opportunities, research, deal sourcing, contract management, and due diligence, a figure it expects will only increase.[10]
However, Masters noted that AI will only work if managers feed the technology good data. “If you put bad information in, the technology could produce bad results,” he added.
Asset tokenisation is also gaining ground in private markets. According to Masters, tokenisation could be another distribution channel for private market managers looking to raise money from retail customers. As tokenisation allows for fractionalisation of fund units on distributed ledgers, subscriptions are much cheaper, enabling for the investment process to be democratised.
“Investing into a traditional private equity fund can sometimes require investors to put up a minimum of $100 million. In a tokenised private equity fund, an investor could gain access for around $1000,” said Masters.
For tokenisation to become more embedded in private markets, however, regulatory sign off will be critical, although this is something which the CBI is currently working on.
Finding the optimal provider
Launching a private market fund can be a challenging undertaking, which is why service provider selection is so important.
Administering around $110 billion of fund assets globally, JTC’s Fund Solutions provides a full range of administration services, including AIFM, fund accounting, Depositary and investor reporting services to a diverse range of private funds. Leveraging a provider who has the bandwidth and expertise to service complex fund structures and new, innovative asset classes is a must.
To find out more about JTC in Ireland please contact Lloyd Collier, Senior Director – ICS UK & Ireland ([email protected]).
[1] Carne Group – Atlas 2024 Report
[2] Carne Group – Atlas 2024 Report
[3] Carne Group – Atlas 2024 Report
[4] European Parliament – Amending the ELTIF regulation
[5] Scope Explorer – May 15, 2024 – Solid growth in ELTIF market: New regulation to drive further expansion
[6] Scope Explorer – May 15, 2024 – Solid growth in ELTIF market: New regulation to drive further expansion
[7] Private Equity International – November 29, 2023 – ELTIF adoption expected to gather momentum in 2024
[8] FT Advisor – September 20, 2024 – Schroders launches first UK venture capital LTAF
[9] Irish Funds – May 23, 2024 – News Release: Innovation Key to Success as Ireland’s Funds and Asset Management Industry Surpasses €4.3trn AuM
[10] Deloitte – May 29, 2024 – Private capital innovation: Using artificial intelligence can accelerate the portfolio valuation process
