Ireland has flagged that it does not plan to introduce its own version of Luxembourg’s highly successful Reserved Alternative Investment Fund (Raif), signalling a cautious approach in the global race for private market leadership and reflecting the government’s concerns on managing liquidity and valuation challenges in this market.
The country’s Funds Sector 2030 report, released on Tuesday, highlights Ireland’s focus on regulated funds like Ucits and Money Market Funds (MMFs), while stopping short of offering the unauthorised, unsupervised structures that it says have helped Luxembourg become a powerhouse in Europe’s private markets.
While Ireland has seen significant growth in fund administration and its authorised investment structures, the country has decided not to introduce its own version of Luxembourg’s Raifs, a key driver of Luxembourg’s success in private assets.
Doubled in size
Over the past decade, global private markets have more than doubled in size, with assets under management (AUM) growing from 9.7 trillion dollars in 2012 to an estimated 24.4 trillion by 2023. In Europe, private capital AUM hit 2.3 trillion dollars in 2022, with Luxembourg accounting for nearly half of that.
“We have recommended changes which will make the regulated structures better.”
Brian Corr, Irish finance ministry
Luxembourg’s Raif and Special Limited Partnership (SCSp) structures have been pivotal in attracting 420 billion euro and 625 billion euro in AUM, respectively, making the country a preferred hub for private asset funds in Europe, attracting investors from across continental Europe and beyond.
Ireland, on the other hand, has chosen a different path. The Funds Sector 2030 review, drafted by a team of civil servants that in the past year also had discussions with Luxembourg market experts, recognises the demand for more flexible, less regulated fund structures but argues that Ireland’s strength lies in its reputation for regulated funds.
Alfi CEO takes issue with Irish report
“Ireland has built a reputation as one of the preferred fund domiciles for regulated funds in Europe and is a leader in Ucits, MMFs and ETFs,” said the report. “Introducing an unauthorised and unsupervised product may impact negatively on this reputation.”
However, a senior fund industry executive in Luxembourg took issue with the Irish emphasis on regulated finds, saying it is incorrect to claim that Raifs are unsupervised and regulated products. “We prefer to use the term ‘manager-regulated’,” Serge Weyland, CEO of fund industry association Alfi, told Investment Officer, referring to the regulator-supervised AIFM fund managers that handle the Raif funds.
Weyland also pointed out that the Irish Limited Partnership structure, known as ILP, is similar to the SCSp structure in Luxembourg.
The Irish review also underlined risks tied to private assets, including issues related to liquidity mismatches and valuation. Moreover, Ireland’s current range of authorised and regulated fund products is sufficient for private asset investment strategies, the report concluded. “For these reasons, the Review Team does not recommend the introduction of a new unauthorised and unsupervised fund structure,” the report said.
‘We think we can fully compete’
Irish finance ministry official Brian Corr, responsible for the Funds Review 2030, told Investment Officer however that this does not mean Ireland does not wish to compete with Luxembourg in private markets. “We think we can compete fully, but within (more efficient) regulated structures,” he said via email, while acknowledging that Luxembourg has a longer history and track record in this space.
“We have recommended changes which will make the regulated structures better,” Corr said. “One example noted is loan origination funds where the Irish regulator currently has regulations which aren’t in place in other member states. The new AIFMD will bring in similar rules for all member states, hence levelling the playing field.”
Ireland does already offer other unauthorised structures that can be used in the private assets sector. Examples include the 1907 Limited Partnership vehicle and companies operating under the S.110 tax regime, Corr said. Additionally, he noted that recent revisions to the Central Bank of Ireland’s rules for Eltifs are expected to further support the private assets space. Ireland this year launched a 48-hour approval process for Eltif registrations, a process questioned by specialists in Luxembourg, where supervisor CSSF takes significantly more time to conduct a more dilligent review.
Luxembourg aware of risks
Luxembourg has in recent years stepped up its efforts to mitigate risks related to liquidity and valuations. Supervisor CSSF is closely involved in discussions with the industry on liquidity mechanisms and on valuations. Luxembourg in 2022 also launched a valuations professionals association, the LVPA, whose objective is to improve the overall quality of private fund valuations.
The Irish review made clear that while Ireland’s private asset market has grown, it still lags behind Luxembourg in terms of scale and attractiveness. As of December 2023, Irish-domiciled funds held 150 billion euro in private assets, roughly one tenth of the amount managed through Luxembourg’s unauthorised structures.
Industry stakeholders had pushed for Ireland to adopt a Raif-like regime, arguing that it would help the country better compete with Luxembourg in private markets. However, the review team in the end concluded that Ireland’s existing suite of authorised structures is sufficient to meet investor needs, and any shift toward unauthorised products could undermine its regulatory framework.
Tax cuts coming for Irish funds
The Irish review also shows that the country is on the verge of significantly reforming its tax system for investment funds. The review proposes to reduce the tax on certain investment funds from 41 percent to 33 percent. The aim of this reform is to encourage more Irish savers to move their money from low-interest savings accounts and invest in funds with higher returns.