Trends in Fund MergersTuesday, 01 December 2020
Despite the continued impact of COVID-19 on the investment funds and wider investment management sector, pre-existing trends in terms of consolidation amongst asset managers and their fund vehicles has continued apace. When added to the ordinary business of redesigning, amalgamating, and closing fund portfolios, 2020 to date has seen a surprising number of fund mergers in the local market (including those involving non-Irish Funds).
In this update we provide a short recap on the rules for fund mergers and an overview of some of the key trends taking place in the context of ongoing COVID-19 restrictions, as well as some insights in terms of what can be expected in the market in the near-term.
Recap on existing rules
One of the first points to note when considering rules for fund mergers in Ireland is that there are important differences depending on whether the structure is regulated as a UCITS or an Alternative Investment Fund (and note that we will not consider unregulated structures in this update). Particular, EEA-wide, rules are provided for in the context of UCITS, which are generally speaking clear and well suited to the funds involved, with requirements provided for in terms of key documents (terms of merger), regulatory review and approval, types of merger which can take place, information to be provided to investors, etc. Whether or not the merger concerned is domestic only or intra-EU arrangement, the rules are well adapted and the Central Bank of Ireland’s application form is suited to its purpose, with the effect that clients rarely experience material issues (outside of what might be expected, e.g. obtaining investor consent) in organising restructuring efforts.
With AIFs, the position is not as straightforward, particularly when non-domestic funds are involved, however, Ireland’s rules are relatively well developed and the Central Bank has had well-considered guidance concerning the “Amalgamation of Retail Investor AIFs and Qualifying Investor AIFs with other investment funds” for some time (those guidelines last requiring revision back in July 2013). As with UCITS, the Central Bank’s rules address everything from key documentation which governs the terms of the merger, to investor notification and decisions which must be reached, regulatory review, etc. That being the case, AIF mergers can be problematic or difficult to organise for a number of reasons, when considered against their UCITS equivalents. Commonly experienced issues include:
(a) Jurisdictional issues: mergers involving AIFs often involve structures from outside of Ireland and indeed the EU, with Caribbean, US, and East-Asian vehicles often those which are to merge into, or receive assets from, Irish authorised AIFs. Issues which can arise include the roles of respective regulatory authorities, local rules for merger and subsequent winding-down/de-authorisation, entitlements of non-consenting investors, etc.; and
(b) Divergent structures: aside from the issues detailed at (a) above, the divergent nature of merging vehicles can pose a problem for AIFs such as where, for example, the merging fund is a contractual or trust structure and the receiving fund has corporate form, relevant funds have different (non-equivalent) internal rules, investment policies, etc..
In addition to the trend towards increasing numbers of mergers, a number of which are driven by consolidation at sponsoring asset manager level, a discernible trend appears to be amongst managers combining portfolios into larger structures, other than where a clear need arises (e.g. underlying investors highly value segregation from investors in other sub-funds, funding arrangements require such, etc.). Another trend, in the context of COVID-19, has been recourse to electronic means of organising governance fora to review and approve mergers, convey consent on the part of investors, etc.
One significant but welcome development we have seen has been the Central Bank’s willingness to accept written resolution on the part of members as being the mechanism through which shareholder consent has been conveyed, in place of a requirement for a general meeting – a useful method where investors are located in multiple jurisdictions, where time periods are short, or where they are other administrative burdens in terms of organising general meetings.
In terms of future trends, we expect to see continued activity in this area through 2021 and beyond as consolidation amongst asset managers continues and the drive for reduced costs, particularly amongst passive managers, continues. Whether regulatory standards evolve with AIFMD2 remains an open question, however, the Central Bank’s flexibility when it comes to adoption methods shows that as practice evolves, regulatory authorities can prove responsive when asked to allow adaptive, robust, and mutually beneficial practices as part of relevant processes.
How can ByrneWallace help?
ByrneWallace are experienced in helping asset managers, investors, and other stakeholders in navigating and complying with all aspects of the UCITS/AIF merger regime. Whether it be an institutional investor asked to endorse a merger or a multi-line asset manager undergoing an internal restructure, we can provide assistance and support, including in the completion of notification forms, liaison with regulatory officials, etc. Merger approvals can be a complex and lengthy undertaking for all involved and ByrneWallace is happy to lend its support in terms of securing the best outcome for all parties to a heavily-regulatory focused process of this nature.