Fund Finance: Central Bank of Ireland relaxes regulatory prohibition on provision of third-party guarantees by QIAIFs

Subject to certain requirements, a QIAIF may now guarantee the obligations of third-party entities in respect of investments and/or intermediate vehicles in which the QIAIF has a direct or indirect economic interest. This is a welcome development in a fund finance context and will allow Irish QIAIFs to provide direct guarantees and security for certain other obligors instead of a more cumbersome and costly cascading pledge agreement. 

Background – AIF Rulebook restriction on third-party guarantees and security

Irish funds (including ICAVs) which are authorised as a Qualifying Investor Alternative Investment Fund (QIAIF) are subject to the Central Bank of Ireland's (Central Bank) Alternative Investment Fund Rulebook (AIF Rulebook).

The AIF Rulebook provides that QIAIFs shall not grant loans or act as a guarantor on behalf of third-parties. The term “guarantor” is not defined but, in practical terms, this is generally understood to mean that QIAIFs can guarantee, secure and/or be responsible for the obligations of themselves and their wholly owned subsidiaries but they cannot guarantee, give security for and/or be responsible for any third-party.

The restriction is particularly relevant in subscription line financings where a QIAIF is acting as a feeder fund to a third-party master fund borrower as part of a wider structure. In this scenario the QIAIF feeder cannot grant security directly to the lender but market practice is to implement a ‘cascading pledge’ whereby the QIAIF creates security in favour of the master fund with respect to its own capital commitment to the master fund and the master fund makes an onward assignment of this security interest to the lender.

Relaxation of prohibition

In its latest (50th) edition of its AIFMD Q&A (available here) the Central Bank have provided further guidance on the scope of this restriction, as set out below. Following industry consultation, the Central Bank have now confirmed that, subject to certain conditions, the AIF Rulebook does not prevent a QIAIF from providing a guarantee in respect of investments and/ or intermediate vehicles for such investments in which the QIAIF has a direct or indirect economic interest, even where such vehicles are not wholly owned subsidiaries. As with the current interpretation of the prohibition, it is anticipated that 'guarantee' will continue to be interpreted to include provision of security and/or otherwise taking responsibility for third-party obligations.

AIFMD Q&A ID 1160 (dated 7 March 2025) 

The Q&A is as follows:

Question.

I am a QIAIF that intends to provide a guarantee in respect of investments and/or intermediate vehicles for such investments in which I have a direct or indirect economic interest. Is this a contravention of the rule in Chapter 2, Part 1 Section 1 (i)(7) of the AIF Rulebook that a QIAIF shall not act as a guarantor on behalf of third-parties? 

Answer.

Chapter 2 Part 1 Section 1 (i)(7) of the AIF Rulebook does not prevent a QIAIF from providing a guarantee in respect of investments and/ or intermediate vehicles for such investments in which the QIAIF has a direct or indirect economic interest, provided that:

1. such arrangements are determined by the alternative investment fund manager (AIFM) to be in the best interests of both the QIAIF and its investors and are ancillary to the QIAIF's predominant investment strategy;
   
   
2. the AIFM (or in the case of a non-Irish AIFM or registered AIFM, the authorised QIAIF) and the QIAIF’s depositary confirm that the proposed transaction is at arm’s length and in the best interest of investors;
   
   
3. the prospectus discloses to investors that the QIAIF can provide a guarantee in respect of investments and/ or intermediate vehicles for such investments in which the QIAIF has a direct or indirect economic interest, along with any associated material risks;
   
   
4. the liability of investors in the QIAIF under such arrangements (above the value of their current holdings of shares or other interests in the QIAIF) shall be limited to the amount, if any, unpaid on the shares or other interests held by them which shall include, in the case of a QIAIF that raises capital under a formally agreed capital commitment basis, the amount of the undrawn capital commitments in accordance with the prospectus and the constitutional document of the QIAIF;
   
   
5. the QIAIF complies with provisions of Central Bank AIFMD Q&A ID 1159¹; and
   
   
6. the AIFM must comply with the relevant requirements under AIFMD as applicable in relation to leverage and its risk management, including regularly conducting stress tests in accordance with Article 48 and other applicable requirements of AIFMD which shall cover market risks and any resulting impact, including on margin calls, collateral requirements and credit lines.

Commentary

We do not anticipate that the conditions imposed by the Central Bank will be overly burdensome or onerous in a well managed QIAIF and so expect that this exemption from the AIF Rulebook prohibition will be widely utilised in financing structures.

This is a welcome development in a fund finance context and will allow QIAIFs to provide direct guarantees and security for certain other obligors instead of requiring a more cumbersome and costly cascading pledge arrangement. This brings the QIAIF regime broadly in line with other key funds jurisdictions and the Central Bank's European Long-Term Investment Fund (ELTIF) regime which does not explicitly prohibit thirdparty guarantees.

This guidance can be expected to ultimately benefit investors by reducing complexity and costs of permitted financings while also strengthening Ireland's position as a recognised centre of excellence for the private funds industry.

 

^{1 a pre-existing requirement with respect to co-investment alongside third-party investors.}