Andrea Lennon, head of Ireland for Crestbridge, observes the rise of alternative lenders and credit origination funds in the Emerald Isle.
In a financial ecosystem that has long been dominated by traditional banks, Crestbridge Ireland is seeing more launches of alternative lenders and credit origination funds than usual.
Since the 2008 financial crash, these non-traditional entities have become much more well-known, offering investors good returns. In a recent piece of research, the Crestbridge Alternative Managers Mood Index (‘CAMMI’), most asset managers reported that they expected to increase their exposure to credit over the course of 2023. Private credit is expected to be the fastest-growing asset class this year, achieving a CAMMI score of 71.43 (where 50 is no change and 100 is the maximum), the highest of any alternative asset class, including private equity. This adds to a growing body of research which indicates private credit is to be one of the fastest-growing asset classes available this year and in the near future – and whose overall asset size could potentially dwarf even private equity over time.
Often, these loan funds are better suited to provide for the unique financing needs of companies than traditional banks, particularly in the small to medium enterprise (SME) sector. This has given rise to an ecosystem of alternative lending that provides a diverse range of financing options for businesses seeking capital.
Once a diamond in the rough, private credit now sparkles as a gem in a multitude of investment portfolios – with more managers than usual choosing to domicile their lending funds in Ireland. A significant factor in the burgeoning success of alternative lenders is Ireland’s Qualifying Investor Alternative Investment Funds (QIAIFs) regime, so far, mostly utilised by US and Nordic-based managers.
As a structure, QIAIFs are popular amongst asset managers for their many advantages, particularly for those seeking to penetrate European markets. First, their compliance with the Alternative Investment Fund Managers Directive (AIFMD) allows them to market to all European Economic Area (EEA) countries, reaching professional investors across 28 EU Member States and 3 additional EEA Member States. This broad access is especially beneficial for non-European managers keen on tapping into these markets.
In terms of investment flexibility, QIAIFs stand out due to their freedom to invest in any asset type and implement any investment strategy. Fund managers can therefore employ a wide range of strategies, including but not limited to long/short equity, real estate, credit, distressed securities, private equity and loan origination. The Central Bank of Ireland has recently clarified that QIAIFs flexibility extends to Digital Assets, such as cryptocurrencies. Moreover, except for loan origination funds, QIAIFs face no restrictions on borrowing and leverage, further enhancing their flexibility.
QIAIFs also impress with their fast-track authorisation process. Provided they have an authorised AIFM, QIAIFs can generally receive authorisation from the Central Bank of Ireland (CBI) within 24 hours of application, thereby streamlining the process considerably.
Lastly, the structural flexibility of QIAIFs adds to their attractiveness. They can be established in a variety of legal forms, including corporate, partnership, and other contractual structures. Furthermore, they can be open-ended, limited liquidity, or closed-ended, making them versatile enough to cater to diverse investment needs and strategies.
In recent years, Ireland has made updates to its AIF rulebook and passed the Investment Limited Partnership (ILP) Act, further improving the flexibility and appeal of its fund structures, including QIAIFs. For example, the new guidance permits closed-ended QIAIFs to issue differentiated share classes, enabling key changes such as stage investing, excuse and exclude provisions, and management or ‘carry’ classes. These updates have made Ireland an even more attractive jurisdiction for private capital managers, including those based in the US.
Looking ahead, private credit’s growth trajectory suggests that its significance in the asset management space will only continue to rise. As the sector evolves, the flexibility and adaptability of QIAIFs will prove instrumental in meeting the changing needs of investors and businesses alike.
In the face of this shift, it’s clear that the traditional banking sector will need to adapt and innovate to maintain its relevance. As QIAIFs and other alternative lenders continue to gain momentum, they’ll undoubtedly play a transformative role in the way businesses source capital and investors diversify their portfolios.
The rise of private credit and alternative lenders underscores the need for diversification in the financial ecosystem. As the old adage goes, ‘Don’t put all your eggs in one basket’. This wisdom holds true for investors and businesses alike. With the introduction of innovative financial products and structures like QIAIFs, the basket of options for capital sourcing and investment is growing wider than ever.
As we venture further into 2023, it will be interesting to observe how the landscape of private credit evolves and how asset managers continue to leverage the flexibility and advantages of QIAIFs.
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