Ireland’s status as a popular European domicile for life settlement funds is rooted in the country’s double tax treaty with the US which allows Irish investment vehicles, such as Section 110 companies and Qualifying Investor AIFs (QIAIFs), to receive US life settlement payouts free from US withholding tax (provided they meet the treaty’s limitation on benefits provisions). Tax, after all, has a significant impact on the net returns of any investment fund, alternative or not.
And QIAIFs, including life settlement funds, already domiciled in the Emerald Isle received a small boost in early March, as a consequence of the Central Bank of Ireland (CBI) publishing the 50th edition of its AIFMD Questions and Answers (Q&A).
Among the notable updates this time include the allowing of QIAIFs to provide financial guarantees for third-party obligations. Historically, QIAIFs operating in Ireland were restricted from guaranteeing debts that were not directly tied to their own operations. The recent change removes this limitation, allowing QIAIFs to provide financial guarantees for third-party obligations (subject to certain requirements being met). This flexibility could potentially alter risk exposure, financing structures, and investment strategies across multiple asset classes.
“The ability to guarantee third-party debts may open up new financing structures for QIAIFs. For instance, funds may be able to facilitate structured lending arrangements that enhance liquidity and capital efficiency. This could make Ireland-domiciled funds even more competitive in the global market,” said David Naughton, Partner and Head of Investment Funds and Financial Services Regulation at law firm Byrne Wallace Shields LLP.
While this regulatory change would appear to offer greater financial flexibility, it also introduces potential additional risks. QIAIFs providing guarantees on third-party obligations could face additional liabilities, potentially impacting investors if guarantees are called upon. If applicable to life settlement funds, which already manage longevity and premium payment risks, they will need to carefully assess how these guarantees align with their risk management strategies.
“The clarification on the rules around the guarantee of third-party debts is positive and demonstrates successful engagement between the CBI and the funds industry in providing clarity to QIAIFs and their managers. Naturally, this is not a development that will immediately and significantly impact or accelerate growth in the Ireland-domiciled life settlement funds market. If this new rule is now of relevance to the sponsor of a life settlement fund, they will have to consider carefully how they incorporate the benefits that this new rule offers in terms of their overall portfolio management offering,” added Naughton.
It’s not only internal risk management where life settlement fund managers will need to pay close attention.
“Given the nature of life settlement investments, where returns are realised over extended periods, investors are likely to scrutinise any increased exposure to third-party liabilities, which could impact capital raising.” said Naughton.
Moreover, regulatory bodies in other jurisdictions, such as the US Securities and Exchange Commission (SEC) or Internal Revenue Service (IRS) may take an interest in how Irish-domiciled life settlement funds utilize these new capabilities.
This latest edition of the AIFMD Q&A is part of the broader reform of the AIFMD regime. AIFMD II is set to come into force in April 2026, and introduces stricter rules on delegation arrangements, liquidity management tools, the mandating of the use of liquidity management tools by AIFMs to better handle liquidity risks, the establishment of a new framework for loan origination by AIFs, including specific requirements and limitations, and enhanced requirements for depositaries, including stricter liability provisions and clearer rules on the delegation of depositary functions.
This updated Q&A follows on from the publishing in November last year of the final report of the Funds Sector 2030 document, which recommended that the Central Bank of Ireland should review its AIF Rulebook and associated requirements that impact on the establishment of private asset funds, such as life settlement funds, in Ireland.
The swath of recent developments in Ireland give market participants cause for optimism.
“The CBI’s clear focus on this area and the upcoming AIF Rulebook revision which will come as a result of AIFMD II can add clarity of operation for private asset fund structures in a number of areas,” said Naughton.
“Following the publication of the Fund Sector 2030 report and its recommendation that the AIF Rulebook be reviewed to support growth in private assets, the CBI has been working closely with the funds industry to understand what areas need focus and possibly change. For life settlement structures, clearly a segment of the private asset funds sector we see in Ireland, these are positive signs of evolution, recognising wider global trends.”