By Geoff Cook, Chief Executive Officer, Jersey Finance

The long awaited EU Alternative Investment Fund Managers Directive (AIFMD) – perhaps the most fundamental international regulation to ever impact the funds industry – was, after years of build-up and months of analysing the finer points of its implementation, finally introduced this summer.

While EU countries are looking to bring the AIFMD into national law at their different paces, those alternative fund managers, administrators and service providers who have some sort of interest in or contact with the European market, are still trying to get to grips with exactly what the detail of the AIFMD means to them, and how they need to act to continue to facilitate alternative funds business.

There are three key ingredients the funds community are looking for currently: certainty about being able to raise capital in Europe; confidence in being able to effectively and appropriately service and support their funds; and flexibility in how funds can be managed should they be targeted at non-European growth markets.

Of course, the AIFMD has an impact on the role of those International Finance Centres (IFCs) that have earned reputations as specialist funds centres. As far as Jersey is concerned, the message is unequivocally that, thanks to the significant amount of hard work and preparation that has gone into gearing up for the introduction of AIFMD, it is very much business as usual for fund managers using the jurisdiction.

In fact, due to the distinct position it is in, in relation to the EU and the rest of the world, there is a strong argument that Jersey is even better placed now as a result of the regulation.

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Substance

As a non-EU ‘third country’ for the purposes of the AIFMD but a well-established jurisdiction at the centre of European funds business, the feeling is that the AIFMD will actually enhance Jersey’s appeal as a centre for structuring and servicing alternative funds – including private equity, real estate and hedge funds - in the long-term.

This is important for Jersey, given its persistent strength in the alternative investment funds market. Jersey has continued to demonstrate a significant degree of resilience across its funds sector, with figures for the second quarter of 2013 showing that the value of assets under administration in Jersey remains above the £200bn barrier for the second consecutive quarter, to stand at £201.3bn. Alternative asset classes continue to account for around 70% of that total, with some of the largest European private equity funds ever launched having been formed in Jersey in recent months.

First and foremost, Jersey is focused on offering the alternative funds community a long-term, stable environment. Having signed 27 bilateral ‘AIFMD’ cooperation agreements with EEA countries, including the UK, Germany and France, Jersey’s regulator (the Jersey Financial Services Commission) is already granting licenses for fund managers, enabling them to continue to access those EU markets through private placement arrangements.

An interactive online tool designed to help explain and clarify the status of Jersey’s AIFMD cooperation agreements with European countries, including details of private placement arrangements and transitional provisions, has been launched at www.jerseyfinance.je/aifmd-map.

In addition, new regulations have been introduced to mirror EU requirements and allow for the creation of an ‘opt-in regime’ for managers wishing to comply fully with AIFMD requirements in marketing to European investors. This essentially means that Jersey has not only achieved a 'private placement' regime under the AIFMD, but has also already implemented, ahead of time, the necessary mechanics to support an EU-wide AIFMD marketing passport, which is anticipated to become available for non-EU fund managers in 2015. This is not something that can be said for other IFC jurisdictions.

As far as the issue of ‘substance’ is concerned, in Jersey, there is already a regulatory requirement for Jersey entities to demonstrate substance, and so-called ‘letterbox arrangements’ that might be found elsewhere are certainly not the model in Jersey regulated fund structures.

In fact, Jersey’s deep knowledge of the alternative fund sector, including its experience in asset servicing, its tax, accounting and filing capabilities, and its governance expertise, mean that fund managers should take confidence in Jersey having all the ingredients to more than satisfy the AIFMD’s criteria for management substance. This is backed-up further by the immediate availability of a fully compliant depositary regime and infrastructure of institutional and independent depositary service providers where managers opt in to full AIFMD compliance.

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Global

Meanwhile, in the current climate, managers are understandably adopting global strategies and raising capital in growth markets around the world where wealth is being created and global investment opportunities are sought after.

With this in mind, using a non-EU but European time-zone jurisdiction such as Jersey, that is experienced and has expertise in handling non-European alternative funds business will be attractive – particularly given that it needn’t be touched by AIFMD regulation at all.

As a non-EU jurisdiction, Jersey offers a completely separate funds regime that lies outside the scope of the AIFMD, meaning that managers who don’t want to access EU capital can benefit from an element of flexibility and market their funds to the rest of the world - just as they do at the moment, using Jersey’s familiar and broad range of fund structures.

This flexibility puts Jersey in something of a unique position. As well as offering a route that offers the same controls under AIFMD that would be offered by an EU Member State, at the same time Jersey offers managers the ability to market their funds outside Europe without the need to consider the impact of the AIFMD at all.

Fund promoters can establish all their management entities in Jersey and, from one location, meet EU requirements. At the same time, they can serve the rest of the world in a non-AIFMD compliant environment - with potentially lower costs. Offering both will not be available to EU Member States or to all IFCs.

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Future

Thanks to its approach to the AIFMD, Jersey’s position as a centre for on-going administration and service support for private equity, real estate and hedge funds is positive. Thanks to its flexible approach, wherever the fund’s assets or investors are, Jersey provides a good option, offering the expertise, capability and experience to administer the structure.

Parallel ‘offshore-onshore’ structures may well become more common, for fund managers who need to satisfy a specific investor demand for keeping a fund onshore – albeit with the potential additional compliance costs that could bring. But this is not anticipated to replace funds ‘offshore’, which in Jersey’s case will continue to offer a good value, flexible, robust option to cater for all aspects of alternative fund business.

In fact, as AIFMD beds down, it is anticipated that Jersey will prove increasingly attractive for managers with an international focus on both non-European and pan-European funds. Jersey has risen to the challenge presented by AIFMD and, by offering a regime that offers a blend of certainty and flexibility, taken the opportunity to broaden its scope and appeal as a specialist alternative funds centre.

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This article was first published in FTSE Global Markets, Channel Islands report, October/November 2013.