Thursday, July 06, 2017
Brexit: the Jersey Solution for London-based Alternative Investment Fund Managers
By Elliot Refson, Committee Member, JFA
Over recent months, there have been numerous articles speculating on how Brexit might unfold. Whilst the UK government’s White Paper set out their ambitions for Brexit, the reality is that we do not know what the eventual position will be. So what do we know and how can Jersey help London based Alternative Investment Fund Managers future-proof their fund structures?
“There are known knowns; these are things we know we know. There are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don't know we don't know….” (Donald Rumsfeld 2002)
We do know:
• That in the referendum over a year ago the UK electorate voted to leave the EU
• The triggering of Article 50 earlier this year has opened a two year window to negotiate the withdrawal
• The negotiating period has now formally started
• If no agreement is reached within two years, and no extension has been agreed then Brexit occurs with the UK leaving the EU and all EU treaties, with no replacement regime in place
• For a negotiated agreement to be reached it will need to be adopted by a qualified majority of 20 of the remaining 27 member states representing 65% of the total EU population and also approved by the European Parliament which has the right to veto both any agreement and any extension of the negotiation period
• We also know that if no agreement is reached the free movement of goods, services, people and capital will be severely impacted
In the alternative investment arena, aside from any impact on the availability of talent in London as a result of restrictions to freedom of movement, the key impact of Brexit as the UK becomes a third country will be the loss of the EU marketing passport for both Alternative Investment Fund Managers (AIFMs). This means the loss of the right to freely market funds across the member states of the EU.
What is equally certain is that whatever form Brexit takes - including the much touted “equivalence” route where companies from countries that are deemed to have equivalent regulatory standards are permitted to trade freely across borders - it will result in a period during which UK managers will not be able to directly access investors across the EU and possibly EU managers will also lose access to UK investors.
This is because of the two stage process required. Firstly any agreement will be subject to a technical review by the European Securities and Markets Authority (ESMA), which is under-resourced and therefore slow. ESMA’s advice will then be considered by the EU Parliament, Commission and Council which must reach a political decision acceptable to all three bodies. Further, EU Member States may have a limited appetite for an amicable agreement with the UK, due to a desire not to leave the UK in a better position post-Brexit than it was as a Member State. The issue of the loss of the passport and access to EU investors is the key point to address.
For some larger managers, opening an office within the EU to preserve access to the passport may be an answer. However, this is a costly option particularly for smaller managers. In addition, Preqin statistics indicate that the majority of UK managers only market into one or two EU countries, so if the fund’s target investors are in countries that have an accommodative private placement regime (NPPR), doing this through Jersey will be a better solution.
Globally 20% of investment in hedge funds is from European investors, of which almost three quarters is from the UK, The Netherlands and Switzerland (ex EU). For managers seeking to distribute into the EU, a Jersey-based manager can use NPPR to access almost all of the European Investor base. NPPR is guaranteed into the UK and The Netherlands has a very low barrier to entry for Jersey based Managers (Switzerland has its own marketing regime).
As at 31st December 2016 there were 127 Alternative Investment Fund Promoters marketing 254 funds in this way (this figure reported bi-annually has grown with every release since 2014). Jersey’s efficient and world-respected regulatory regime coupled with its ability to offer funds to investors outside of the scope of AIFMD, and therefore without the need for a depository, capitalisation and other associated costs, can result in higher investor returns in a more attractive and certain tax environment.
Despite the uncertainty around Brexit, UK alternative fund managers can rely on Jersey’s cost-effective and future-proof solution.
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