Stability, expertise and flexibility have been highlighted as key components of the international fund domicile of the future in a new report published this month by IFI Global and supported by Jersey Finance.

‘The Evolution of the International Fund Jurisdictions’ report forms the latest in a series undertaken by IFI Global with Jersey Finance, with previous reports published over the past two years having focused on fund domiciliation, structuring, and fund governance.

This new report explores the origins of the fund domiciliation industry and how a number of locations around the world with no previous connection to funds, have ended up playing fundamental roles at the heart of the global funds landscape, servicing more than US$16 trillion of fund assets.

The report also explores how those centres, including Jersey, BVI, Bermuda, Cayman, Guernsey, Ireland and Luxembourg, have since evolved and what their past experiences tell us about their future direction. Among the report’s key areas of focus are:

·        Key dates, from the establishment of the first expatriate banking operation in Jersey in the 1960s to EU alternative fund regulation in 2018

·        The origins of the international funds industry in the 1980s, including the first investment funds offered to expats and the largely Anglo-Saxon asset management industry of the 1990s

·        The dawn of alternatives, including the introduction of regulatory measures, the shift towards institutional investors, the heightened focus on governance and substance in the wake of the global financial crisis, and the impact of Brexit

·        The future, including the growth of sustainable finance and crypto funds and the importance of first mover advantage when it comes to new investment categories

 Commenting on the findings, Elliot Refson, Head of Funds at Jersey Finance, said:

“Given the trends over the last decade or more highlighted in this paper, there’s no doubt that the fund jurisdictions that will be most successful in the future will be those that are stable with strong expertise and infrastructure, and robust but flexible regulatory frameworks. This has really been Jersey’s mantra for the past twenty years, and we’ve seen the fruits of that in the growth of Jersey in recent years as a trusted funds domicile.

“There will undoubtedly be more changes over the coming decades and our focus will remain on staying true to our values and on retaining our position as an integral part of the global fund landscape.”

 Simon Osborn, CEO of IFI Global and author of the report, added:

 “Fund domiciliation patterns have always been subject to change and there is no reason to believe this will not continue to be the case in future. To understand how the asset management business might develop in the future, it is a good idea to know something about how the international fund jurisdictions, on which this industry depends, are evolving.

 “This White Paper touches upon how a few unlikely locations, dotted around the world, got into this business, focuses on what is happening in international fund domiciliation today and explores what may well happen to international fund jurisdictions over the next few years.”

The new research can be viewed and downloaded here.

An ability to remain agile in a changing landscape, deliver innovative solutions and offer a platform of stability are key differentiators for Jersey’s funds industry that are resonating clearly with managers and investors, according to the chairman of the Jersey Funds Association (JFA).

JFA Chair Tim Morgan gave his update at the JFA Annual Dinner recently (23 September), attended by more than 350 funds and wider industry professionals, including an overview of the current funds landscape, the ongoing work of the JFA with its key stakeholders in Jersey, and future opportunities for Jersey’s funds sector. It was the first physical return to events for the JFA since 2019, since when all updates had been provided on a digital basis.

Pointing to the fact that Jersey’s funds industry recorded another new record high of fund assets being administered at the half-way point in 2021 (£436bn), with private equity and venture capital increasing by 21% year-on-year and the number of Jersey Private Funds (JPFs) rising to 456, Tim commented:

“The latest figures show that Jersey’s focus on alternative investment funds continues to provide a stable platform of long-term capital. From the start it was clear that the pandemic was affecting participants differently. Large, well-known sponsors with strong platforms continued to fundraise. Conditions were more challenging for new and smaller investment groups. However, many have in any case proceeded with the raising of successful, small, first funds and club deals, and that correlates with the continued growth in the number of JPFs we have seen. It’s a real endorsement of Jersey’s appeal and expertise.”

In addition, Tim, who is also a partner at the Jersey legal practice of the Maples Group, highlighted the importance of Jersey’s funds industry maintaining momentum in delivering innovative solutions to global investors:

“Jersey has continued to test innovations in digital assets, as well as increased amounts of structures aimed at sustainable technologies and related assets, which is very positive. In addition, significant changes have also occurred in the administration space – increasingly tech is a key component of how services are being provided, which is enhancing how governance, risk management and compliance are managed in practice. Jersey service providers have been impressive in adopting a digital first approach over the past year and this is undoubtedly a key part of our success.”

Meanwhile, Tim also highlighted that shifts in global geopolitics, regulation and competition were providing challenges, with Jersey’s focus on maintaining a perfect ecosystem for alternative funds putting it in a strong position:

“The political environment is volatile – the change in US administration; increased pressures from the EU and OECD in relation to tax; numerous policy initiatives from UK in the post Brexit and post pandemic environment; upcoming elections in Germany and France. All this means that there is a need for continual engagement in relation to Jersey’s position internationally. At the same time, jurisdictionally, the competitive environment is intense.

“However, Jersey’s ability to pivot in an agile manner, in particular between JPFs and more narrowly-held joint venture and co-investment vehicles, is valuable and provides popular, efficient solutions. At the same time, Jersey has an incredibly strong culture of partnerships with the JFSC, government, and other industry elements all working together on areas of opportunity or concern for our funds and wider finance industry. This is a real differentiator for us, as we continue to focus on our core message - that Jersey offers a unique ecosystem to provide a platform of stability in a rapidly changing market.”

Entertainment at the event, which was held at the Trinity Showground, was provided by comedian and writer Jo Caulfield and London-based singer-songwriter and former Jersey Young Musician of the Year Sam Walwyn.

The main sponsor of the dinner was Mourant, whilst silver sponsors were BNP Paribas Securities Services, IQ-EQ, Ogier and PwC, and the champagne sponsor was Carey Olsen.

‍

Oakbridge FundServices (Jersey) Limited (“Oakbridge Funds”), a specialist independent fund administrator based in Jersey has launched to service the alternative funds sector.

Expert in the main alternative asset classes with a focus on Private Equity and Venture Capital, Oakbridge Funds will provide administration services to offshore closed and open-ended funds and corporate structures.

The Oakbridge team previously worked together at a pan European multi-jurisdictional fund administration business and have more than 40 years’ experience of working in the fund services sector.

Experienced private equity professionals Robin de Gruchy-Wilson, Alex Smyth and Jonathan Crawford will lead Oakbridge Funds’ operations and service led approach.  Jamie Crawford joins the Oakbridge Funds Board as a Director.  Jamie brings a wealth of financial services and investment knowledge and is a Director of ED Group.  

Oakbridge Funds benefits from the resources and experience of its majority owner, ED Group. ED Group is an investment business with activities in the UK, Europe, North America and theChannel Islands. In Jersey, ED Group also owns a regulated Investment Business, Oakbridge Limited, and a regulated Trust Company Business, ED Capital Limited.

Oakbridge Funds Managing Director, Robin de Gruchy-Wilson, said: ‘We have founded Oakbridge Funds with a clear vision.  We are a dynamic and ambitious team.  We have a clear strategy for growth and our independent ownership structure means we are navigators of our own journey.’

‘Oakbridge Funds’ launch comes at a time when there is demand in the market for a truly independent specialist provider.  We are based in Jersey with a focus on carrying out fund administration for multi-jurisdictional funds using industry leading technology and have no intention to outsource any of this work. We believe in excellence and attention to detail and our experienced Jersey based team is very well placed to achieve this.’

ED Group Director, Jamie Crawford, said: ‘Our venture with Oakbridge Funds echoes ED Group’s ethos of investing in and helping innovative companies grow. We already have substantial experience and resource in the local financial services sector between our existing trust company and investment businesses. We look forward to working with Robin, Alex and Jonathan to grow Oakbridge Funds into a leading specialist administrator in the funds sector. ED Group is delighted to provide a solid foundation for the launch and growth of Oakbridge Funds.’

Oakbridge Funds is regulated by the Jersey Financial Services Commission for the conduct of Fund Services Business and Trust Company Business.

‍

‍By JFA member firm Langham Hall

‍

Over the past few months, we have seen the fundraising landscape turned on its head,with many LPs halting any new allocations and instead paying careful attention to their existing portfolios.

In late March we estimated that over half of global LPs had pressed pause on underwriting new private fund investments, either stopping their investment allocations entirely, or only proceeding with in-process investments.

As markets begin to open up again, we are seeing positive sentiment from LPs, who are now starting to look at resuming their investment programmes, albeit with perhaps a different risk appetite to that of 2019.

Looking to Europe in particular, we have seen a sustained increase in the number of non-EU sponsors looking to market to the bloc, where the aggregate AuM now exceeds €23 trillion.

For these sponsors, there are several routes to market, with no “one size fits all” approach. These include reverse solicitation, marketing under National Private Placement Regimes (“NPPR”), or the setup of a European parallel vehicle to access the marketing passport under the Alternative Investment Fund Managers Directive (“AIFMD”):

·        Reverse Solicitation: this refers to the acceptance of subscriptions from investors that actively solicited the manager without any active marketing taking place. Managers that receive genuine inbound enquiries may accept subscriptions via reverse solicitation, but it would be prudent to document that true reverse solicitation has taken place in case of litigation further down the line. Due to its passive nature, reverse solicitation cannot be considered a marketing strategy.

·        Private Placement: for managers using non-EU structures, e.g. Cayman, Delaware or Channel Islands, some countries still retain their National Private Placement Regimes. These can be tricky to navigate but for managers raising in just a handful of countries, this can be a cost-effective way of accessing Europe. For many countries, the manager will be required to complete and file Annex IV reports for each Alternative Investment Fund (“AIF”) being marketed. For countries such as Germany and Denmark, a depositary-lite is required to be appointed. It is important to note that NPPR is particularly difficult in much of southern Europe, including France, Italy and Spain.

·        European Parallel: Under AIFMD, funds which operate within this framework qualify for the European marketing passport, allowing these AIFs to be distributed in all 28 European member states. In this model, the fund will be required to appoint a regulated full scope Alternative Investment Fund Manager (“AIFM”), as well as a depositary. We often see these funds setup in Luxembourg, using a host-AIFM, to avoid the regulatory and substance burden of setting up a sponsor owned Luxembourg AIFM. By having an AIFMD compliant parallel fund, managers can accept capital opportunistically and at short notice. There are also no restrictions on where the fund can be marketed (although there are restrictions on the parties to whom it can be marketed).

Clearly there are pros and cons to each method, and managers will need to review which is the most suitable depending on their marketing strategy. However, with such a large pool of institutional capital in Europe, it is getting harder and harder to ignore the fundraising potential in the region.

‍

The introduction of global regulatory initiatives is set to challenge traditional fund structuring models, make fund domiciliation much more complex, and heighten the importance of investor buy-in, according to new research published this month by IFI Global and supported by Jersey Finance.

Based on the views of alternative managers, law firms, advisors and some of the world’s largest investors in alternatives, the research, which was carried out between October 2019 and January 2020*, seeks to explore the changing face of fund domiciliation and the drivers behind domicile decisions, given the pace of change in the regulatory landscape.

Overall, the survey found that key issues including Brexit, BEPS, substance and transparency have shot up the agenda when it comes to domiciliation and are themes that are likely to influence decision making for some years to come. Amongst its other findings were:

‍

- the most important determinant in domicile selection is whether a jurisdiction is well known and respected by investors that are being targeted by a fund manager.

- investors want to allocate to funds that are domiciled in jurisdictions with good infrastructure, considerable local expertise and knowledge of the asset class in question along with well-established regulations.

- there is some investor dissatisfaction at recent increases in costs in international fund jurisdictions as a whole but especially those in the EU - a common complaint is that the drive to develop local substance has increased costs for no particular benefit to investors.

- BEPS will impact all domiciles with alternatives, especially jurisdictions in the EU whose funds rely upon treaties for their tax exemptions.

- alternative investing is expected to continue to grow in the long-term, with jurisdictions that have the skills and experience in domiciling and     servicing alternative funds expected to facilitate that growth.

‍

Whilst the study was undertaken prior to the coronavirus pandemic, Elliot Refson, Director of Funds at Jersey Finance, believes its findings are more pertinent than ever:

 “It’s clear that, with the fund domiciliation landscape becoming more competitive and more complicated than ever, IFCs need to be alive to key trends and have a thorough understanding of what is driving the long-term future of fund structuring, so they can be equipped to continue to support the alternative fund management community going forward.

“Investor buy-in is absolutely vital.Investors want to do business through familiar, robust, high quality and cost-effective environments that are tried and tested and offer no surprises.In a world that was already defined by uncertainty and volatility and is even more so as a result of the COVID-19 outbreak, managers and investors will be drawn towards stability and certainty. Those IFCs that can focus on that,demonstrate real resilience even in times of mass upheaval, and offer a platform of substance built on expertise, specialist skills, compliance with international standards, innovative solutions and consistent levels of good service will be the winners – and Jersey ticks those boxes.”

The research, entitled ‘The Future of International Fund Domiciliation’, can be viewed and downloaded here.

*the research was conducted prior to theCOVID-19 pandemic.

‍

Further positive figures about the size of the funds industry in Jersey were unveiled at Jersey Finance’s London showcase conference for the funds sector last week.

Elliot Refson, Business Development Director - Funds at Jersey Finance, said that the number of Jersey Private Funds (JPF) had increased 25% in six months, highlighting the success of Jersey’s government, regulator and industry working together to create the best possible environment for attracting innovative, quality funds business.

Figures from the Jersey Financial Services Commission (JFSC) showed that the number of JPFs, a structure introduced in 2017 to cater specifically for the needs of small groups of sophisticated investors, had reached 257 by 30 June 2019, up from 205 at the end of 2018, with assets under management of £43 billion.

Joe Moynihan, CEO of Jersey Finance, described Jersey as positioned perfectly to act as a quality filter to manage international financial flows: “As investors look for stable IFCs that offer specialist expertise, Jersey can be a voice of reason among the noise, ready to support investor ambitions.”

Furthermore, irrespective of the outcome of Brexit, Jersey was able to bridge the gap between the UK and Europe thanks to the bilateral agreements that were in place with the EU alongside its long standing relationship with the UK, boosted by a recently signed Memorandum of Understanding between the JFSC and the UK Financial Conduct Authority which gave fund managers added certainty around accessing UK investor capital through Jersey in the build up to Brexit.

Entitled ‘Beyond Boundaries’, the annual Jersey Finance funds conference 2019 (on September 10) attracted more than 350 delegates and a range of industry leading speakers and panellists who discussed the impact of regulation and governance, the trends in the alternative funds sector, and further examples of innovation and trailblazing by fund managers, lawyers and administrators who were using Jersey for their fund structuring.

The event was also an opportunity to flag up how Jersey had become a clear choice for socially responsible investing (SRI) and especially impact investing, with Mr Moynihan noting that there were already more than 30 SRI funds under administration in Jersey with assets valued at US$7.4 billion.

He also highlighted Jersey’s increasing global footprint pointing to the fact that Jersey became the first IFC to be permitted to open an office in the Dubai International Finance Centre last year. Further, next month, Jersey will formally open its first office in New York, partly to support the growing demands from US promoters choosing Jersey evidenced by US promoter assets under administration in Jersey increasing by 148% over the past five years.**

Meanwhile, the Island’s rapid investment in technology – it is the first place in the world to have full fibre telecom networking delivering speeds of 1 Gbps (gigabits per second) – had positioned the jurisdiction at the forefront of fintech investment fund services.

The conference, at the Royal Lancaster Hotel, included keynote addresses from Todd Buchholz, former Director of Economic Policy at the White House and current managing director of the US$15 billion Tiger hedge fund, and Dan Snow, BAFTA award-winning broadcaster and popular figure on BBC television presenting historical topics.

A total 18 industry experts from London and Jersey contributed to four breakout sessions which were entitled ‘New Alternatives’ moderated by Alice Murray, founding editor of The Drawdown; ‘Solutions for Fund Managers – Governance, Substance and Location’, with moderator Tim Morgan, Partner, Mourant and Chairman of the Jersey Funds Association; ‘Building Global Bridges’ moderated by Nicholas Neveling, editor, Real Deals; and ‘The Evolution of Real Estate’ with moderator Sophie Reguengo, Partner, Ogier.*

They debated factors affecting the alternatives market, pinpointing the strengths of the Jersey offering, drawing on the use of case studies outlined by managers, while also examining how the funds sector was responding to the technical and regulatory challenges it faced and Jersey’s role in providing solutions.

Summing up the Jersey offering, Joe Moynihan added: “Having one of the largest communities of finance industry and legal specialists of any IFC, combined with our speed to market, adoption of the latest standards in transparency, our tax neutral status and mature environment for funds business and with increasing numbers of local firms and advisers operating across multiple jurisdictions, we have all the hallmarks to remain the jurisdiction of choice.”

New Guidance Notes were published last month (26 April), designed to provide clarity around recently introduced ‘economic substance’ legislation in Jersey and how that legislation, which came into play in January this year, should be interpreted.

As the JFA acknowledged last month, the legislation was introduced to meet the requirements of the EU's Code of Conduct Group for Business Taxation around appropriate levels of substance for certain tax resident entities in Jersey, following an assessment by the EU that ultimately saw Jersey formally recognised as a cooperative jurisdiction.

With that in mind, these guidance notes are helpful, providing interpretations of how the law should be applied by Jersey-based fund managers, and highlighting what it means for service providers and fund structures – particularly in terms of reporting and the tests the law provides for around governance, income generating activities, and physical office and staff presence.

It’s sensible of course that fund managers will look at this guidance and assess the structures they have in place to make sure they can amply meet the necessary criteria.

However, although this legislation underlines unequivocally that Jersey is committed to best practice and international cooperation, it is also worth noting that, from a fund management perspective, it is further evidence of the direction of travel Jersey has been pursuing for some time and reflective of Jersey’s ongoing commitment to nurturing a substance-driven environment for fund managers.

It’s no coincidence that the number of fund promoters in Jersey has almost doubled in the last five years to more than 250, whilst Jersey has a community of more than 20 hedge fund managers – a figure that continues to rise.

Managers spanning the full range of asset classes and sizes have in recent years, for instance, been bulking out their operations in Jersey through staff and premises to the point that Jersey now has a significant on-the-ground management community, whilst we can also boast a considerable and growing infrastructure of experienced directors and risk management, administration and compliance experts.

Jersey has established a reputation as a centre for fund management precisely because it has long been a jurisdiction of substance with a regulatory environment that is internationally-recognised and that is already in tune with global thinking on substance.

Crucially, the new rules absolutely work with Jersey’s existing regime and the majority of fund managers will not perceive them as creating an additional layer. Jersey was, for instance, an early mover on the OECD’s BEPS project, which had a focus on substance, and in 2017 became only the third jurisdiction in the world to have completed domestic ratification of the BEPS agreement.

In addition, the significant work Jersey has done around the AIFMD over the past decade has positioned it well as a jurisdiction that is focused on supporting managers and giving them a solid platform for growth.

As a result, the new substance legislation should not come as a shock to managers operating in Jersey.

And if it is concluded that a manager needs to change its arrangements, the expertise is already readily available in Jersey to take on any extra work. Reporting is a case in point - in some instances, for example, older agreements might have delegated reporting arrangements to another entity in the group based outside Jersey. Under these new rules, reporting is a core income generating activity for a Jersey fund manager and if a manager concludes that it will be responsible for reporting as one of its core activities, reporting must be carried out by or on behalf of the manager in Jersey. Because the intellectual capital and capacity is in Jersey to service reporting functions, any change to the group's contractual framework to facilitate reporting from Jersey should be straightforward.

As a result, the expectation is that not only will managers here be able to meet the new criteria as set out by the new legislation, but that the new parameters will actually prove to be a natural next step that will further bolster Jersey’s appeal as a centre that is ready and willing to provide the perfect ecosystem for fund management activity.

The infrastructure is here, the connectivity is here, and the market access is here, and that should be a compelling proposition.

Jersey’s focus on alternative funds and its growing status as a centre for fund management is positioning it positively but sustained bravery is essential to Jersey’s future success, according to the Chairman of the Jersey Funds Association (JFA).

Speaking at this year’s annual JFA Dinner (3rd May) held at the Royal Jersey Showground, Mike Byrne told an audience of over 450 funds professionals, senior politicians and regulatory representatives that “Jersey’s funds industry looks in excellent health” with figures for the end of 2018 indicating that the total net asset value of funds under administration in Jersey stood at a record high of more than £320bn, up 15% year-on-year.

Pointing to rising levels of business across the alternative asset classes, Mike, who completes his third and final year at the helm of the JFA this summer, commented:

“It’s been a very successful year for our funds industry, both in the funds and the fund manager space, with our focus on alternative funds creating a very stable platform of long-term capital that is largely insulated from short term market sentiment.

“That focus is very well placed, with pensions, sovereign wealth funds and institutional investors all continuing to allocate to private equity, private debt, real estate and infrastructure funds. With a record £320bn of fund assets now being serviced across our regulated funds space and a further £20bn now held in Jersey Private Funds, there is a clear picture of an extremely healthy jurisdiction.”

In addition, Mike pointed to how Jersey’s growing status as a fund management centre is positioning it well in light of new economic substance rules:

“Our industry has faced a number of challenges over the past year but we have come out the other side very successfully. In particular, the past year has seen an almost unprecedented level of cross-industry work to ensure that we responded to economic substance requirements by developing a law that demonstrates our commitment to meeting global standards and reflects the true substance which we know exists in our industry.

“In fact, we are seeing an ever-increasing community of fund managers fully resident in the island, across private equity, hedge, debt, real estate and crypto funds. These managers are bringing a real depth and diversity to our industry at a time when the issue of substance is so high on the agenda.”

Looking to the future, Mike underlined the importance of Jersey adopting a bold approach if it is to continue to be successful:

“We must continue to adopt a brave approach in how we operate, in the markets we serve and in the products we offer. We need to think creatively, for instance, about how we bring to life the Jersey proposition and the positive solutions we can provide for both EU and non-EU investors. And, whilst discussions around the AIFMD and passports now seem long in the past, the fallout from Brexit continues to have unintended consequences on many fund jurisdictions, including Jersey, and we must be prepared for that.”

Lead sponsor for the evening was Mourant and silver sponsors were BNP Paribas Securities Services, IQ-EQ, Ogier, Praxis IFM and PwC, whilst the champagne reception was sponsored by Carey Olsen

Recent political manoeuvring in Westminster has done little to resolve the feeling of uncertainty amongst private equity, real estate, infrastructure and other alternative fund managers around the long-term solution to capital raising within the EU.

It won’t be until mid-March now – just weeks before the UK’s expected departure from the UK – that we will have a better idea as to whether the UK is looking at a cliff-edge no deal exit, whether a new deal will be given the green light, or whether the agony will be prolonged by extending Article 50.

Yes, there may be transitional measures in place for fund managers between the UK and European regulators for now, but it’s hardly a satisfactory long-term answer for UK managers looking to access EU investor capital. And with 90% of alternative managers in Europe being in either the UK or Switzerland, that’s a lot of non-EU managers looking for a better solution.

The good news is Jersey continues to play a vital role in supporting managers looking to market vehicles in all or parts of continental Europe, regardless of the outcome of Brexit – deal, no deal or deadline extension.

We’re continuing to see private placement as a very viable and attractive option for managers, with figures announced recently indicating that the number of AIFs marketing into the EU this way through Jersey grew by 8% over 2018, whilst the number of managers doing so rose by 13%. That’s a real demonstration of faith in Jersey’s model.

You can see how private placement is being used in practice here - across all asset classes and fund sizes.

There’s good reason for this confidence. Jersey is already a third country in relation to the EU, with all relevant agreements in place to support private placement across Europe. That means Jersey can continue to operate seamlessly irrespective of the outcome of Brexit.

Doing so is also more targeted – EU figures show that only 3% of managers in Europe actually blanket market to more than three EU countries. In 97% of cases, it makes much more sense to opt for a private placement solution.

In addition, the set-up process for managers is a lot quicker than onshore solutions and a lot more efficient and cost-effective, whether that’s relocating fully or partially to Jersey through, for instance, a Jersey ManCo structure.

There’s long-term security for managers too - changes to the private placement regime are unlikely, but if they do happen, private placement will still be in place for three years from that date, by which time Jersey will have access to the AIFMD passport in any case.

It’s a pretty compelling proposition for UK, and other non-EU managers, looking to market into the EU, and the industry agrees – according to current figures, the value of funds administered in Jersey broke through the £300bn mark in 2018 to reach the highest ever level – any perceived uncertainty around Brexit certainly hasn’t hampered the growth of Jersey’s funds sector.

The message is clear – whatever happens at the end of March, Jersey is ready to play a key role in enabling managers to continue to market their funds to and generate returns for EU investors. No problem.

#JerseyForFunds

Elliot Refson, Business Development Director, Funds at Jersey Finance, and committee member at the Jersey Funds Association, recently spoke to PFM about how Jersey is supporting private equity fund managers with their EU distribution through Brexit.

A growing number of Jersey-registered fund managers are opting to future-proof their strategies and market into Europe through national private placement regimes (NPPRs) under the Alternative Investment Fund Managers Directive (AIFMD), according to the latest figures from Jersey’s regulator the Jersey Financial Services Commission (JFSC).

As at December 2017, 149 alternative investment fund managers (AIFMs) had been authorised in Jersey to market into Europe through NPPRs, up 17% compared to December 2016, clearly highlighting that the use of private placement continues to work well as a means of marketing funds into the EU.

Over the same period, the total number of Jersey alternative investment funds (AIFs) being marketed into Europe through NPPRs also increased significantly to stand at 291, representing a 15% year-on-year increase.

In addition, the JFSC has now authorised a total of 31 depositaries in Jersey under AIFMD, a figure that has risen 7% over the year.

Commenting on the figures, Geoff Cook, CEO, Jersey Finance, said:

“We’re continuing to work together with the fund management communities both in and outside of the EU, so it’s pleasing to see such a strong uptake of Jersey’s tried-and-tested private placement regime. Five years on since AIFMD was introduced, it’s a route that is proven to work, providing alternative managers with a clear, effective and future-proof means of accessing EU investor capital.”

Mike Byrne, Chairman, Jersey Funds Association, added:

“We believe that Jersey is extremely well positioned to play a positive role in supporting alternative managers right across the private equity, real estate, hedge, debt and infrastructure asset classes, particularly against a Brexit backdrop.

“Whilst these latest figures reinforce that Jersey has a key role to play in giving non-EU managers, including those in the US, Asia and soon the UK, with a means of marketing into Europe, we are also seeing EU managers structuring through Jersey to tap into the vital UK market.  In doing so, we are enabling them to get on with generating good returns for investors – something that is in everyone’s interest.”

The use of private placement as a means of accessing EU capital in the context of Brexit will be one of the issues to come under the microscope at the 2018 Jersey Finance Annual London Funds Conference later this year (24 April), which will also examine how market trends, shifts in regulation and protectionist movements are challenging and shaping the global funds industry.

Commenting on the UK Government’s newly announced strategy last week, outlining plans to maintain a burgeoning investment fund and encourage asset managers to stay in London amidst Brexit-related uncertainty, Mike Byrne, Chairman of the JFA, said:

“The clear emphasis of this strategy is to give UK fund managers confidence, particularly again a Brexit backdrop. Ultimately a healthy and vibrant UK asset management industry is good for Jersey too - we are excellently placed here to help and support UK fund managers with their EU and global distribution ambitions, and really there is no need for them to relocate from the UK.
‍
Jersey is already enabling more than 130 non-EU, mainly UK, managers market their funds into the EU and in the run up to and post-Brexit we envisage that this number will rise. The paper also outlines plans to build out the UK asset management industry’s fintech, social impact and ethical investment capabilities, and Jersey’s expertise in this emerging area could well play a supportive role too.”

‍

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.

This Q&A was first published in Real Deals on 17 November 2016.

Jersey Finance’s chief executive Geoff Cook explains how the fund management industry is evolving and what international financial centres (IFCs) should be doing to meet the industry’s changing needs.

From the perspective of someone involved in running an international financial centre (IFC), how do you see the fund management environment changing?
‍
GC: The OECD’s base erosion profit shifting (BEPS) initiative has changed the tax landscape and substance has become very important. Where a fund is based is becoming less of a technical question and more a question of substance. A fund needs to show that it has offices and ‘boots on the ground’ to conduct the business of the fund. A physical presence is important.

‍
Where do these trends leave Jersey as a jurisdiction?
‍
GC: After Brexit and the ongoing developments around BEPS Jersey is in a good position. With regards to Brexit, there is no change to Jersey’s status, as it has bilateral treaties in place with EU member states so there is no need to seek re-approval or renegotiate access. There is certainty for fund managers.
‍
On the BEPS initiative, Jersey is strong on the substance point. There are more than 13,000 people working in the finance sector, more than a fifth of total employment in the Island, and Jersey has one of the largest number of finance industry professionals of any IFC.
‍
The fund administration and legal sectors are strong and well-equipped to service the needs of fund managers. We have more than 2,000 people working in fund management and legal services alone and that number is growing. There is a new waterfront development with accommodation and office space, so the infrastructure is place to support further expansion.

‍
To what extent do these factors influence how managers decide where to domicile their funds?

GC: Substance and certainty are crucial. There are other important hallmarks for fund managers too. Political and tax stability is a big factor. We are lucky to have a steady parliament and a tax system that has not changed a great deal since 1945. Jersey is tax neutral for funds and offers competitive personal tax rates for professionals who want to work here. A robust and appropriate regulatory environment is also key, and we have shown that our system works and is proportionate.
‍
Jersey offers a platform that is stable and open. It is governed by English Common Law and is close to London. Finally, as a well-regulated and credible IFC, Jersey offers good access to markets around the world through its private placement regime.
‍
All of these elements are important for managers deciding where they should domicile their funds.

‍
Has the fact that the Panama Papers have cast the spotlight on how IFCs operate, and that the BEPS program is building momentum, prompted managers to take a step back, reevaluate the jurisdictions they use and possibly relocate?
‍
GC: I think that is a fair assumption. If you are a fund manager you have to look at this and make sure you are comfortable with the jurisdictions you are using. There has been a lot of relocation and managers have been moving to IFCs that are stable, well-regulated and are in good standing with tax authorities.
‍
Following the financial crisis Jersey appointed McKinsey to look into the risks facing Jersey’s financial services industry, so the Island has been addressing these questions for a long time now and has developed a clear strategy to address fund manager needs Managers have taken note and Jersey has enjoyed solid growth in the number of alternative asset managers using the jurisdiction.

The NAV of assets under administration for Jersey’s fund industry climbed to £228.4bn in the first quarter of 2016, the second highest level since 2008. Private equity, which was up by 10 per cent a year, and real estate, up 20 percent annually, underpinned this strong performance. Jersey is also now the sixth largest center for hedge funds.
‍
The private placement regime is clearly as popular as ever, offering managers stability and certainty.
‍
We are confident that we have put a very strong platform in place, but we are not complacent and always looking at ways to ensure that our proposition is strong.