A future proof approach to AIFMD
With the end of the transitional period for AIFMD implementation now in sight, it’s a critical time for fund structuring in Europe. As we look forward into 2014, the outlook for the global funds industry is looking more positive and Jersey’s funds industry is certainly in a strong position.
This strength is reflected in Jersey’s most recent statistics – at the end of 2013, the net asset value of Jersey funds had stayed firm around the £200 billion mark, actually showing a year-on-year increase of 2.5%. The figures also show that Jersey remains a particularly strong contender in the alternative asset classes, with hedge, real estate, and private equity funds representing the majority of assets under administration.
This only underlines just how important a robust response to AIMFD has been for Jersey. Whilst across Europe there are still uncertainties around the exact impact of AIFMD, with many alternative fund managers and service providers still trying to come to terms with what the detail means to them, from Jersey’s perspective its future as a fund domicile looks bright.
Jersey’s approach to the AIFMD is appealing to UK, EU and non-EU managers with a number of high value funds being structured through Jersey recently. In particular, an increasing number of asset and investment management businesses are establishing a presence on the island, and major service providers such as Apex Fund Services (Jersey) Limited. Additionally, established managers on the island, including one of the world's largest hedge fund managers, Brevan Howard, have recently built out and enhanced their existing considerable local presence.
Rather than it being an obstacle, Jersey looks upon AIFMD as an opportunity, responding to its implementation by offering stakeholders three potential options:
All this is down to a great deal of hard work, ensuring that Jersey has a ‘future proof’ model. The regulatory infrastructure is already in place in Jersey to cater for these three options, with no other EU or third country jurisdiction able to offer that range of options.
When it comes to marketing into Europe, managers want confidence that their funds are being appropriately serviced. There has been some talk of the AIFMD having a ‘concentration effect’ in Europe involving just a handful of onshore EU countries, but Jersey’s experience is different. In fact, research suggests that around 70% of EU fund managers are considering setting up an offshore solution in response to the AIFMD (KNEIP, June 2013), and Jersey is well placed to capitalise on that.
Where EU marketing is concerned, offshore is very much alive, with Jersey managers still able to access EU markets. Having signed 27 bilateral cooperation agreements with EEA countries in 2013, including the UK, Germany and France, Jersey’s regulator (the Jersey Financial Services Commission) is now granting licences for hedge fund managers actively targeting European markets through private placement arrangements.
In addition, as the first third country to offer managers the option of a fully compliant AIFMD framework, Jersey has created an ‘opt-in regime’ for managers wishing to comply fully with AIFMD requirements when marketing to European investors. This provides regulatory equivalence compared to onshore EU locations and will be of particular interest to managers from July 2015, when fully compliant third country managers anticipate the use of an EU-wide marketing passport.
Jersey is in a very strong long-term position to continue to market hedge funds into Europe – and, with the UK Treasury confirming its national private placement regime will be in place until 2018, Jersey will continue to enjoy easy access to the UK investor market.
Meanwhile, managers want to retain an element of flexibility and need a cost effective solution where they manage funds targeting investors in non-European growth markets. A greater amount of non-UK and non-European hedge fund activity is currently being channelled through Jersey and an increase in the number of Jersey alternative funds targeting assets and investors in growth markets across Russia, Africa and Asia are anticipated this year.
As a non-EU jurisdiction, Jersey offers a regime that is fully outside the scope of the AIFMD for managers who don’t require EU capital, whilst using a non-EU jurisdiction that has the expertise to handle global hedge fund business is highly attractive too.
Using Jersey’s broad and familiar range of structures offers clear benefits to managers seeking lower operational costs outside of Europe, with the ability to avoid the depositary requirement, leverage restrictions, regulatory capital burdens and remuneration rules that are found within the AIFMD.
Offering a regime that is both fully AIFMD compliant and outside the scope of the AIFMD is something that EU countries and most IFCs aren’t able to match, and puts Jersey in a very strong position.
One key talking point surrounding AIFMD in recent months has been the particularly vexed issue of achieving a management entity's operational efficiency whilst demonstrating an appropriate degree of substance.
In fact, establishing a Jersey manager entity, with an appropriate degree of substance, can be relatively simple and cost-effective. Jersey’s regulator is able to offer a fast-track licencing process that is the envy of many onshore locations, where there are instances of managers taking months to get an AIFMD licence.
Managers can draw on Jersey's deep experience in fund administration, asset servicing, tax advice, and accounting, and have fast access to governance expertise. The long-standing ability for Jersey to field local directors and officers of management entities with risk and portfolio management skills, and Jersey's ever-growing pool of skilled non-executive directors means there is little risk of Jersey management entities being discounted as mere ‘letterbox entities’. This sort of long-standing expertise has created a genuine offering of substance in Jersey.
It will be of considerable comfort to hedge fund managers that the familiar onshore EU adviser/offshore manager model still works in Jersey too, without the risk of an EU onshore adviser being regulated as a manager onshore.
The last few years have been something of a whirlwind for hedge fund professionals and it is understandable that, particularly in the coming few months, managers will be looking for a blend of flexibility, certainty and excellent service delivery.
Jersey has turned the AIFMD into an opportunity, enabling managers to establish all their management entities in Jersey and meet EU requirements while at the same time serving the rest of the world in a lower cost non-AIFMD compliant environment. The feeling in Jersey is that there is a specific opportunity for UK fund promoters to use Jersey as part of a ‘wait and see’ strategy, giving them the opportunity to continue their business as usual whilst assessing the full impact of the AIFMD.
With a number of successful managers already putting their faith in Jersey by relocating in recent months, its future as a specialist centre for hedge fund servicing and management in a post-AIFMD world is very strong indeed.
This article first appeared in HFMWeek's AIFMD Report 2014, published April 2014.