A nod of approval for private placement
With the transitional phase for implementing the EU Alternative Investment Fund Managers Directive (AIFMD) having finally come to an end this summer, attention has now turned to how it is bedding down in different jurisdictions and what private equity managers are doing to manage the regulation in the most effective way.
Far from the AIFMD prompting a re-domiciliation towards onshore locations - something that had been suggested by some corners of the European funds community - from a Jersey perspective, in the months since the AIFMD was brought in there has actually been an uptick in the value of private equity fund business being structured through the jurisdiction.
The latest figures show that the total value of funds being administered in Jersey, as at June 2014, has stayed consistently high, around the $330bn mark. Private equity forms a substantial amount of this, and the specific value of private equity assets under administration in Jersey has risen steadily, almost doubling over the past five years.
Moreover, Europe's largest private equity fund raised in recent years enjoyed its final $10bn closing this year from a Jersey management platform - just one of a number of recent multi-billion dollar Jersey fund launches.
Undoubtedly, the trend evidenced across managers in Jersey is one of building significant future management substance. A number of major fund houses have moved to or expanded their presence in Jersey recently. Having opened an office in Jersey in June this year, for instance, Carne Group recently received authorisation for an independent AIFMD-compliant management company in Jersey. It was the first to be approved outside the European Union, allowing alternative fund managers – including private equity managers - to comply with the AIFMD regime while maintaining a fund in an offshore, non-EU jurisdiction.
This isn’t a one-off, but reflects a general growth in interest from alternative fund managers in a Jersey structure of this nature, allowing them to meet the requirements of the AIFMD without the need for an EU domicile.
If the first few months of AIFMD being in play have shown private equity managers anything, it’s that the much hallowed AIFMD ‘passport’ is not automatically the most suitable choice. Increasingly, managers are finding that the private placement option into Europe offered through Jersey can provide them with the certainty of European market access they need, but with added flexibility and without the headache and costs of reporting under full AIFMD ‘passporting’ compliance.
Figures from the Jersey Financial Services Commission (JFSC) indicate a strong take-up in Jersey's private placement route into Europe. Just months after AIFMD came into play and 176 Jersey funds and 49 Jersey fund managers are already actively marketing into the EU with JFSC authorisation under private placement regimes.
This is a considerable success, but perhaps not surprising given the mixed reception the passport has been given by managers. In research by IFI Global (‘The Impact of AIFMD’, October 2014), for example, a significant number of managers said the AIFMD’s carrot, the passport, is of ‘little’ to ‘no interest’ to them.
Further, the cost of reporting and compliance under AIFMD through the passport remains a concern. Research by BNY Mellon and FTI Consulting (July 2014) highlights that managers expect regulatory, risk and compliance reporting to lead to significant ongoing costs - with those costs often falling onto individual funds.
Overall, the value, benefits and ease of implementation of the AIFMD passport are far from clear. But the private placement option is an attractive and highly credible alternative. And, because of the work that has gone into future-proofing Jersey’s regime, if the untested AIFMD brand succeeds in the longer term, the availability of an AIFMD-compliant option in Jersey, when third country manager passporting commences in the EU, will only add to Jersey’s appeal across all manager and investor types, and locations.
Moving on from a period of intense focus on AIFMD and considering longer-term market developments is now vital for private equity managers and, with further regulation on the horizon, Jersey is well placed.
Being a non-EU jurisdiction, for instance, Jersey is ring-fenced from the business risks and distractions of unprecedented levels of EU regulatory creep.
For over 25 years Jersey has provided an efficient and familiar, appropriately regulated and tax neutral operational model for the structuring of private equity funds, which has helped deliver safe and stable returns for the industry and its international investors through all economic cycles.
Before jumping aboard the passporting juggernaut, managers should carefully consider the options available to them – recent figures, research and business flows all suggest the tried and tested offshore model will continue to support discerning and successful managers and investors for many years to come.
This article was first published on PE International on 14th November 2014.