This article was first published in Unquote on 4th December 2014...

The AIFMD was expected to pose a significant challenge to the offshore model – but Jersey's attractiveness as a fund domicile remains strong, writes Jersey Finance chief executive Geoff Cook...

As we near the end of the year, it's a good time to take stock and reflect rationally on how the widespread global shifts in regulation are impacting the private equity landscape, in particular how the EU Alternative Investment Fund Managers Directive (AIFMD) is bedding down in different jurisdictions and how private equity managers are managing the regulation most effectively.

While some speculative comment has emanated from corners of the European funds community suggesting the AIFMD is prompting GPs to return onshore to domicile, from a Jersey perspective, this could not be further from the truth. In fact, in the months since the AIFMD came into play, there has actually been an uptick in the value of private equity fund business being structured through the jurisdiction.

The latest figures (June 2014) compiled by the Jersey Financial Services Commission (JFSC), for instance, reveals the total value of funds being administered in Jersey has stayed consistently high in recent months, around the £200bn/€250bn mark, with private equity forming a substantial proportion of this. In fact, the specific value of private equity assets under administration in Jersey has risen steadily in recent times, almost doubling over the past five years.

Jersey sure

Moreover, Europe's largest private equity fund raised in recent years enjoyed its final $10bn closing from a Jersey management platform, and the second largest real estate fund ever to be listed on the London Stock Exchange was structured through Jersey this year. These are just two of a number of recent high value Jersey fund launches.

A number of major alternative 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, 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 major alternative fund houses and managers in a structure of this nature, allowing them to access the European market and meet the requirements of the AIFMD but without the need for an EU domicile.

Passport puzzle

The initial response of managers to the AIFMD has been interesting, not least the idea emerging that the much-hyped pan-European AIFMD "passport" may not always automatically be the most suitable choice.

In contrast, the private placement option is proving popular. Increasingly, private equity managers are finding that the private placement option into Europe 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 JFSC indicate a strong take-up in Jersey's private placement route into Europe. Just months after AIFMD came into play we find 176 Jersey funds and 49 Jersey fund managers are already actively marketing into the EU with JFSC authorisation under private placement regimes.

This considerable success reflects the broad appeal of Jersey within Europe but is perhaps not surprising given the mixed reception the passport has been given by managers.

In recent research by IFI Global (The Impact of AIFMD, October 2014), for example, a significant number of managers said the AIFMD's carrot, the passport, was of "little" to "no interest" to them.

The cost of reporting and compliance under AIFMD through the passport remains a major concern too. Research by BNY Mellon and FTI Consulting (July 2014) highlighted that managers expect regulatory, risk and compliance reporting to account for the majority of ongoing costs associated with AIFMD compliance, with the increased costs in some cases looking set to fall onto individual funds.

The value of the AIFMD is also being questioned. The BNY/FTI research also suggested that only 39% of managers believe the AIFMD will be either "very beneficial" or "slightly beneficial" to their organisation.

Shore thing

In the long-term, beyond AIFMD, managers will need to think more and more carefully about the most suitable structures for them. Non-EU "third-country" jurisdictions like Jersey, for instance, can be ring-fenced from the business risks and distractions of unprecedented levels of EU regulatory creep, and this may well form an increasing part of managers' considerations in the future.

Now reluctantly accepted as the unavoidable future regulatory model onshore, the AIFMD brand has provided commentators with an opportunity to second-guess the Channel Islands' dominance in the alternative funds business – but all the statistics suggest the tried and tested offshore model will continue to support discerning and successful managers and investors for many years to come.

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