Building significant future substance
For many alternative fund professionals, the EU Alternative Investment Fund Managers Directive (AIFMD) has been the main regulatory focus in recent years – and, with the transitional phase for implementing it having finally come to an end this summer, attention has now turned to how it is bedding down in different jurisdictions.
In the months since the AIFMD was brought in, Jersey has actually seen an uptick in private equity funds 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. The specific value of private equity assets under administration in the Island is rising steadily, and has actually increased by an impressive 97% 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.
Far from the AIFMD prompting a re-domiciliation towards onshore locations - something that had been suggested by some corners of the European funds community - the trend evidenced across managers in Jersey is undoubtedly 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 - 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.
The move signals a general growth in interest from alternative fund managers in a Jersey structure of this nature, which allows them to meet the requirements of the AIFMD without the need for an EU domicile.
If the growing raft of regulation impacting private equity managers does anything, it should make them think carefully about what structures work best for them. Managers are increasingly finding, for instance, that the AIFMD ‘passport’ is not automatically the most suitable choice and that the private placement option into Europe offered through Jersey can provide them with a welcome degree of certainty and flexibility, 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 all extremely positive for Jersey, but perhaps not particularly surprising given the mixed reception the passport has been given by managers. Research by IFI Global (‘The Impact of AIFMD’, October 2014), for example, reveals that a significant number of managers feel the AIFMD’s carrot, the passport, is of little to no interest to them.
The cost of reporting and complying with the AIFMD, through the passport, is a concern too. 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 increased costs in some cases looking set to fall onto individual funds.
The value, benefits and ease of implementation of the AIFMD passport is far from clear, and the private placement option is proving an attractive and highly credible alternative. But, 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.
As we now look forward to a new era of funds regulation in Europe, it’s important to move on from a period of intense focus on AIFMD and consider longer-term developments.
Being a non-EU jurisdiction, of course, Jersey is ring-fenced from the business risks and distractions of unprecedented levels of EU regulatory creep. As a result of this and its flexible approach to AIFMD, the future for Jersey’s private equity business looks bright.
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.
Figures and recent business flows suggest the tried and tested offshore model will continue to support discerning and successful managers and investors for many years to come.
This article first appeared in PE News' feature on Regulation, published 17th November 2014.