Flexibility and substance in a post-AIFMD world
By Geoff Cook, Chief Executive Officer, Jersey Finance
After years of build-up and analysis, the long awaited EU Alternative Investment Fund Managers Directive (AIFMD) – perhaps the most fundamental piece of international regulation to ever impact the funds industry – was finally introduced this summer.
At their varying paces, European Economic Area (EEA) countries are looking to bring the AIFMD into national law. Equally, at industry level, preparing for the AIFMD is happening at different speeds. Research from KNEIP conducted in June this year with alternative investment fund managers, for instance, revealed that just 15% of alternative investment fund managers are ready to meet the AIFMD’s requirements for reporting, and only at the beginning of October did the European Securities and Markets Authority (ESMA) publish their final reporting requirements.
At a domicile level, there are three key ingredients private equity managers are looking for: certainty about being able to facilitate capital raising in Europe; confidence in having the expertise to effectively and appropriately service and support their funds; and flexibility in how their funds can be managed should they wish to target non-European growth markets.
As far as Jersey is concerned, the message is unequivocally that, thanks to the significant amount of hard work and preparation that has gone into gearing up for the introduction of AIFMD, it is very much business as usual for private equity managers using the jurisdiction, whether they are targeting Europe or further afield.
In fact, due to its distinct position – being at the centre of Europe but not part of the EU – it could be strongly argued that Jersey is even better placed now as a result of the regulation.
As a non-EU ‘third country’ for the purposes of the AIFMD but a well-established European private equity jurisdiction, the feeling is that the AIFMD will actually enhance Jersey’s appeal as a centre for structuring and servicing private equity funds in the long-term.
This is important for Jersey, given its persistent strength in the alternative investment funds market. Jersey has continued to demonstrate a significant degree of resilience across its funds sector this year, with figures for the second quarter of 2013 showing that the value of assets under administration in Jersey remains above the £200bn barrier to stand at £201.3bn. Alternative asset classes continue to account for around 70% of that total, and some of the largest European private equity funds ever launched have been formed in Jersey in recent months.
First and foremost, Jersey is focused on offering the private equity funds community a long-term, stable environment. Having signed 27 bilateral ‘AIFMD’ cooperation agreements with EEA countries, including the UK, Germany and France, Jersey’s regulator (the Jersey Financial Services Commission) is already granting licenses for fund managers, enabling them to continue to access those EU markets through national private placement arrangements.
In addition, new regulations have been introduced to mirror EU requirements and allow for the creation of an ‘opt-in regime’ for managers wishing to comply fully with AIFMD requirements in marketing to European investors. This essentially means that Jersey has not only achieved the capability to operate national private placement regimes under the AIFMD, but has also already implemented, ahead of time, the necessary mechanics to support an EU-wide AIFMD marketing passport, which is anticipated to become available for non-EU fund managers in 2015. This is not something that can be said for many other International Finance Centres (IFCs).
To help explain and clarify the status of Jersey’s AIFMD cooperation agreements with EEA countries, an interactive online tool has been launched at www.jerseyfinance.je/aifmd-map, detailing private placement arrangements and transitional provisions.
Jersey’s expertise and deep knowledge of the private equity sector, including its experience in asset servicing, its tax, accounting and filing capabilities, and its governance expertise, mean that it has all the ingredients to more than satisfy the AIFMD’s criteria for management substance. In fact, in Jersey there is already a regulatory requirement for entities to demonstrate substance, and so-called ‘letterbox arrangements’ that might be found elsewhere are certainly not the model in Jersey regulated fund structures.
With research published by KNEIP in June showing that reporting is viewed by 40% of AIFMs as the primary concern surrounding the AIFMD, having that level of specialist administration and servicing experience should give private equity managers a great deal of reassurance.
Further, in a Multifonds white paper published in June this year (‘The Impact of AIFMD and Convergence Survey’), 64% of alternative fund professionals said that depositary liability was the most challenging aspect of AIFMD. Again, Jersey can give confidence here, having in place a fully compliant depositary regime and infrastructure of institutional and independent depositary service providers where managers opt in to full AIFMD compliance.
Meanwhile, in the current climate, managers are understandably adopting global strategies and seeking to raise capital in growth markets around the world.
With this in mind, using a non-EU but European time-zone jurisdiction that has expertise in handling non-European private equity business will be attractive. As such a jurisdiction, Jersey is offering a completely separate funds regime that lies outside the scope of the AIFMD, meaning that managers who don’t want to access EU capital can benefit from an element of flexibility and market their funds to the rest of the world - just as they do at the moment, using Jersey’s familiar and broad range of fund structures.
This flexibility puts Jersey in something of a unique position. As well as offering a route that offers the same controls under AIFMD that would be offered by an EEA country, at the same time Jersey offers managers the ability to market their funds outside Europe without the need to consider the impact of the AIFMD at all.
Managers can establish all their entities in Jersey and, from one location, meet EU requirements. At the same time, they can serve the rest of the world in a non-AIFMD compliant environment - with potentially lower costs. Offering both will not be available to EU Member States or all IFCs.
Thanks to its approach to the AIFMD, Jersey is in a very strong position as a centre for servicing private equity funds. Wherever a fund’s assets or investors are, Jersey can offer the expertise, capability and experience to administer it.
With the vast majority of alternative fund managers (88% according to Multifonds’ June white paper) indicating they will take advantage of the ‘grace period’ until July 2014, it’s clear that the coming twelve months will be crucial as the AIFMD brand beds down.
However, it is expected that parallel ‘offshore-onshore’ structures will become more common. The same white paper highlighted that 77% of EU managers may choose to set up offshore structures as a result of AIFMD – suggesting that the kind of good value, flexible, robust option offered by Jersey will become increasingly appealing to private equity managers.
By offering a regime that offers a blend of certainty and flexibility, Jersey has taken the opportunity to broaden its scope and appeal as a specialist centre for private equity and, over the coming months, it is anticipated that a growing number of private equity managers with an international focus on both non-European and pan-European funds will turn to Jersey.
This article was first published in Private Equity Manager, Fund Domiciles Guide, November 2013.