This article was first published in Real Deals, 4 December 2014.
With the transitional phase for implementing the EU Alternative Investment Fund Managers Directive (AIFMD) having finally come to an end this summer, there has been a marked rise in analysis, and some speculative comment, in recent weeks about how it is bedding down in different jurisdictions, what the regulation has meant as far as fund structuring is concerned, and how private equity managers are managing the regulation most effectively.
From a Jersey perspective, far from the AIFMD prompting a re-domiciliation towards onshore locations, something that had been suggested by some corners of the European funds community, 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, compiled by the Jersey Financial Services Commission (June 2014), show that the total value of funds being administered in Jersey has stayed consistently high, around the £200bn/$330bn mark. Private equity forms a substantial amount 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.
Further reflecting the confidence there continues to be in Jersey as an alternative funds domicile, in the real estate funds sector, values under administration in Jersey have grown to their highest since pre-crisis levels.
Moreover, Europe's largest private equity fund raised in recent years enjoyed its final $10bn closing this year from a Jersey management platform, whilst the second largest real estate fund ever to be listed on the London Stock Exchange was structured through Jersey this year and was just two of a number of recent high value Jersey fund launches.
Far from European regulation, including AIFMD, causing a movement away from offshore centres, undoubtedly the trend evidenced across managers in Jersey is one of building significant future management substance.
A number of major alternative fund houses have moved to or expanded their presence in Jersey recently, such as Brevan Howard and Apex Fund Services (Jersey) Limited.
Having opened an office in Jersey in June this year, Carne Group recently received authorisation for an independent AIFMD-compliant management company in Jersey, which is 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 Jersey 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.
Thanks to its approach to regulation and specialist alternative fund expertise, Jersey is affirming its position as a leading domicile for European private equity business, including structuring and servicing, both in spite of and as a result of the AIFMD.
The first few months of AIFMD being in play have thrown up some interesting issues. Perhaps of particular interest from a private equity manager’s point of view is the idea that the much hallowed pan-European AIFMD ‘passport’ is not automatically the most suitable choice. Contrary to what some onshore commentators suggest, the private placement option is gaining real traction and providing managers and investors with some real, practical benefits.
Increasingly, private equity 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, 176 Jersey funds and 49 Jersey fund managers are already actively marketing into the EU with JFSC authorisation under private placement regimes.
Additional data also shows that the UK remains a key market for Jersey managers and, in indicating which EEA Member States they intended to market into, most managers licensed to carry on fund services business in Jersey say they intend to market their funds into the UK. The fact that the UK remains such a key market is not surprising, given its strong links with Jersey. With the UK Treasury confirming its national private placement regime will be in place until 2018, Jersey will continue to benefit from certainty of access to the hugely important UK investor market.
Interestingly, however, the next most important intended markets for Jersey managers were Sweden, Belgium, the Netherlands, Ireland, Denmark, France, Germany and Luxembourg.
Overall, this is a considerable success, reflecting the broad appeal of Jersey within Europe - but it 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.
Further, the cost of reporting and compliance under AIFMD through the passport, and the possibility of those costs eating into investor returns, remains a major concern. Research by BNY Mellon and FTI Consulting (July 2014), for instance, 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 actual value of the AIFMD is being questioned too. The BNY Mellon/FTI Consulting research also suggested that only 39% of managers believe that AIFMD will be either very beneficial or slightly beneficial to their organisation, and the same proportion of respondents believe end investors will benefit from AIFMD.
As far as the European fund structuring landscape is concerned, the IFI Global research reveals that managers hold the general view that AIFMD will not require them to change the domiciliation of their funds, and suggests that, whilst the European alternative fund industry is going through a period of substantial structural change, whether that is down to the AIFMD is debatable.
What the AIFMD will prompt, the research says, is for the European alternative fund industry to become even more institutionalised than it is today, with fewer independent alternative managers left in the EU with AUMs below $1 billion by 2020. The indications are that boutique managers cannot see any real advantages to AIFMD, with a number of them indicating that they might move to centres outside Europe. In such circumstances, Jersey can offer a cost-effective base with European market access guarantees.
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.
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 the statistics suggest the offshore model will continue to serve managers extremely well in the long term.
Of course, there is a real need now for private equity managers to move on from a period of intense focus on AIFMD and consider longer-term market developments. 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.
From a private equity servicing point of view, there is expected to be significant opportunity for Jersey service providers to support their onshore counterparts as regulatory pressures, including AIFMD, ramp up the volume and complexity of reporting requirements.
Onshore managers are already looking to outsource their administration and governance requirements to dedicated specialists, and Jersey, with its sophisticated network of highly experienced administrators, is ready to meet that demand.
What is encouraging from Jersey’s perspective is that, whilst there has been a noticeable rise in alternative funds being structured through Jersey targeting UK and continental European assets, this has been accompanied by a growing number of promoters making use of Jersey for funds targeting assets and investors in non-European growth markets around the world.
Thanks to its approach to regulation and alternative fund expertise, Jersey is not only affirming its position as a leading domicile for European funds business, but is also strengthening its appeal as a European time-zone centre for global private equity, real estate, infrastructure and hedge fund structuring and servicing.
Growth markets are continuing to offer opportunities from both an asset and investor point of view. India and China will soon resume their places as the largest economies in the world, whilst seven of the ten fastest growing economies of the last few years have been African. A recent PwC asset management survey indicated that the global asset management industry will grow from $65trn to in excess of $100trn by 2020, and that alternative investments will grow from $6.5trn to over $13trn.
Further, a report commissioned by Jersey Finance and published by Capital Economics last month also highlighted that Africa has the opportunity to quadruple living standards by 2040, but to do so it will need to find $11.4 trillion in extra investment over that period. Whilst the report estimates that only around 48% of that can be plugged by a combination of aid, domestic profits and local governments, the remainder, $6.1 trillion, will have to come from foreign direct investment.
By providing protection for investors, expertise and experience, efficient cross-border investment pooling, efficient and robust regulation and tax neutrality, Jersey is well placed to make an important contribution to the economic growth Africa needs. There are clear opportunities for private equity structuring through Jersey against this backdrop.
For this reason, Jersey’s ability to offer a regime that is fully outside the scope of the AIFMD has been crucial, positioning it strongly to cater for a rise in the number of funds targeting growth markets across Russia, Africa and Asia.
Law firm Mourant Ozannes, for instance, recently provided Jersey advice to CVC Capital Partners on the launch of its latest Asia Pacific Fund, which raised $3.5 billion to invest in the Asia Pacific region.
And earlier this year, Appleby’s Jersey office advised on two landmark UK property transactions with a combined value of £2.5bn, both involving Asian investors - Blackstone’s sale of its interest in the Broadgate Estate to Singaporean sovereign wealth fund, GIC, one of the largest real estate transactions in UK history; and the sale of Blackstone’s beneficial interest in the Chiswick Park Estate to the China Investment Corporation (CIC).
As cross border finance grows, so too will the demand for tax neutral capital raising and pooling centres. With its flexible regulatory regime, structuring expertise, respect for the rule of law, use of a common business language, time zone convenience and protection of property rights, Jersey is extremely well placed to meet this demand, both within and outside of Europe.
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.
Where Europe is concerned, before private equity managers jump aboard the passporting juggernaut, careful consideration of the options available is required – 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.