Positive signs for Jersey tried and tested model
This article first appeared in PE News' 'Review of the Year' feature.
“Change is the process by which the future invades our lives.” So wrote American futurist, writer and former associate editor of Fortune magazine Alvin Toffler.
As we near the end of the year, it’s a good time to take stock and reflect on how recent widespread global changes in regulation have impacted the private equity landscape, in particular how the EU Alternative Investment Fund Managers Directive (AIFMD) is impacting private equity fund structuring.
2014 was always going to be a challenging year for the private equity community but there are now some extremely positive signs for Jersey’s tried and tested model.
In fact, the value of private equity fund business being structured through the jurisdiction has grown since the AIFMD was implemented, with the total value of funds being administered in Jersey growing by around 5% year-on-year to currently stand at around the £200bn/$330bn mark.
The specific value of private equity assets under administration in Jersey has risen steadily in recent times, almost doubling over the past five years, whilst Europe's largest private equity fund raised in recent years enjoyed its final $10bn closing from a Jersey management platform too.
Undoubtedly the trend evidenced across managers in Jersey this year has been one of building significant future management substance. Carne Group, for example, 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.
Increasingly, private equity managers are finding that private placement 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 of full AIFMD ‘passporting’ compliance.
Recent figures indicate a strong take-up in Jersey's private placement route into Europe. 176 Jersey funds and 49 Jersey fund managers are already actively marketing into the EU with authorisation from Jersey’s regulator under private placement regimes.
This success reflects the broad appeal of Jersey within Europe but also the mixed reception the passport has been given by managers.
The cost of reporting and compliance under AIFMD through the passport, for instance, is a major concern. 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 same research also suggested that only 39% of managers believed that AIFMD would be either ‘very beneficial’ or ‘slightly beneficial’ to their organisation.
In addition, research by IFI Global (‘The Impact of AIFMD’, October 2014) suggested that for a significant number of managers, the AIFMD’s carrot, the passport, was of ‘little’ to ‘no interest’.
Overall, the value and ease of implementation of the AIFMD passport are far from clear, whilst the private placement option is proving a highly credible alternative.
So what’s on the horizon for Jersey in the coming 12 months? The results of ESMA’s recent ‘Call to Evidence’ will certainly be an important next step in terms of AIFMD passporting being extended beyond EU AIFs managed by EU AIFMs. The work that has gone into future-proofing Jersey’s regime, though, means that the availability of an AIFMD-compliant option in Jersey, if and when third country manager passporting commences in the EU, will only add to Jersey’s appeal.
From a fund servicing point of view, as regulatory pressures ramp up the volume and complexity of reporting requirements there is also expected to be a significant opportunity for Jersey’s specialist service providers to support their onshore counterparts by meeting the demand for outsourced administration and governance requirements.
Beyond AIFMD and, as cross border finance grows, so too will the demand for tax neutral capital raising and pooling centres. Private equity managers will need to think carefully about the structures that work best for them. Being ring-fenced from the business risks and distractions of unprecedented levels of EU regulatory creep, non-EU jurisdictions like Jersey, for instance, may well form an increasing part of managers’ considerations in the future.
There has been much change over the past 12 months, but the signs are that, having provided an efficient and familiar, appropriately regulated and tax neutral operational model for the structuring of private equity funds for over 25 years, Jersey will continue to help deliver safe and stable returns for the industry and international investors for many years to come.