Providing Certainty and Flexibility
By Nigel Strachan, Chairman, Jersey Funds Association
After years of build-up and months of analysing the finer points of the Level II implementation measures, the official date for the introduction of the long awaited EU Alternative Investment Fund Managers Directive (AIFMD) – perhaps the most fundamental international regulation ever introduced to impact the funds industry - is upon us.
While EU countries have been bringing the AIFMD into national law, so too are private equity fund managers, service providers and other professionals having to come to terms with exactly what the detail of the AIFMD means to them, and how they need to act in order to ensure they are fully geared up to continue to facilitate private equity business after 22nd July.
What the impact will be in terms of how private equity funds are structured once the AIFMD comes into force is undoubtedly something being considered by all private equity managers, who require a combination of certainty about being able to raise capital for and market their funds into Europe, confidence in the ability to effectively and appropriately service and support their funds, and flexibility in how they can manage their funds should they want to target non-European growth markets.
All of these considerations have formed part of Jersey’s flexible and distinct approach to the AIFMD. In fact, private equity fund managers using Jersey to domicile their funds will actually be presented with a number of fund structuring opportunities as a result of the new regulation.
As a non-EU ‘third country’ for the purposes of the AIFMD but a well-established jurisdiction at the centre of European funds business, the feeling is that the AIFMD will actually enhance Jersey’s appeal to private equity professionals, provide a compelling proposition in response to the considerations outlined above, and affirm its long-term position as a European alternative funds centre of excellence, far beyond this summer’s AIFMD introduction date.
This is important for Jersey, given its persistent strength in the alternative investment funds market. Despite ongoing challenging market conditions, Jersey has continued to demonstrate a significant degree of resilience across its funds sector, with figures up to the end of 2012 suggesting that the global funds industry remains attracted to Jersey.
The value of assets under administration in Jersey stood at £192.8bn as at December 2012 – up around £3.5bn year on year. In particular, alternative asset classes accounted for around 70% of that total value of funds under administration, with private equity fund administration business done in Jersey continuing to perform remarkably strongly.
Maintaining such a healthy funds sector and demonstrating real strength and expertise in alternative funds business – particularly against a volatile economic backdrop - emphasises the positive reaction to Jersey‘s approach to the AIFMD and should give private equity managers some real food for thought in how they structure their funds in a post-AIFMD world.
Jersey’s funds industry, government and the regulator have been, and continue to be, intensively engaged on the AIFMD and, as a result, Jersey is now in a very strong position. By maintaining a ‘business as usual’ approach to funds business within the EU, the overwhelming message is that Jersey is focused on giving the private equity community confidence and certainty.
From July, access to EU markets for Jersey will be through private placement arrangements with individual EU countries, until at least 2018. In order to achieve this, new regulations were introduced in Jersey in April this year, mirroring EU requirements and allowing for the creation of an opt-in regime for managers wishing to market to European investors.
Then in May, Jersey was in the first tranche of jurisdictions for which the co-operation agreement, to be entered into with individual regulators of EEA member states and which will allow Jersey to continue to utilise the private placement route, was approved by the European Securities and Markets Authority (ESMA).
This approach will give private equity professionals the confidence they need that Jersey will provide a seamless transition for facilitating ongoing funds business within Europe this summer.
Beyond private placement arrangements, Jersey is also committed to being fully AIFMD-compliant and obtaining an EU-wide AIFMD marketing passport by 2015 - as soon as it is anticipated such passports will be available for non-EU private equity fund managers. This will have the result that private equity fund managers will be able to market their Jersey-domiciled funds to investors right across the EU.
Jersey is also well on track in this regard, with the new regulations introduced in Jersey in April this year also paving the way for Jersey to have this Europe-wide fully-compliant regime in place ahead of 2015. The AIFMD is all about regulating and authorising alternative fund managers, and this is actually something that Jersey already does, in line with IOSCO standards.
As far as private equity fund structuring in Europe is concerned, Jersey has all the elements in place to ensure this will happen smoothly, with all the comfort, stability and reassurance that the AIFMD brings.
Meanwhile, as a non-EU jurisdiction, Jersey is also able to offer the private equity community a welcome degree of flexibility through a completely separate funds regime that lies outside the scope of the AIFMD - just as it does at the moment - for private equity fund managers who are marketing to the rest of the world and don’t want to access EU capital.
In the current climate, this makes absolute sense – private equity managers are not merely focusing on Europe: they are adopting global strategies and raising capital in growth markets around the world where wealth is being created and investment opportunities are sought after. In a large variety of cases, this means not touching Europe at all, but targeting, for instance, markets in the Far East.
In such situations, using a non-EU but European time-zone jurisdiction that is experienced and has expertise in handling non-European private equity business and that isn’t touched or impacted by AIFMD regulation, such as Jersey, will be attractive.
Combined, all these routes put Jersey is a unique position. It can offer private equity fund managers a route that is absolutely in line with the AIFMD, that offers all the stability and comfort the AIFMD brings and that would be offered by an EU Member State, from a centre that is in close proximity to Europe.
And at the same time, it offers managers the ability to market their funds outside of Europe without the need to consider the impact of the AIFMD at all.
While there has been some speculation that the AIFMD may prompt a migration of fund business away from international finance centres, this is not Jersey’s expectation at all. In fact, a rational analysis of the situation shows that overall Jersey’s position will actually be enhanced by its approach to AIFMD.
Private equity managers will be able to base themselves in Jersey and, from one location, meet all EU requirements while at the same time serving the rest of the world - with potentially lower costs. Offering both will not be available in all international finance centres or indeed in EU Member States.
With this in mind, far from a migration of private equity business away from international finance centres, the expectation is to see continued growth in private equity funds being structured through Jersey.
It may be that more parallel structures will be established in onshore EU markets, for fund managers who need to satisfy overwhelming specific investor demand for keeping a fund onshore - with the potential additional compliance costs that could bring - but this is not anticipated to be in place of funds ‘offshore’, which in Jersey’s case will continue to offer a good value, flexible, robust option to cater for all aspects of private equity business.
In addition, based on its strong track-record of supporting international private equity business, backed up by its approach to the AIFMD, Jersey is also being seen as an attractive centre to relocate to by a growing number of alternative fund managers.
Increasingly recognised for its safe environment, flexible approach, world class legal, accounting and administration supporting infrastructure, and the ‘no-change’ solution it offers private equity professionals, a growing number of fund managers are establishing a foothold in Jersey - seven asset managers have established a presence in Jersey over the past 12 months alone.
Moreover, as the international funds community embarks on the final stretch towards the long awaited July AIFMD implementation date, competition between jurisdictions will only increase, and Jersey is not resting on its laurels. Encouraging fund structuring through Jersey doesn’t stop at AIFMD, and there is a firm focus on continuing to innovate across its fund regimes and responding appropriately to market demands in order to stay ahead of competitors.
Besides AIFMD, for instance, the industry is working with other regulatory changes, such as the US Foreign Account Tax Compliance Act (FATCA) and engaging in the evolving debate on global tax information exchange. At the same time, Jersey’s broad range of fund regimes are kept under constant review - enhancements made to Jersey’s Limited Liability Partnership Law being a recent example.
With the AIFMD shortly to become a reality, Jersey’s hard work and preparation has ensured it is in a very strong position indeed to continue to support the private equity community and remain at the forefront of international private equity business. Managers will have to consider the options most appropriate to them in how they structure their funds but, with the certainty and flexibility it will provide in a post-AIFMD world and the expertise its funds sector can offer, Jersey is a very attractive long-term proposition.
This article was first published in Real Deals magazine's Fund Structuring Guide, June 2013.