It’s ten years this month since the Alternative Investment Fund Managers Directive (AIFMD)was implemented across the EU. But what has been the impact on the alternatives landscape from Jersey’s perspective of a regulatory framework that was borne out of the 2008 global financial crisis and has played a significant role in shaping today’s cross-border funds industry?

When the AIFMD was introduced across EU Member States in 2013, it formed part of a global trend amongst regulatory and political authorities to increase regulation with a view to shore up market stability and protect investors, against the backdrop of the global financial crisis.

In the years leading up to the introduction of the AIFMD, there was a huge amount of industry consultation and debate around what the regulation might mean for cross-border funds and non-EU jurisdictions – debate that to some degree continues today.

A decade ago, there were frequent discussions, for instance, around whether and how non-EU managers would be able to market to EU investors and what that might mean for structuring. For some years, there were whisperings of a ‘passport’ being extended to non-EU third countries based around criteria of equivalence – with Jersey, as a non-EU jurisdiction, being high on the list should that option ever become available.

Ten years on, that passport option has not materialised. What has materialised however, is a Jersey funds sector that is thriving and buoyant, not in spite of the AIFMD but in part because of it.

Flexibility

A large part of this success is due to just how well the National Private Placement Regime (NPPR) has worked in practice – a marketing mechanism whereby alternative funds can be marketed to EU investors based on specific agreements with individual EU Member State authorities.

While ‘onshore’ EU funds are subject to the full scope of the AIFMD, for example, Jersey funds are not. Having to subject a fund to the full scope of the AIFMD rules comes with significant cost, whereas flexibility and speed to market are all advantages enjoyed by utilising NPPRs.

“The private placement approach has been something of a lightning rod for the Jersey funds industry,” explains Michael Johnson, Chair of the JFA. “It’s proven to work extremely effectively, offering quick and easy access to EU capital without the regulatory burden of complying with the AIFMD in its entirety.”

In scenarios where managers are needing blanket access to EU Member States, private placement is not necessarily the right choice. But the fact is that this is rarely the case.

"The reality,” says Elliot Refson, Head of Funds, Jersey Finance, “is that 97% of managers market into only three Member States or less – that’s backed up by figures from the EU Commission. Where that’s the situation, opting to go onshore, therefore, merely adds to ongoing costs and increases the regulatory burden disproportionately.”

The private placement alternative through Jersey, in contrast, is far more flexible and cost effective. This is a message that has resonated well with managers not just with their eye on EU capital but also with a global outlook.

There are currently, for example, more than 200 non-EU managers marketing their funds into the EU through private placement via Jersey – a figure that has grown by around 60% in five years. Specifically, the number of US-originated fund structures serviced through Jersey has grown 61% while the value of fund assets under management has risen by 22%, according to Monterey. It’s an indication of the appeal of Jersey’s platform as a gateway to Europe.

Jersey has accelerated that growth not by sitting back but by introducing complementary structures; half a decade ago we introduced the Jersey Private Fund (JPF) which allows up to 50 investors to establish a fund in under 48hours. Working effectively under private placement rules, it has become a go-to structure so much so that there have been more than 635 formed.

More recently, the jurisdiction introduced its own Limited Liability Company (LLC) legislation modelled on regimes in Delaware and Cayman - which offers its own legal personality and the option of attaching body corporate status - providing familiarity and certainty for US and other global fund managers. Again, the LLC works well with private placement criteria for managers wanting to target EU capital.

“It is this willingness to innovate, to stare down challenges and grasp opportunities that has led to Jersey’s position today where we are seeing record inflows of assets under management, with a sizeable 142% increase in a decade,” adds Joel Hernandez, Deputy Chair of the JFA.

All this is good for the EU market too – it opens up multiple options for EU investors, enabling seamless and effective connectivity between the EU and global markets, keeping high quality EU and global capital moving, generating growth and opportunity.

Reflecting on the past ten years, it is perhaps the ‘high quality’ bit here that is most important. At the outset, AIFMD was intended to protect investors. Alongside the onshore EU fully AIFMD compliance option, which will be the solution for certain managers, Jersey’s private placement option has established itself over the past decade as a key part of the modern European alternative funds infrastructure, helping to achieve that aim of investor protection and market integrity while at the same time driving high quality capital to where it is needed most.