Jersey doesn’t appear to be sweating on EU regulations that ring-fence outsiders from accessing EU private equity investors. Jersey Funds Association head Nigel Strachan tells Nicholas Donato the offshore financial center’s confidence stems from offering GPs a menu of oversight options.

Situated just off the coast of France on the edge of the English Channel is Jersey, the largest of the Channel Islands and whose sophisticated and comprehensive infrastructure of laws has been attracting fund managers from Paris, London, Frankfurt and other EU financial hubs to its nearby shores for some years.

Jersey began building its reputation as a fund domicile in the late 1980s by offering a regulatory regime more in line with industry needs.

“Jersey was offering a limited partnership that placed no cap on the number of limited partners at a time when the UK partnership structure was limited to 20 investors,” says in an interview with PE Manager Nigel Strachan, chairman of the Jersey Funds Association (JFA), the association for the island’s funds industry.

London would eventually lift its LP cap to remain competitive, but Jersey’s flexible approach towards fund registration and supervision preserved its popularity with private equity managers.

Enhancing its status as a fund domicile was the need for GPs to find a jurisdiction that offered investors from all around the world “a tax neutral platform”, says Strachan. Firms including CVC Capital Partners, Nordic Capital and Axa have all domiciled funds on the island. As of last year, the net asset value of funds under administration in Jersey stood at roughly £200 billion (€235 billion; $308 billion), with ‘specialist funds’ like hedge, real estate and private equity representing about 70 percent of the overall total, according to JFA statistics.

But over the past three years fund managers have been mulling another major consideration when selecting their next fund’s domicile. The Alternative Investment Fund Managers directive, due to take effect 22 July, will subject EU fund managers to a new era of oversight and regulation. The question for many has been whether a fund setup offshore would have a difficult time entering the market as a ’third country’. For Jersey, the concern was losing business from GPs that predominantly fundraise in Europe but domicile their funds offshore.

“Thanks to the flexible and distinct way Jersey has approached the AIFM directive, however, private equity fund managers using Jersey to domicile their funds will actually be presented with a number of opportunities as a result of the new regulation,” says Strachan when asked about this concern.

RESPONSE TO AIFM

So how did Jersey turn a potential shutout from Europe into an opportunity? Jersey’s response to the AIFM directive has been to create a multitier regulatory framework that accommodates both fund managers subject to EU regulations and those who want to continue “business as usual”, Strachan explains.

“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.”

To satisfy the directive’s requirements, Jersey recently had a cooperation agreement approved with EU market regulator the European Securities and Markets Authority (ESMA). The agreement enables fund managers using Jersey to continue to market into Europe through private placement rules until at least 2018 – the time when EU sovereigns may need to scrap their non-AIFM approved marketing routes.

The cooperation agreement, approved on 22 May, will give both EU and non-EU regulators permission to supervise fund managers that operate on a cross-border basis both within and outside the EU.

Individual cooperation agreements must still be signed with national regulators from each EU country.

“The difficulty here is that we don’t know what each EU member state approach will be – so France is different to Germany, but we certainly know for the UK that the private placement option is open come this July,” says Strachan.

Nonetheless Strachan believes that Jersey’s agreement with central EU authorities will help facilitate conversations with national regulators. “The member states' regulators would have been unlikely to enter into the agreements without ESMA approval, so the focus can now shift to them to see if they have any further points they want to raise.”

And of course fund managers who need not, nor wish to, comply with the directive can continue to draw on Jersey’s multitier regulatory framework and use vehicles that lie outside the scope of the AIFM directive.

“One of the key strengths in Jersey is the range of regulatory options that you can opt for,” says Strachan.

Fund managers with less than 15 investors can operate entirely unregulated, aside from obtaining consent from the Jersey Financial Services Commission to issue securities. “The idea here is to provide GPs looking to establish a track record the chance to invite a small group of sophisticated investors to partake in their first fund,” says Strachan.

Funds with a wider offering (of up to 50 investors) can make use of a light-touch regulation regime that still allows GPs to be up and running in as little as three days. The regime is only available to “sophisticated” or “professional” investors who understand the risks of private equity investing, says Strachan. LPs under this approach must commit a minimum of £250,000, and the fund promoter must receive the blessing of a licensed fund administrator on the island before accepting investments.

A third option for funds with more than 50 investors is a vehicle comprised solely of so-called “expert investors”, who sign agreements stating that they understand the risks involved in their investment are able to bear any losses the fund experiences. “These are typically institutional investors or very wealthy individuals who have less need for government protection,” says Strachan.

“Combined, all these routes put Jersey in a unique position. It can offer private equity fund managers a route that is absolutely in line with the AIFM directive, with all the stability and comfort the directive brings, from a centre that is in close proximity to Europe,” says Strachan. “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 AIFM directive at all.”

Clearly the JFA feels Jersey is well positioned to continue attracting fund managers from both within and outside the EU in a post AIFM directive environment. It’s hard to imagine that same level of confidence just one year ago when the directive’s final language was far from certain. But with further AIFM rulemaking completed, and a cooperation agreement with EU regulators in place, Strachan says Jersey is “well prepared” for monumental private equity regulation being implemented just a few miles from its shores.

‍

This article was first published in Private Equity Manager magazine, July 2013.