The influx of institutional money into alternative investment managers – such as private equity, hedge funds and real estate – shows no sign of abating. Data from Preqin indicates private equity Assets under Management (AuM) stood at $3.8 trillion as of June 2014 (inclusive of private real estate and infrastructure funds), an increase from $3.5 trillion in June 2013. Meanwhile, hedge funds are currently managing a record $2.85 trillion, according to figures from Hedge Fund Research.
This is projected to increase with Credit Suisse's latest annual investor survey predicting the industry will surpass the $3 trillion mark by year-end 2015. Institutional money – predominantly from public and private pension funds – is flowing into alternatives as many of these investors struggle to meet return targets and close the gap on their ever growing liabilities and deficits. As such, alternative investment managers appear to be an attractive option for these return-hungry allocators.
This growing investment into various alternative asset classes is something that will undoubtedly benefit Jersey, as a leading offshore fund domicile.
Domiciling a fund vehicle in Jersey has numerous advantages. One of the main drivers of Jersey's success in the private equity, real estate and hedge fund world is its depth of seasoned and expert service providers, particularly fund administrators, auditors and law firms, which are well-versed in the multifarious challenges that face managers with the benefit of decades of experience, acquired through both strong and difficult economic cycles. Such diversity among service providers helps us cater to an array of asset classes including infrastructure, debt, credit, fin tech and renewable energy funds. This abundance of talent – coupled with Jersey's geographical proximity to, and shared central global time-zone with, London, home to the majority of Europe's alternative asset managers – is encouraging a growing number of managers either to re-domicile to, or establish management subsidiaries in, the Island. This is evidenced by the 46 per cent increase in hedge fund managers establishing in Jersey over the course of 2014. High-profile examples include Brevan Howard and Blue Crest. Meanwhile, there was strong growth in real estate AuM (an increase of 32 per cent) and steady growth in private equity (a five per cent increase) in Jersey over the last year, further cementing Jersey's reputation as a leading offshore fund domicile with real substance.
This growth cannot solely be explained by the high-quality of the service providers on offer. Jersey prides itself on having flexible and easy- to-navigate regulatory and tax regimes. Unlike some other offshore jurisdictions, Jersey's regulatory system offers flexibility in tune with the varying requirements of institutional investors, many of whom have struggled to invest in other offshore vehicles because of their perceived lack of regulatory oversight or in onshore vehicles because of stifling regulatory. Jersey has long been a proponent of rigorous corporate governance standards and oversight so as to protect the rights of investors and shareholders – a feat that stands it apart from other jurisdictions who are now playing "catch up".
Another example of well-thought out regulation in Jersey is the Private Placement Fund regime, introduced in January 2013, which enables privately placed funds marketing to fewer than 50 professional investors to set up their business in a streamlined manner, with regulatory approval often granted in 72 hours. Meanwhile, requirements outlined in the Expert Funds regime can be adopted by managers making a wider offering to expert investors and who wish to fast track their repeat fund launches. There is a lighter regulatory regime still for Very Private Funds targeting fewer than 15 professional investors (perfect for club, joint venture or co-investment activity). Again this multi-regime approach is something that has won Jersey plaudits among numerous alternative investment fund managers. Firms ultimately benefit not only from the flexibility applied to the regulation of fund products but also the rigour of the underlying regulation of the Jersey service providers.
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The Alternative Investment Fund Managers Directive (AIFMD) is having a profound impact on how some managers of alternative investment vehicles who are located or marketing in the EU run their businesses – be it the appointment of a depositary bank subject to strict liability, or some of the requirements around remuneration, use of leverage or marketing. In short, Jersey offers the best of both worlds for fund managers. For Jersey-based managers that raise money from non-EU investors and do not actively market in the EU, Jersey remains outside the regulatory parameters of the Directive. Alternatively, for managers hoping to attain some of the marketing benefits either through the pan-EU passport or via the national private placement regimes, Jersey is also an attractive management location. Jersey managers can still privately place their funds into EU member states whilst complying with minimal AIFMD disclosure and reporting requirements.
Should such managers wish to avail themselves of a cross-border EU marketing passport under AIFMD by operating in full compliance with AIFMD (an option which should become available to non-EU managers in the months to come), Jersey was one of the first third countries to implement an optional regulatory regime entirely equivalent to that of AIFMD.
The big question is whether the private placement option is extended or scrapped beyond 2018, and subsequently replaced entirely by the pan-EU passport option, when made available to managers of non- EU funds. As one of the first mover non-EU countries to mirror Directive requirements as a regulatory option in its local law, Jersey does stand at a competitive advantage to other non-EU countries, some of which have yet to demonstrate such technical equivalence. The likelihood of the European Securities and Markets Authority (ESMA), which is currently consulting with the European Commission on the passport's extension,shutting out equivalently regulated third country managers would lead to accusations of "fortress EU" protectionism. As a leading global fund domicile Jersey is systemically important, home to a significant number of funds managing money on behalf of some of the EU's largest institutional and pension fund investors, most of which is invested back in the EU. Depriving those investors of access to Jersey alternative fund managers and depriving the EU of that important source of capital would likely lead to a predictable chorus of criticism from institutional investors, particularly given the low yielding returns prevalent in other traditional asset classes.
Irrespective of the final outcome of ESMA's consultation – which is due later this year – Jersey does offer enormous potential for fund managers whose activities do not give rise to AIFMD impact, as well as those hoping to embrace its potential marketing benefits.
Jersey one of the first third countries to implement an optional regulatory regime equivalent to that of AIFMD
One of the biggest challenges facing fund managers now is the Organisation for Economic Cooperation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) action plan initiative in what is driven by a clampdown on tax avoidance by multinational corporations. While the draft rules exempt collective investment vehicles (CIVs) – defined as regulated funds such as UCITS - those exemptions do not (yet) extend to non-CIVs, which the OECD views as unregulated products such as non-retail hedge funds and private equity funds. Action six of BEPS, which is focused on treaty abuse, is likely to have the most impact on fund vehicles insofar as it will facilitate a clamp-down on treaty shopping and focus on taxing entities where their substantive activities actually take place.
As a small jurisdiction focused on successful financial services activity Jersey prides itself on being able to offer a simple and tax-efficient environment for funds business but it also requires its fund managers to have real local substance. The management of regulated alternative funds in Jersey has long been substantively run from within the Island by a majority of experienced, locally resident directors, only appointing external advisors where needed, all of which showcases to international regulators and tax authorities that Jersey is the very opposite of a "brass plate" domicile for fund structures whose core management activities are delegated elsewhere. This is not the case with all other offshore or even onshore jurisdictions, many of which have run a minimum local substance model or have relied on complex and contrived taxation treaty or exemption arrangements to attract fund management business. While it is too early to hypothesise the course of action which these rule changes will take, we firmly believe that Jersey is well positioned to meet the challenges they will bring.