Jersey Finance has just opened a New York office in Avenue of the Americas, only a few miles away from New Jersey, which celebrated its 350th (sesquarcentennial) anniversary in 2014. New Jersey was part of a territory previously called New Netherland, renamed after the birthplace of its ruler, Vice Admiral Sir George Carteret, by King Charles II in gratitude for Jersey offering the monarch asylum during the English Civil War. Today the relative political stability of Jersey is held to be an attractive alternative to the polarisation and populism seen in politics elsewhere.
Philip Pirecki heads up Jersey Finance’s New York office. Pirecki, who is a Jerseyman – though you might not guess this from the American accent he acquired during formative years spent in Chicago – says: “Jersey is already very well known in the US for private wealth management and trust planning, and is now considered by US asset managers as a fund domicile”. Indeed, assets raised by US promoters using Jersey domiciled vehicles have shot up 148% over the past five years and are now the second largest source of fund promoters (after UK-based ones), according to the 2018 Monterey Insight Jersey report (the 24th such report). “New York is the ideal office location for us because roughly half of US asset management AUM are managed in the Tri-State area of New York, New Jersey and Connecticut,” says Pirecki, who has forged a career in the alternative investment industry, latterly as a director of both funds and operating companies.
Currently, most Jersey-domiciled funds are running alternative investment strategies, including real estate and private equity, which together make up nearly $200bn of assets. Jersey is home to around $411bn of assets in fund structures, at an all-time high and up 19% year on year, according to the Monterey report (these figures exclude a number of funds including pension funds, managed accounts, securitisations and Jersey Very Private Unit Trusts (JVPUT)). There are 1,161 Jersey domiciled funds running $279.2bn and another 560 non-Jersey domiciled funds running $131.9bn. “There is also $780bn in corporate structures,” says Elliot Refson, Director of Funds at Jersey Finance in St Helier, Jersey. In total, including administration, trustee and other business, Jersey acts as an intermediary for a total of circa £1.3trn (circa $1.6trn) of assets, including assets held in funds, company, trust structures and other vehicles, according to Capital Economics’ 2016 report, “Jersey’s Value to Britain”.
“Jersey is an alternative to Caribbean domiciles traditionally used by US managers for offshore funds,” says Pirecki. “We speak the same language, our time zone overlaps with half of the US working day, and our way of doing business should be very familiar to US lawyers. It is possible to create a Jersey feeder fund that feeds into a US master fund, in a similar manner to other well-known offshore/onshore master/feeder structures. This can be done in as little as six weeks (or just 48 hours for a Jersey private fund), whereas some onshore locations may take months to approve certain types of structures,” he adds. Firms may set up or make use of a fund, or a management company, or both, under different models and structures. For instance, a Jersey manager could act as an Alternative Investment Fund Services Business (AIFSB) for the purposes of marketing funds domiciled elsewhere, such as Cayman funds. It is possible to find administrators providing a “one stop shop” of accounting, administration and director services; or separate providers can be selected for different functions. “We have a deep pool of technical expertise,” says Pirecki. Jersey service providers include fund administrators, transfer agents, auditors, custodians, legal advisers, and directors. “This year my priority is talking to law firms in New York about what Jersey can offer. Canada and South America are on the radar longer term. We want to educate local lawyers so that Jersey is always part of the conversation,” says Pirecki.
Some of the largest Jersey domiciled funds include the SoftBank Vision Fund and Nordic Capital’s funds. Jersey is also home to private lending, ESG/SRI strategies and was one of the first jurisdictions to regulate cryptocurrencies, where local asset managers include Danny Masters’ Global Advisers, and Lewis Fellas’ Bletchley Park Asset Management. The Binance cryptocurrency exchange is also based in Jersey. Managers and family offices located in Jersey include some of Europe’s largest global macro and CTA managers such as Brevan Howard and Systematica. “Managers located in Jersey have mainly come from the UK or Switzerland and we are seeing increasing interest from the US,” says Refson. Jersey has around 20 hedge fund managers based on the island.
Distribution in Europe irrespective of Brexit
Various memorandums of understanding (MoU) between the UK FCA and other European regulators are intended to allow for some degree of continuity, generally for between one and three years, after any “hard Brexit” scenario. For instance, a transitional agreement – the Temporary Permissions Regime (TPR) – will allow EEA AIFMs and AIFs that currently use “passports” to continue distributing in the UK for two years after Brexit. But some managers may need another solution for when these MoU expire – and others may only just be mulling over asset raising in Europe for the first time.
Jersey is outside the European Union and the European Economic Area (EEA), and as such, Jersey Finance does not expect Brexit will change the way in which its funds are distributed. As non-EEA entities, Jersey-domiciled funds predominantly make use of the National Private Placement Regimes (NPPRs) to raise assets in the majority of EU member states, and of course the UK; the UK’s NPPR should not change after Brexit. The UK NPPR is user friendly: applications and confirmations are by email and the fee is £250 per application and £500 annually. Other national regulators charge fees which range from zero in some countries, such as Ireland to thousands of Euros per year in others such as Germany. Law firms will often assist with NPPR applications. Some countries’ NPPRs have additional reporting requirements and Jersey service providers are experienced at meeting these. Some 172 Jersey managers market 310 funds into the EU using the NPPR, as of June 2019. They include industry giants such as CVC, Nordea, Permira and BlackRock and much newer firms such as credit manager, Kennedy Wilson, which featured in The Hedge Fund Journal’s 2019 ‘Tomorrow’s Titans’ report on rising star hedge fund managers.
Jersey has signed cooperation agreements with most EU member states to expedite access to NPPRs. It has not signed agreements with Spain, Italy, Slovenia or Croatia (but even here, some funds have historically availed themselves of reverse solicitation to raise assets in Spain and Italy, according to case studies on the Jersey Finance website). Importantly, NPPRs work well in two of the largest markets for alternative investments – the UK and the Netherlands, while Switzerland, which is outside the EU, has its own regime, which Jersey-domiciled funds have also availed of (the costs of a local agent might range from around 5,000 to 30,000 Swiss francs per year). Jersey Finance argues that with some 97% of EU funds being distributed in three or fewer countries, NPPRs can be a more efficient option than an onshore structure for AIFMD or UCITS passporting. NPPRs also avoid the need to publicly disclose remuneration of partners and key staff under AIFMD or UCITS. Nonetheless, Jersey Finance acknowledges that an onshore passporting solution may make more sense if funds need to distribute in a large number of EU states, and/or those such as Spain or Italy where private placement is not possible. Additionally, some managers run an onshore fund parallel to a Jersey one.
ESMA’s decision on third country AIFMD passports has been delayed, but if this does ever reappear on the agenda, it is worth remembering that Jersey was one of five domiciles that received a positive assessment in ESMA’s initial assessment, which stated: “There are no significant obstacles impeding the application of the AIFMD passport to Canada, Guernsey, Japan, Jersey and Switzerland,” in July 2016. If this assessment was also used as the basis for any future decision on third country passports, Jersey should be “future proofed” (and anyway, private placements can continue to be used for three years after a third country passport comes in). Jersey is up to speed with many international standards. As well as the imprimatur of ESMA, Jersey has positive assessment from the IMF, is a member of the International Organization of Securities Commissions (IOSCO) and the Financial Action Task Force (FATF). In common with most major IFCs, Jersey is classified as a cooperative jurisdiction by the EU’s Code of Conduct Group.
Germany and Denmark
Germany and Denmark require a “depo lite” or depositary lite for marketing. “The depositary duties are to carry out safe keeping of custodial assets (where held at any time during the life of the fund, for example post an IPO), record keeping and ownership verification of non-custody assets, daily cash flow monitoring and on-going oversight (of the valuation process, capital inflows and outflows, compliance with laws and regulations, and investment restrictions). Whilst aspects of this such as cash flow monitoring are less onerous for private equity or real estate funds that may only make a small number of investments than it would be for trading funds, other aspects such as asset verification can be substantially more complex. “A typical fee would be around £30,000 a year and we could charge a flat fee for a closed end fund. INDOS Financial currently acts for two Jersey-domiciled funds marketing into Germany or Denmark: a debt fund lending to SMEs and a venture capital fund. Our independence from other service providers of the fund also strengthens the fund’s governance model,” says INDOS founder, Bill Prew. “Unlike some other providers of depositary services, we are happy to work with managers without a contingent or abort fee, for example in situations where the depo function is ultimately not required if assets are not raised from German or Danish investors,” he adds. “The process of registering with the German or Danish regulators might take around three months,” according to Prew.
Distribution outside Europe
Jersey funds are also marketed in Asia, in places like Hong Kong and Singapore; the Middle East, in places like Abu Dhabi and Dubai, and Africa in places like South Africa. Jersey was the first IFC to open an office in Dubai’s International Financial Centre (DIFC).
Tax and substance
For managers with operations and staff in Jersey, there is no VAT or local sales tax and income tax is a flat 20% up to £725,000, and 1% on top, for those who are approved under the high value residency scheme. There is no capital gains tax on funds. Jersey is tax neutral at the fund level and like most other IFCs, it does not have double tax treaties. “Managers who need to avail of DTTs, to reduce withholding taxes on dividends or coupon, will typically use an onshore structure, perhaps in Luxembourg, linked to a Jersey fund,” says independent fund director, Peter Rioda.
Jersey’s new substance legislation is a natural step in its multi-decade evolution as a jurisdiction of substance, keeping pace with developing international norms. For instance, in 2017 Jersey was the third jurisdiction globally to domestically ratify the BEPS agreement, in relation to the OECD’s BEPs project. The new substance laws – Taxation (Companies – Economic Substance) – came into force in January 2019, in sync with other UK Crown Dependencies, and some other IFCs, in response to the EU Code of Conduct Group for Business Taxation, which recognizes Jersey as a cooperative jurisdiction. The first reporting period will be for calendar year 2019 tax returns, which are submitted to Jersey tax authorities in late 2020. “The law codifies what was already viewed as best practice,” says Refson. A serendipitous consequence of legislation originally designed to foster employment in Jersey has been that the island was well prepared for subsequent laws on substance. “Everyone is pretty confident about meeting the criteria as they were largely compliant already,” says Rioda. “The history of Jersey’s financial industry has been one of substance, as companies and funds sought domiciliation or residency for tax purposes. For over 30 years, we have looked to the UK rules, which determined residence based on where management and board meetings set strategy. There were no real surprises in the new laws, but a gap analysis for different types of companies may identify some changes that need to be made. These could include documenting in more detail where strategic decisions are made and where people were located during company and board meetings.” Pirecki concurs, saying, “board meetings done in person not by phone can be more productive and effective”.
The substance laws introduce the concept of Core Income Generating Activity (CIGA), which varies according to the investment strategy. “If a quantitative or high frequency trading fund is making thousands of trades each year, then the location of a single trade is hardly pivotal – and therefore could come from outside Jersey. But if a private equity or real estate fund only makes 10 or 15 investments over its entire life, these decisions should be made in Jersey,” Rioda explains. Reporting is also classified as a CIGA and can be outsourced.
“There is plenty of scope to delegate and outsource some functions to other service providers inside Jersey, but limited scope to do so outside the island,” he says. There is a strong bench of experienced directors and risk management, administration and compliance experts.
The rules in Jersey have been developed in close cooperation with other crown dependencies, and there should be a level playing field: the Jersey Government Q&A explicitly states that there should not be any “regulatory arbitrage”.
New legal structures
Jersey is confident, but is far from complacent and realises it will need to keep abreast of new trends to stay relevant. It has one of the least complicated legal and regulatory systems in the world and can devise new structures faster than some other jurisdictions. “Our competitors are not going away, and our focus is on building commercial bridges with many nations to add a complementary, alternative option for managers,” says Refson. Jersey takes pride in being responsive and innovative on legal, company and fund structuring, and readers should watch this space for new corporate and fund structures that are designed to be both familiar and user friendly for alternative asset managers – particularly in the US market as Jersey looks to draw on its New York office and establish itself as a key gateway to Europe”.
The article can be read in situ here.