Thanks to this forward-looking approach, it remains one of the most robust elements within Jersey’s range of financial services and continues to prosper, despite various challenges throughout 2017.
On the regulatory front, specialist fund centres globally have had to contend with a growing raft of initiatives, from tax reporting measures through to the EU Alternative Investment Fund Managers Directive (AIFMD) and the OECD’s Base Erosion and Profit Shifting (BEPS) project.
Jersey’s funds industry has, however, continued to perform well over the past year, with a number of significant new funds – including the largest ever private equity fund and some of the biggest alternative funds ever launched – making use of Jersey’s stable, tried and tested regime during 2017.
Figures from the Jersey Financial Services Commission (JFSC) show that the net asset value of regulated funds being administered in Jersey last year peaked at just over £291 billion – the highest level ever, surpassing pre-crisis levels – whilst the value of non-regulated funds serviced in Jersey, particularly through Jersey Private Fund structures, continues to rise impressively too.
Alternative asset classes account for more than three quarters of Jersey’s total funds business, with private equity continuing to be Jersey’s largest industry sub-sector representing around a third of alternatives business by net asset value, followed by hedge (23%) and real estate (17%).
Given the ongoing appetite amongst institutional and pension fund investors into these sectors, Jersey is very well placed in these long-term, closed ended strategies. In fact, evidencing Jersey’s resilience and sustained strength in alternative asset classes, a recent study commissioned by Jersey Finance (Analysis of the Jersey Alternative Funds Sector Investor Base) found that levels of funds business in Jersey pre and post the introduction of AIFMD – a Directive that threatened much disruption – was broadly the same.
The global landscape Jersey finds itself in this year, of course is very different from the retail orientated focus of the 1970s and 1980s. Over the years, Jersey’s fund offering has shifted to reflect its specialisation in alternative funds and a need to focus specifically on the needs of sophisticated, professional investors.
The result of this evolution is a full spectrum of fund solutions, from highly regulated funds to lighter touch options for smaller groups of institutional investors. In line with this, Jersey has continued to demonstrate innovation within its funds armoury and focus on its reputation as a forward-thinking funds jurisdiction.
Thanks to the collaborative approach of the regulator, industry and government, this resulted last year in a comprehensive review of Jersey’s funds regime and the ultimate introduction of the Jersey Private Fund vehicle – a structure geared towards the needs of small numbers of professional investors needing a streamlined, quick-to-market option.
This new vehicle has been hugely successful, with more than 100 such structures launched to date – including some very large funds indeed.
Further enhancements and innovations stemming from this holistic review are anticipated this year as Jersey remains focused on supporting managers across the alternatives space.
Particularly in light of the AIFMD – which marks its fifth anniversary this year – market access is of course a key factor in Jersey’s ongoing success.
As a mature alternative funds domicile, Jersey has long found favour with investors around the world and a look at the investor registers of Jersey funds reveals sophisticated investors from a broad cross section of markets: for instance the top five sources of capital committed to Jersey funds, are the UK, US, Ireland, Luxembourg and Canada.
That said, Europe remains an important market – the research ‘Jersey’s Value to Europe’ (2016) calculated that around a third of Jersey funds business touches the EU – and Jersey is extremely well placed to play a pivotal role in supporting non-EU (including, post-Brexit, UK) managers wanting to access EU investor capital.
Private placement into the EU is working extremely well in this AIFMD era, whilst also giving managers an element of operational flexibility without the complications and cost implications of full onshore AIFMD compliance.
Figures from Jersey’s regulator indicate that more and more managers are making use of this option – the number of alternative funds being marketed into the EU in this way has grown 15% annually to 291 and the number of managers by 17% to 149 (December 2017). It is a viable option – stable, cost-effective and it works.
It is future-proof too, as private placement looks set to be around for some years yet and in the long run Jersey has the comfort of having been given ESMA’s recommendation that it should be granted a third-country passport as soon as that becomes available.
At the same time, though, Jersey can also play an important role in enabling EU managers to mitigate the impact of Brexit too. It is a fact that a hugely significant proportion of investors in alternatives are based in the UK and access to the City is just as important an issue for EU managers as access to the EU is for UK managers.
That is why Jersey has been working with regulators, governments and industry to make sure it can offer EU as well as non-EU managers the future-proof environment they need post-Brexit to realise future success, plus we know that Jersey already plays a significant and positive role in that respect. Research by Capital Economics (‘Jersey’s Value to Britain’, 2016) shows that Jersey is responsible for channelling £1 in every £20 of foreign investment into the UK.
Meanwhile, beyond Brexit and the UK, the indications also point to a trend towards global strategies in the alternatives space. Preqin figures (Q3 2017 Updates) suggest, for example, that the proportion of private equity investors targeting vehicles with a global mandate increased from 35% to 41% year on year in 2017.
The future success of fund managers, including those in and outside of the EU, clearly lies in being able to access global markets easily and few jurisdictions, offshore or onshore, are as equipped to deliver that as efficiently and as robustly as Jersey.
The ‘Analysis of Jersey’s Alternative Funds Sector Investor Base’ research, for example, found that, post-Brexit, 72% of capital in Jersey alternative funds will be committed from non-EU countries, reflecting that whilst Jersey is well placed to bridge the UK-EU Brexit gap, it also offers genuinely global opportunities.
As well as being able to provide administration and servicing solutions for managers and advisors, Jersey is also proving increasingly popular as a host to asset managers, confirming its credentials as a jurisdiction of genuine asset management substance.
Driven by the criteria laid out in BEPS, considerations around ‘substance’ are increasingly at the heart of domiciling decisions made by managers and Jersey’s proposition is compelling. Last year, Jersey’s government signed up as an OECD BEPS associate and became one of the first countries in the world to bring the BEPS legislation into domestic law.
However, Jersey’s commitment to substance extends back beyond BEPs. Jersey already has a presumption towards managers being able to demonstrate on the ground substance, whilst the focus is on providing a bespoke alternative funds service, not a commoditised, quasi-retail, service of the type sometimes experienced in onshore domiciles. In light of BEPs, this should give managers some much needed confidence.
Over the last five years, for instance, the community of fund managers operating in Jersey has more than doubled to now include some of the most significant hedge, real estate and private equity fund managers. Notably, Jersey has become the sixth largest hedge fund management hub globally against industry benchmarks.
Importantly, all these managers are undertaking a full spectrum of fund management, risk and portfolio management functions, plus they are supported by a large pool of skilled and readily available staff that are specialists in alternatives.
In addition, unlike certain other jurisdictions, Jersey is able to draw on a sizeable infrastructure of highly experienced and regulated fund service providers to support alternative asset managers, including a broad network of experienced non-executive directors, specialist administrators, custodians and depositaries, all backed-up by an impressively responsive and accessible regulator.
This sort of pedigree means the jurisdiction is well placed to deliver the substance required of asset managers under the BEPS initiative and AIFMD and presents Jersey with significant advantages.
In an increasingly fragmented marketplace, the focus for Jersey is on working with investors and managers to enable seamless cross-border investment to continue. Ultimately, market disruption in any form is in no-one’s interest and Jersey’s focus will be on empowering managers to do what they do best – deliver good returns for investors and put capital to work efficiently and usefully. That must be in everyone’s interest.
We will be doing that by making a real effort to differentiate ourselves in the market. Jersey’s simple and transparent tax neutral environment for funds, ability to demonstrate service quality and genuine commitment to innovation, really does set it apart from other jurisdictions. Ultimately, Jersey offers a highly attractive and non-contentious opportunity for pooling international capital and giving investors and managers the confidence and certainty they need for the future.
Michael Byrne, Chairman, Jersey Funds Association (JFA).
Mike is a Partner and Asset Management leader at PwC in the Channel Islands. He brings together the firm’s offerings for assurance, tax and regulatory solutions to the asset management sector.
Mike specialises in private equity, hedge funds, infrastructure and fund of funds. He has considerable expertise working in Europe and Asia.