SPONSORED FEATURE: Certainty around fund management substance

As was highlighted at last month’s Jersey Finance Annual London Funds Conference, for which Funds Europe was a media partner, 2015 proved to be another strong year for Jersey’s funds industry, with business flows suggesting that the international funds community continues to respond well to Jersey’s approach to market developments.

The latest figures for the Island’s funds industry show that, as at December 2015, the net asset value of regulated funds under administration in Jersey increased to £225.8 billion (€280.8 million), the third-highest level since December 2008.

In particular, the jurisdiction is continuing to assert its strengths in the alternative funds space, with private equity, hedge, real estate and infrastructure funds business accounting for almost three-quarters of funds flows through the Island. Jersey saw some significant fund launches towards the end of 2015 and practitioners are reporting a strong pipeline of business across the alternative asset classes as we head into 2016.

Globally, alternatives are in a strong place. Preqin figures for 2015 show that far more hedge funds launched than closed last year, 829 to 695, and over the first three quarters of 2015 alone, $86 billion was raised for private real estate funds, surpassing the $75 billion raised during the same period the previous year. That this global uptick is now manifesting itself in Jersey is no coincidence.

Now, as panellists at this year’s conference suggested, Jersey is earning a good reputation beyond fund servicing as shifts in regulation and changes in attitudes towards reputation are prompting managers to look closely at their reporting requirements, corporate governance, jurisdictional substance and operating models.

The EU Alternative Investment Fund Managers Directive (AIFMD) and the OECD’s Base Erosion and Profit Shifting (BEPS) project in particular are encouraging managers to reconsider their business models, providing Jersey with real opportunities as a ‘substance’ jurisdiction offering genuine asset management expertise.

The direction of regulatory traffic including AIFMD and BEPS combined with the longer-term macro trend of globalisation and population growth point to a real opportunity for those jurisdictions that can provide robust cross-border investment platforms and demonstrate a mature response to regulatory change. 

This very much plays to Jersey’s strengths and is consequently resulting in a rise in the inward migration of alternative fund managers to Jersey. Some 126 fund promoters now operate in Jersey, representing a 113% increase since 2011, providing evidence of a significant trend towards inward migration of fund managers to Jersey. 

Meanwhile, the value of total funds under investment management in Jersey rose to £21.6 billion at the end of the year, with hedge fund management figures placing Jersey in the top ten centres globally.

There are a number of reasons for Jersey’s ongoing success in alternative fund servicing and rapidly growing management sector, including its close connections with the UK and being subject to more certain economic, political and regulatory conditions than other fund domiciles. Jersey’s desire to embrace technology and fintech is also proving attractive to managers who are faced with increasingly complex due diligence, reporting and efficiency challenges.  

In addition, whilst managers have focused on market access into Europe as a result of the AIFMD, Jersey, as a non-EU ‘third country’, has succeeded in positioning itself strongly, offering a range of options. 

It was pertinent that at this year’s conference, panellists agreed that AIFMD is still considered the biggest regulatory issue for funds professionals but that, while the trend is towards a more exacting regulatory environment, flexibility remains key for alternative managers. 

Jersey is ideally positioned as a result of its existing private placement access and ESMA-verified passporting potential as a third country under AIFMD.

The ‘business as usual’ National Private Placement Regimes (NPPRs) through Jersey to access Europe under the AIFMD is working well, with figures at the end of 2015 revealing that 230 Jersey funds are now being marketed into Europe through NPPRs, a 12% increase compared to June 2015, whilst 104 alternative fund managers had been authorised, up by almost a quarter over the previous six months (24%). 

In addition, it was welcome news that last year the European Securities and Markets Authority (ESMA) recommended that Jersey should in due course be granted an EU-wide passport and more recent announcements from ESMA have also clarified that NPPRs will run in parallel with the passport, once granted, for three years. That Jersey has been recommended in this way is a strong endorsement, positioning it ahead of the field.

At the same time, an ability to offer a ‘rest of the world’ regime outside the scope of the AIFMD is proving crucial, meaning that Jersey is well set up to cater for managers targeting, for example, the rapidly growing Asian private equity, infrastructure and real estate investor markets.

As well as Jersey’s position in relation to AIFMD being a cause of strong appeal for managers, the OECD’s BEPS project has also put the issue of ‘substance’ –  the ability for a manager to be able to demonstrate a genuine physical presence in a jurisdiction – at the heart of the decisions being made by managers. The 15 points set out by the OECD as part of the BEPS project are likely to place a greater emphasis on fund managers in terms of demonstrating substance in the jurisdictions in which they operate.

With an ability to boast a mature infrastructure of fund sector firms and a healthy corporate governance ratio set against its 1,300 regulated funds, Jersey is well placed to help fund managers meet the challenge of demonstrating substance and a fully operational on-the-ground presence. As a result, the direction of traffic in relation to BEPS has the potential to cause a trend towards building future management substance in Jersey, a trend that is already becoming a reality. It’s no surprise that in 2015, 61 GPs were registered in Jersey, compared to seven in 2014 and four in 2013.

The challenges around demonstrating substance prompted by BEPS are being exacerbated by changes to the tax environment in the UK for fund managers, including how carried interest is calculated and whether fund management and performance fees should be treated as capital gains or income. The growing complexity of the tax environment for asset managers is proving to be even more of a reason to reconsider their model and domicile. Again, given its clear corporate and personal tax environment, Jersey can offer greater certainty and is proving an attractive option. 

It is encouraging that the opportunities we set out as part of Jersey’s funds industry growth strategy are now coming to fruition, including the jurisdiction witnessing a significant rise in interest as a centre for alternative fund management business. 

This new world of regulation, led by AIFMD and now BEPS, is proving something of a challenge for some centres, but Jersey’s proactive approach to transparency, governance, compliance, reporting and substance is positioning it strongly as a sustainable fund servicing and management centre. There is clearly real confidence in Jersey’s platform and as a result, this inward fund manager migratory trend is expected to continue.

Geoff Cook is CEO at Jersey Finance

©2016 fund europe



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