Fund finance is growing in Jersey. As an international financial centre (IFC) of choice for global investments primarily into the UK and Europe, Jersey is home to regulated funds with aggregate net assets under management of approximately £458 billion (June 2022).
CONTINUED RISE IN FUND ASSETS IN JERSEY
The continued rise in assets under management reflects Jersey's increasing popularity as a funds jurisdiction and, in particular, as a home for funds investing in alternative asset classes, including hedge, real estate and private equity funds, which make up approximately 89% of funds business in Jersey. In addition, the lightly regulated Jersey Private Fund introduced in 2017 also continues to increase in popularity, with just over 550 launched to date with an increase of 22% over the last 12 months.
Further, significant funds continue to be raised from a wide range of EU countries, with Jersey seeing an annual increase in Jersey fund managers marketing into Europe with more than 200 Jersey-registered alternative managers marketing 374 funds – a 47% increase over the last five years (December 2021).
There are many reasons for the continuing confidence in Jersey as an IFC. With an increasing global need to demonstrate local economic substance, Jersey, with its 13,000-strong financial sector workforce and well-developed local infrastructure, has the edge over competitor jurisdictions who cannot comply with global substance requirements as readily as Jersey. Unsurprisingly, there has been a corresponding increase in the demand of the size, complexity and frequency of fund finance transactions in Jersey despite the impact of the current economic outlook and the COVID-19 pandemic.
JERSEY FUND FORMATION
As a leading financial centre, the fund and financial services regimes are well established and there have been no substantial changes that impact on fund formation, lending or security in recent years. The most commonly used fund structures in Jersey follow well established patterns and remain as companies, limited partnerships or unit trusts.
From September 2022, the Jersey limited liability company (LLC) vehicle has been able to be incorporated. The Jersey LLC is expected to prove popular with US investors and managers and build on the strong transatlantic ties Jersey already enjoys. The Jersey LLC has been designed to be as attractive as possible and will be very familiar to those who already use Delaware or Cayman LLCs in their structures, allowing great flexibility while still protecting Jersey's reputation as a leading, regulatory-compliant finance centre. Series LLCs are still to be introduced at a later date.
Jersey has also introduced well-received updates to the Limited Partnerships (Jersey) Law 1994. These amendments are to improve its flexibility and clarity and to reflect modern improvements made to equivalent laws in competitor jurisdictions by providing further protections/rights for limited partners and third parties.
SECURITY AND COLLATERAL
Security is taken under and governed by the Security Interests (Jersey) Law 2012 (the 2012 Law). In force since January 2014, the 2012 Law is a stable and well-trodden security regime specifically designed for the needs of financial services. Perfection requirements for a Jersey law-governed security depend on the collateral, and range from possession of the certificates representing certificated investment securities, control of deposit or portfolio accounts by way of notices and acknowledgments with the relevant account bank or custodian, to registration on the public Security Interests Register (the SIR), which will perfect security over any collateral and is the most common, and highly recommended, means of perfection.
A registration fee of currently £150 is payable for each security document registered on the SIR. No other stamp duties, taxes or registration fees are due in Jersey for the taking and registration of security.
In a fund finance context, lenders commonly take as transaction security:
CALL RIGHTS These rights will usually be under the relevant fund documents (e.g. partnership agreement, subscription agreement, articles of association or LLC agreement). Investors are usually notified of the security interest and may be asked to sign an acknowledgment of the notice. The notice and acknowledgment provide an “estoppel” argument, but neither is required to perfect the security interest. Usual perfection method: SIR registration.
- BANK ACCOUNTS Notice is served on, and an acknowledgment obtained from, the account bank. In this context, a “bank account” could be a deposit account or a portfolio/securities account. Bank account security, combined with call rights security, is still the most common security package sought. Usual perfection method: Control over bank account via notices and acknowledgments and/or SIR registration.
- CONTRACT RIGHTS REGARDING A CUSTODIAN AGREEMENT Notice is served on the custodian and an acknowledgment obtained. This is generally combined with a security over any relevant portfolio/securities account – but not often seen in a fund finance context. Usual perfection method: SIR registration.
- CONTRACT RIGHTS REGARDING MANAGEMENT OR GP FEES Notice is served on the relevant contractual counterparty and an acknowledgment obtained. Usual perfection method: SIR registration.
- SHARES, PARTNERSHIP INTERESTS, UNITS OR LLC INTERESTS Notices and acknowledgments are generally obtained but not required for perfection. Share or unit certificates and blank transfer instruments are delivered at completion. Usual perfection method: Possession of share or unit certificates (for certificated securities) and SIR registration.
In general, there is no legal or regulatory impediment to lending to funds in Jersey. The fund manager and directors/controllers of the fund can agree limits and restrictions in the constitutional documents of the fund and the investment manager agreement, if they so choose. In particular, the ability of the fund manager to borrow additional sums or grant security over the fund's assets is an important commercial point to consider.
There are no regulatory restrictions on borrowing for Very Private Funds, funds under the Private Placement Funds Regime, Unregulated Funds or Jersey Private Funds.
For slightly more regulated Expert Funds, Listed Funds and Eligible Investor Funds, no legal restrictions are set in stone but the Jersey Financial Services Commission (the JFSC) reserves the right to additional scrutiny if the fund is permitted to borrow money in excess of 200% of its net asset value (NAV).
For open-ended certified collective investment funds offered to the general public, which are more heavily regulated, the JFSC provides guidance on borrowing restrictions of the following fund type:
- GENERAL SECURITIES FUND Not more than 25% of the fund's total net asset value.
- FUND OF FUNDS May borrow up to 10% of its total net asset value, but only on a temporary basis for the purpose of meeting redemption requests or defraying operating expenses.
- FEEDER FUND May borrow up to 10% of its total net asset value, but only on a temporary basis for the purpose of meeting redemption requests or defraying operating expenses.
- MONEY MARKET FUND May borrow up to 10% of its total net asset value, but only on a temporary basis for the purpose of meeting redemption requests or defraying operating expenses.
- WARRANT FUND May borrow up to 10% of its total net asset value, but only on a temporary basis for the purpose of meeting redemption requests or defraying operating expenses.
- REAL PROPERTY FUND May borrow for the purpose of purchasing real property and for shortterm purposes like defraying expenses or to facilitate redemption. The maximum aggregate amount that may be borrowed is 35% of the total net asset value. Borrowing for the purpose of purchasing real property must not exceed 50% of the purchase price of the real property. For real property funds with a net asset value of less than £5 million, and especially during the early life of the fund, some relaxation of the above limits may be granted by the JFSC.
- FUTURES AND OPTIONS FUND Must be discussed with the JFSC.
- GUARANTEED FUND Must be discussed with the JFSC.
- LEVERAGED FUND Must be discussed with the JFSC.
JERSEY ECONOMIC SUBSTANCE
The economic substance regime is now well established in Jersey and the comparative ease of demonstrating substance has led to an influx of activity.
It applies to limited partnerships as well as companies and LLCs. Collective investment vehicles (but not their subsidiaries) remain outside the scope of the economic substance regime, save in the case of self-managed funds who are subject to the regime in respect of their fund management activities only.
GREEN AND ENVIRONMENTAL, SOCIAL AND GOVERNANCE IN JERSEY
Environmental, social and governance (ESG) issues have moved firmly into the mainstream across the globe, and Jersey has taken proactive steps to acknowledge the importance placed on ESG by investors and managers alike. The JFSC has published disclosure requirements applicable to Jersey Funds who reference sustainable investments in their offering materials with the intention of combatting the risk of greenwashing.
When a fund is marketed on the basis of investing in a sustainable investment as part of its investment objectives, it must disclose all material information in relation to the sustainable investment, which may help simplify matters when setting key performance indicators for sustainability-linked lending.
THE YEAR AHEAD: A GLIMPSE INTO THE FUTURE OF JERSEY FUNDS FOR 2022/23
We expect the Jersey fund finance market to continue on its current trajectory. A pipeline of new facilities of all kinds is expected in the jurisdiction, but we continue to anticipate that NAV, hybrid and concentrated NAV facilities will remain a popular alternative for private equity sponsors looking to increase leverage. In addition, we expect to continue to see an uptick in GP liquidity solutions as fund managers consider how to best deal with end-of-life options for funds and their investments. We anticipate that funds will look to hold certain investments for longer to see through the expected economic recession. The practical impact of the pandemic, and particularly the time taken to process new deals, seems to have abated, with the deal timelines generally back to pre-pandemic levels.
Originally Published by Global Legal Insights – Fund Finance 2023, January 2023
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.