Earlier this year, Jersey unveiled a new Limited Liability Company (LLC) structure aimed at strengthening the Island's profile as an attractive jurisdiction for US alternative fund managers. The new structure, which was officially approved by the Government of Jersey, took effect on 14 February. It further expands Jersey's existing range of private fund vehicles by adding a new LLC model familiar to US private equity, venture capital and other alternative fund professionals.
The new Jersey LLC framework comes amid a period of sustained growth for Jersey's funds industry in relation to the US market, with funds business from US promoters more than doubling over the past five years. Jersey Finance's Head of Funds Elliot Refson, and Americas Lead Philip Pirecki, look at the importance of balancing progressive innovation with a platform of stability for managers with an international investor base:
Q: What role does Jersey Finance play in promoting alternative investment strategies? Why?
Elliot Refson (ER): Jersey has evolved its proposition over a number of decades to specialize in servicing the cross-border alternative fund space. Managers and investors are attracted to Jersey thanks largely to the high standard of our offering, which combines a depth of expertise, a huge amount of experience, flexibility, certainty and a stable outlook. It's a combination that is rarely found in other jurisdictions.
Today, Jersey services almost $700 billion of global fund assets, from regulated through to light touch regimes. Alternatives represent around 80% of our total funds activity, including in the private equity, real estate, venture capital and hedge fund spaces — private equity alone specifically represents almost 70% of total funds business.
Q: What is the latest on the regulatory and legislative front that alternative investment managers need to be watching closely?
Philip Pirecki (PP): For US alternative fund managers, trying to market into Europe can be a significant regulatory challenge. While ten years ago the Alternative Investment Fund Managers Directive (AIFMD) was the starter in creating added layers of complexity, it's become a constantly evolving regulatory environment. We now have AIFMD II, Markets In Financial Instruments Directive (MiFID), Sustainable Finance Disclosure Regulation (SFDR), to name but a few.
The reality is that to maintain uninterrupted business and access to international capital, managers today are expected to navigate significant regulatory complexity – and that often requires a change in operations, such as moving domicile or implementing new compliance frameworks. In our experience, stability and familiarity are key for all investors, but especially US alternative fund managers with an international investor base.
ER: BEPS — base erosion and profit shifting — and substance requirements have also had a big impact in recent years. As a domicile that has always been an early adopter of best practice, Jersey has been well placed in this regard — substance legislation has simply meant a codification of prevailing best practice. But some other jurisdictions are struggling as they don't have the depth of expertise required.
Q: Jersey has been a gateway to Europe for offshore investment managers. Is this still a trend and are there any particular strategies that are seeing greater interest in Europe at the moment?
ER: Our key message when we talk to US managers is that Jersey can be their gateway to EU capital. Being outside of the EU but with strong pan-EU relationships, Jersey is a third country and so sits outside of the EU regulatory sphere, including AIFMD. So there is a level of independence, while also being very much at the heart of Europe. Marketing into the EU through Jersey means utilizing National Private Placement Regimes (NPPR), which have been proven to work extremely effectively, offering quick and easy access to EU capital without the regulatory burden of complying with the full scope of the AIFMD. Consequently, that comes with significant cost and speed-to-market advantages.
It's often the assumption from US managers that accessing EU capital requires an EU onshore presence, but that's not the full picture. The reality is that few managers need blanket access to EU Member States. Figures from the EU Commission suggest that 97% of managers market into just three EU markets or less. Consequently, the ongoing cost and regulatory burden of operating from an onshore EU base is disproportionate, with private placement being a very credible, fast, cost-effective and sensible solution.
PP: It's a message that has resonated well with managers in the US. Since Jersey Finance opened its office in New York, the number of US-originated fund structures serviced through Jersey has grown 61%, while the value of fund assets under management has risen by 22%, according to Monterey. More widely, we now have around 200 non-EU managers currently marketing their funds into the EU through private placement via Jersey. That figure has grown by almost 60% over the past five years.
Q: Which fund structures remain popular for funds domiciled in Jersey and why?
PP: The Jersey Private Fund (JPF), launched five years ago, was introduced to meet a very specific demand for the private fund market, and it has been a resounding success. The structure allows up to 50 investors to establish a fund in under 48 hours. There are now 638 JPFs established in Jersey, with it very much now seen as a go-to structure.
ER: Earlier this year, Jersey made the innovative move to introduce its own LLC legislation, again to meet a very specific demand amongst managers with investors whose activity takes place internationally. US private equity, venture capital, and other alternative fund professionals will find this framework simple to understand and implement.
Modelled on existing regimes in Delaware and Cayman, it aims to provide much-needed familiarity and certainty for US and other global fund managers. Benefitting from a simple registration process, the Jersey LLC has a separate legal personality and can be classed as a 'body corporate', and offers a number of key opportunities, including being used for issuing securities, or as a manager vehicle. It can also be used as a fund entity in conjunction with the hugely successful JPF regime. The unique flexibility of LLC operating agreements gives members the ability to structure and manage their undertaking as best suits their needs.
Q: What impact are regulators having on domiciles overall and how will this affect cross-border fund structuring in the coming years?
PP: A key objective for managers with an international investor base is around future-proofing their operational models, so that they can be comfortable about meeting the challenges of an ever-changing regulatory environment. For domiciles that means offering an ecosystem that can go some way towards mitigating regulatory uncertainty.
ER: And that has to be balanced against the need to be progressive and innovative. It's why Jersey launched the JPF over five years ago, enhanced the flexibility of its Limited Partnership vehicle last year, and introduced the LLC this year. Overall, it's a picture of incremental progression that is mindful of the need for a stable, certain platform.
Managers can't control changes in global regulation, but they can limit the impact these changes have on their ability to conduct business through their choice of jurisdiction and the use of reliable structures, such as the LLC.
This interview was published in Alternatives Watch in May 2023.
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