First published by Global Legal Group, January 2021
As an international financial centre (IFC) of choice for global investments primarily into the UK and Europe, Jersey is currently home to regulated funds with aggregate net assets under management of approximately GBP 362 billion (June 2020), an increase of over GBP 20 billion in the last 12 months, building on the GBP 46 billion increase seen in the 12 months before that.
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 87% of funds business in Jersey (as compared to 81% in 2019). In addition, the lightly regulated Jersey Private Fund introduced in 2017 also continues to increase in popularity, with just fewer than 350 launched to date and over 100 launched in the last 12 months.
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 in 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. Notwithstanding the global pandemic, initial fears of investors defaulting on capital calls and lenders left exposed seem for the most part unfounded, and the previously reported trends on the increasing popularity of net asset value (NAV) and hybrid facilities have continued.
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.
In 2020, the Jersey Government finalised the legislation required to create a Jersey limited liability company (LLC) vehicle, which is expected to prove very 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.
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 (SIR), which will perfect security over any collateral and is the most common, and highly recommended, means of perfection.
A registration fee of currently GBP 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:
|Collateral||Market practice comment||Usual perfection method(*)|
|Call rights||These rights will usually be under the relevant fund documents (e.g. partnership agreement, subscription agreement or articles of association).Investors are usually notified of the security interest and 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.||SIR registration|
|Bank accounts||Notice and acknowledgment from the account bank are obtained. 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.||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 acknowledgment obtained. This is generally combined with a security over any relevant portfolio/securities account – but not often seen in a fund finance context.||SIR registration|
|Shares, partnership interests or units||Notices and acknowledgments are generally obtained but not required for perfection.Share or unit certificates and blank transfer instruments are delivered at completion.||Possession of share or unit certificates (for certificated securities) and SIR registration|
Once Jersey LLCs are introduced, security over an LLC interest will also be taken pursuant to the 2012 Law, and the approach taken will vary depending on the nature of the LLC interest and the terms of the LLC agreement.
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 (JFSC) reserves the right to additional scrutiny if the fund is permitted to borrow money in excess of 200% of its 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:
|Guidance on borrowing restrictions|
|Fund type||Limits on borrowing|
|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.|
|Real Property Fund||May borrow for the purpose of purchasing real property and for short- term 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 GBP 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.|
The economic substance regime is now well established in Jersey and the comparative ease of demonstrating substance has led to an influx of activity.
Collective investment vehicles (but not their subsidiaries) are currently outside the scope of the economic substance regime, but the Jersey Comptroller of Taxes has indicated that self-managed collective investment funds structured as limited companies will be brought within the scope of the regime in the Crown Dependencies in respect of its fund management activities. No date has been set and at the time of writing, drafts of the enabling legislation have not yet been prepared.
Green and environmental, social and governance
Environmental, social and governance (ESG) issues have moved firmly into the mainstream across the globe, and Jersey is taking proactive steps to acknowledge the importance placed on ESG by investors and managers alike by developing a new sustainable finance initiative: in June 2020, Jersey launched a public consultation on a proposed ESG disclosure regime to promote green, environmental, sustainable, and socially responsible investments and to prevent "greenwashing".
Channel Islands-based lenders are also among those keen to support this type of investment as was seen over the summer when RBS International supported EQT in the largest-ever ESG-linked capital call facility.
The year ahead: A glimpse into the future of Jersey funds for 2020/21
In the midst of the pandemic it is difficult to predict anything with confidence but, anecdotally, we expect the Jersey fund finance market to continue on its current trajectory, albeit with a slight reduction in pace. A pipeline of new facilities of all kinds is expected in the jurisdiction, but we do anticipate NAV, hybrid and concentrated NAV facilities to remain popular. Whilst this will likely include a small number of preferred equity arrangements, they remain expensive and it is not clear whether their popularity will increase .
The above notwithstanding, there is no escaping the continued practical impact of the pandemic, and new deals continue to take longer to process.
Despite the potential huge economic and political consequences, Brexit has taken a backseat to the pandemic and it remains unclear whether the UK will avoid a no-deal Brexit (though at this stage it seems unlikely) . However, even though Jersey is neither part of the UK nor the EU, it enjoys close links with both and, whatever the outcome, will be recognised as a stable route for investors across both regions.
For the original chapter in GLI – Fund Finance 2021 please visit: https://www.globallegalinsights.com/practice-areas/fund-finance-laws-and-regulations/jersey
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.