Over the last few months, we have started to see new trends in inquiries and instructions regarding the use of Jersey and Guernsey structures by US managers targeting either European assets, or European capital.
This is partly down to improving economic conditions, the attractiveness of UK/European assets to international investors, the availability of European capital, and the success of the Jersey and Guernsey financial services sector, which is growing in popularity in international markets. Statistics from the Jersey Financial Services Commission show that 2020 saw a 3.3% increase in company incorporations, with more than ten companies incorporated every working day of the year.
In particular, US managers are showing interest in using Jersey or Guernsey as solutions in three scenarios, set out below:
- To hold a single European Asset
Often, a Delaware or Cayman fund with US investors will form a new Special Purpose Vehicle to buy a particular asset, known in US parlance as an Alternative Investment Vehicle ("AIV"). If that asset is UK or European real estate, infrastructure, logistics or even private equity, the AIV is often formed in Jersey or Guernsey.
The advantages of Jersey and Guernsey are: a) that a significant amount of the prime UK assets are already held in Jersey and Guernsey structures; b) the Jersey and Guernsey structures are familiar to international investors, buyers and sellers of European assets and are serviced by quality administrators and advisers; and c) even if the AIV has multiple investors, the AIV will not have to be regulated as a fund because it holds a single asset and does not operate on the principle of risk spreading – worth noting that this is not the case in all offshore jurisdictions.
- As a feeder fund into a Cayman/Delaware master fund
Some European investors have been reticent about investing directly into US (largely Delaware) or certain other jurisdictions because of regulatory issues, concerns over blacklisting, or over data protection concerns about the privacy shield. In those circumstances, a Jersey or Guernsey feeder fund is often a simple solution.
The advantages of Jersey and Guernsey are: a) the private fund regimes offer a light-touch regime where there are fewer than 50 investors who meet sophisticated investor criteria; b) regulatory authorisation can be obtained within 48 hours; c) both Jersey and Guernsey products can be offered under national private placement regimes within the EU; and d) if there is only one investor then the single investor "fund of one" will fall outside of the private fund regimes in Jersey and Guernsey.
Where a Jersey/Guernsey feeder fund is investing into a Cayman master fund, our Channel Islands offices work closely with our Cayman law colleagues in Cayman, London, Dubai, Hong Kong or Singapore, depending on the location of the client.
- As a Europe-focused parallel structure to a US-focused fund
Parallel structures, or European sleeves, are set up to bring together US and European investors in two separate streams under a single investment manager and strategy. A Delaware or Cayman structure will typically accommodate the US investors; but a Jersey or Guernsey fund can be set up in parallel, to accommodate UK/EU investors, who might be more comfortable with a structure based in their own timezone, with a more familiar regulatory/data protection regime.
The advantages of Jersey and Guernsey are: a) a simpler regulatory regime than the onshore model when marketing to investors in a small number of EU countries (bearing in mind that 97% of funds marketed into Europe market to three or fewer member states); b) a familiar model to US managers and counsel, that will become even more familiar when the Jersey LLC vehicle comes online shortly; and c) the speed, upscaling potential and regulatory certainty offered by the private fund regimes in both Islands.
The selling points tend to be linked to the popularity of the private fund models in both Islands – in Jersey, the Jersey Private Fund, and in Guernsey, the Private Investment Fund.
Since the launch of the private fund products in Guernsey and Jersey in 2016 and 2017 respectively, the regimes have been used for a wide variety of different purposes and fund product ranges – club-deals, family/private investment structures and the much larger mega-funds (eg SoftBank Vision Fund) have all availed themselves of this highly flexible and appropriately regulated fund product.
The benefits are:
- Regulatory – The private funds offer a light touch investment fund product suitable for sophisticated investors. Similarly, structured appropriately, a single asset vehicle (AIV) or single investor vehicle ("fund of one") is not subject to regulation under applicable funds legislation in Jersey or Guernsey; both products thereby obviating the higher regulatory oversight (and therefore cost) demanded by some European jurisdictions.
- Flexibility – Private funds and single asset/single investor vehicles can be structured as companies (including cell companies), limited partnerships, unit trusts, (or, soon, Jersey LLCs, which are based on the Delaware model well known and much used by US investors and managers).
- Promotor/Investor Familiarity – Both regimes (including the regulatory treatment and the underlying legal constructs) are similar to offshore regimes with which US managers and their advisers are already familiar.
- Speed – Where all criteria are met, the private funds can be authorised by the regulators within just 48 hours.
- Upscale potential - If fund managers are looking to broaden the investor base, private funds can be converted to publicly offered fund products. Where fund raising does occur within the EU, Jersey and Guernsey products can be offered under national private placement rules and the Jersey/Guernsey AIFMD regimes.
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.