1. Transaction Activity
1.1 Private Equity Transactions and M&A Deals in General
Following this cycle's all-time peak, reached in 2021, the global M&A market turned in its second-weakest year in exactly a decade in 2023. However, the more normal deal activity levels seen in the latter part of 2023 have created an environment in which we are now seeing global M&A bouncing back in 2024.
As a well-regulated international finance centre, Jersey continues to deliver innovative and highquality downstream acquisition and investment fund-structuring solutions to global private equity and sector-focused institutional sponsors.
In line with global market conditions, strong topsponsor appetite remains for renewable energy/resources and infrastructure opportunities, which have greater potential for value creation over the life of an asset. Such transactions may involve more upfront cost and complexity. One key attraction for maintaining a stable of infrastructure assets is the “best in class” investorreturn prospects that they have the potential to achieve. The acute focus on ESG seen across all sectors means that renewable energy and resources asset targets are in focus.
The mid-market landscape continues to be the most competitive, and possibly the most overcrowded, segment of the global private equity market in recent years. This is compounded by the need for many sponsors to access alternative credit solutions to complete leverage buyout transactions, which has added to the considerable pressure and focus on increasing investor returns. As a result, the fast pace and large number of participants involved in pre-emptive bid and conventional auction processes persist. This chapter provides an overview of the key trends and features of private equity transactions in Jersey and those involving Jersey-registered vehicles (ie, an acquisition (or disposal) where the buyer (or seller) is a special purpose vehicle owned and controlled by a private equity fund).
1.2 Market Activity and Impact of MacroEconomic Factors
Domestic market activity in Jersey is dominated by private equity involvement in financial services sector businesses, such as professional corporate services and trust company businesses, which are the target of primary, secondary or tertiary private equity investment. Furthermore, 2024 has also seen reasonable levels of M&A trade sale locally. Certain standout transactions have triggered significant consolidation in the trust and corporate services industry. Global banking businesses with a Jersey footprint also provide non-core business carve-out opportunities for private equity sponsors in the local financial services sector.
Separately, sustained use of Jersey vehicles by leading private equity sponsors investing in larger-scale primary cross-border deals across 2023 saw a spread of activity across the following asset sub-classes:
- professional services, advisory and consultancy;
- wealth management-related financial services;
- enterprise software and business-to-business services; and
- renewable energy.
Rising interest rates, general equity market volatility and tightening credit market conditions (particularly in the leveraged loan space) have meant that private equity activity in the Jersey market, and in cross-border transactions where Jersey vehicles are used, has increasingly been focused on legal, tax and financial due diligence, closer examination of target growth strategies and a realignment of expectations on valuation.
Higher costs of borrowing in the UK and European market have led mid-market, and some top, sponsors to access leverage via alternate credit providers. This has positively impacted the credit markets by enabling borrowers to fund acquisitions on more flexible terms, given that most alternate financiers are not constrained by the kind of regulatory capital and covenant criteria that constrain mainstream bank lenders.
It remains to be seen how global M&A markets may be affected by changes of government in the UK, other major European economies and the United States.
2. Private Equity Developments
2.1 Impact of Legal Developments on Funds and Transactions Anti-money Laundering (AML) Supervisory Regime
In mid-2023, the practical effect of the changes made to Jersey's AML supervisory regime (known as the Schedule 2 regime) was felt by local corporate service providers. Although significant to Jersey's own efforts and contribution to the global combatting of financial crime, M&A market participants transacting in Jersey or utilising Jersey acquisition vehicles for crossborder transactions will not have been impacted by the changes to the Schedule 2 regime. The main difference in the new regime is the shift in primary responsibility for AML regulatory compliance away from Jersey corporate service providers to Jersey vehicles directly involved in certain types of financial services activities, leading to their appointment of Jersey Financial Services Commission (JFSC)-regulated AML service providers.
Jersey Funds Regimes for Private Equity Funds
The Jersey Private Fund (JPF) regime, which was introduced by the JFSC in 2017 and last updated in July 2024, has become an increasingly popular regulatory regime for structuring private equity funds in Jersey. More than 700 JPFs had been established by March 2024, with the regime having particular application to funds with up to 50 investors.
The JPF regime is streamlined and flexible, with a 48-hour online authorisation procedure, and is subject to a light regulatory touch but without compromising investor protection. JPFs are aimed at professional investors, high net worth investors and investors committing at least GBP250,000 (or equivalent). For more widely marketed private equity funds, the Jersey Expert Fund regime also remains popular – it has no upper limit on the number of investors and a commitment level of at least USD100,000.
Recent enhancements include the following:
- co-investment arrangements that are part of a fund's carry/incentive scheme are now excluded from the investor count; and
- certain family and incentive arrangements are not treated as JPFs, and the definitions of employees and family connections have been further widened.
As private equity funds are typically closed-ended, the attraction of JPFs and expert funds in terms of speed of establishment, together with appropriate and proportionate regulation suited to the sophisticated investor base, continues to position Jersey favourably for fund establishment by both existing and new sponsors, and the majority of new structures tend to be JPFs. .
3. Regulatory Framework
3.1 Primary Regulators and Regulatory Issues Private Equity Fund Regulation
The principal legislation governing the regulation of private equity funds in Jersey is the Collective Investment Funds (Jersey) Law 1988 and, for private funds, the Control of Borrowing (Jersey) Order 1958. Funds that are marketed in Europe are also subject to the Alternative Investment Funds (Jersey) Regulations 2012 (the “AIF Regulations”). Funds that are marketed in the EU are subject to the code of practice for alternative investment funds and AIF services business (the “AIF Code”).
In addition, all funds are subject to the requirements of Jersey's AML regime, which applies AML rules to all financial services businesses in Jersey. Jersey-based service providers for funds are subject to regulation under the Financial Services (Jersey) Law 1998 (the “FS Law”) unless an exemption applies. Providers of fund services must be registered and regulated by the JFSC, pursuant to the FS Law.
AML/KYC
Relevant sanctions and the usual AML/KYC rules apply to private equity transactions; there are no Jersey-specific restrictions. The alignment of Jersey's AML regulatory regime with current Financial Action Task Force standards and recommendations has not had any impact on private equity transactions in Jersey or the use of Jersey-registered acquisition vehicles. National security regulation in Jersey is very similar to that in the UK. Financial investors are screened by local authorities in accordance with international standards. There is no particular focus on sovereign wealth fund (SWF) investors, although many SWFs are, in the ordinary course, subject to robust checks either as principal deal counterparties (including as co-investors) or as fund investors/limited partners.
Takeover Code
The Takeover Code applies to certain transactions involving Jersey companies. Takeover Code compliance is implemented by the UK Takeover Panel, as the designated authority under primary Jersey legislation.
A Jersey company is subject to the Takeover Code if any of its securities are listed on a regulated market or multilateral trading facility in the UK, or on any stock exchange in the Channel Islands or the Isle of Man. This includes being listed on the main board of the LSE and the Alternative Investment Market. A Jersey company that has shares listed on other exchanges, such as the NYSE and Nasdaq, may also be subject to the Takeover Code if the Panel considers that the company's management and control are in the UK, the Channel Islands or the Isle of Man.
Domestic competition and antitrust regulation applies where merging businesses meet relevant thresholds. Where applicable, the approval of the Jersey Competition Regulatory Authority may be required.
EU Foreign Subsidies Regulation (FSR)
The EU FSR does not directly apply in Jersey and so is not relevant to local M&A transactions therein. However, Jersey financial services businesses that form part of wider UK and European or global groups may be tangentially impacted. One general observation regarding EU FSR is that, in addition to the usual M&A considerations (such as the completion timetable, closing conditions and risk allocation in deal documents), the EU FSR regime is likely to introduce additional and potentially significant disclosure requirements for private equity sponsors.
4. Due Diligence
4.1 General Information
The focus of due diligence in Jersey is on verifying corporate existence, maintaining solvency and other corporate governance-related matters. Typically, buy-side legal due diligence involves utilising publicly available information and any information made available by the seller as part of the tender/auction process. Where a target is prepared to support the offer, bidders may also present separate requests in respect of matters on which they require further information. Such legal due diligence is usually secondary to financial (including taxation) due diligence.
With a hostile bid, legal due diligence is generally limited to information in the public domain (see 4.2 Vendor Due Diligence). However, a bidder may be able to obtain information from the target that has been provided to a competing bidder if the Takeover Code applies. This is because the target has a duty to provide equal information to rival bidders in a competitive situation.
Public information available to bidders in Jersey includes:
- audited accounts (for public companies only);
- memorandum and articles of association;
- details of directors and shareholders (for public companies only);
- prospectuses; and
- other information that may be available via UK sources, such as public announcements issued by the target.
4.2 Vendor Due Diligence
Vendor due diligence (VDD), as part of private equity transactions, depends almost entirely upon the shape of the target group structure and the target asset or business.
VDD is often not comprehensive and, in Jersey, it is not generally considered a substitute for a buyer's own due diligence. A VDD report may provide a helpful start to the due diligence process. An obvious advantage is where a vendor is prepared to make representations and warranties, or provide indemnities, in the transaction documents in relation to information contained in the VDD report. Typically, sell-side legal advisers present VDD reports as being based on a risk review mandated by the seller/target group, in contrast to a deeper-dive diligence exercise.
It is not common in Jersey for advisers to permit reliance on buy-side diligence reports in Jersey to financiers or warranty and indemnity (W&I) insurers. However, it is typical for buy-side advisers to liaise with both financiers and insurers on behalf of bidders, to address and provide comfort around specific legal issues that may arise as part of financing or the writing of a buyer's W&I policy.
5. Structure of Transactions
5.1 Structure of the Acquisition
Most private equity acquisitions in Jersey are structured as private treaty sales with purchase agreements negotiated between the parties. However, there has been an increase in the use of the Jersey statutory merger procedure to effect both private and public acquisitions in recent years. Competitive auction processes are common in the infrastructure space, where prime assets are coveted.
Larger transactions involving a Jersey target company or listed targets may proceed by way of a court-sanctioned scheme of arrangement or a process governed by the Takeover Code. The Takeover Code, and the appointment of the Takeover Panel to administer provisions thereof, have been adopted in Jersey through the enactment of domestic legislation. Other acquisition types include statutory mergers and business asset transfers, although these are less frequently encountered.
5.2 Structure of the Buyer
Straight-line Jersey private company acquisition structures are preferred by private equity sponsors and co-investors.
Tiered Jersey debt and equity acquisition structures involving a topco (top holding company), midco (intermediate financing vehicle) and bidco (bid vehicle) are typical. Such structures have the following attributes:
- they enable structural subordination of intragroup/external financing;
- they facilitate the requirements of both private equity sponsor and target management;
- they provide UK-resident-non-UK-domiciled target management with remittance-based taxation options for future exit (eg, capital gains taxation);
- they allow for simplified dividend flows to private equity fund investment vehicles and ultimately limited partnership (LP) investors; and
- they should not be subject to onshore tax/ stamp duty on future disposal.
In addition, the use of Jersey management incentive planning (MIP) vehicles for manager incentivisation aligns target management objectives with those of the private equity sponsor.
Recent years have seen a significant increase in the use of MIP vehicles for the many incentivisation-restructuring rounds that have occurred where portfolio company assets are in the buyand-build phase.
5.3 Funding Structure of Private Equity Transactions
Generally, private equity transactions are financed via a mix of equity contributions sourced from investing private equity funds and external debt/leverage provided by syndicate banks, institutional financiers and a range of alternate credit providers. For larger transactions, accessing funding from the debt capital markets (ie, bridge to bond) is attractive from a cost of funds perspective. Unitranche financing, which involves a hybrid loan structure combining senior and subordinated debt into one loan facility at a blended interest rate, has also proved attractive to private equity sponsors.
Interest rate movement and the high margin cost of vanilla leveraged financing options has led the most active sponsors to seek out alternative and mezzanine-style credit solutions. This has impacted credit committee consideration of new money transactions, resulting in more protracted come-to-market periods. For alternate credit funding of private equity acquisition transactions, it is relatively common for private debt funds to have agreed to provide committed capital at signing. The efÏciency associated with not having to syndicate or take out bilateral debt post-completion has driven this particular behaviour. Overall, the market has coped well in the past 12 months, wherein leverage terms for private equity transactions have changed.
Both fund-level and leverage financing options feature significantly in downstream private equity transactions involving Jersey vehicles. Market conditions have enhanced the attractiveness for private equity sponsors of participating in leverage financing solutions as alternate credit providers. The prominence of subscription line, net asset value and hybrid fund financing facilities (used to finance short-term settlement disparities between general partner calls on investors for committed capital and the need for available capital at the bid or portfolio company acquisition stage) has only continued to grow in recent years.
At signing, an equity commitment letter is used to provide contractual certainty of funds for sponsor contributions. For higher-value transactions, it is common to see debt and security documents agreed by signing (but left unexecuted) and confirmations given by the buy-side in relation to this to provide comfort to sellers.
5.4 Multiple Investors
Both joint venture and syndicated consortium investor transactions are common in Jersey, particularly in infrastructure asset deals. While not entirely “commonplace”, the steady rise in pre- or post-closing co-investments involving multiple private equity sponsors, or sponsors and their most valued limited partners, is starting to represent a greater proportion of all private equity deals.
Co-investment structures are an increasingly popular way to syndicate the sponsor equity contribution to be made. It is not uncommon to see primary investment opportunities initially involve private equity sponsors acquiring minority interests in target groups pending enterprise valuation adjustments and similar. Joint venturestyle arrangements between private equity fund sponsors and corporate investors are increasing in frequency.
Towards the end of 2023, there was a definite uptick in North American sponsors involving corporate or sovereign co-investors in the early stages of a proposed transaction. It is understood that this assists with bidder profiling in granting exclusivity, or as part of participating in a competitive auction process.
6. Terms of Acquisition Documentation
6.1 Types of Consideration Mechanisms
There is generally no restriction on the type of consideration that can be offered on a private treaty sale or negotiated offer. Consideration can therefore include, among other things, cash, loan notes and shares. In a Takeover Code-governed transaction, for a mandatory offer, the consideration must be cash, or be accompanied by a cash alternative, and it must comply with minimum consideration requirements.
The nature of the underlying asset, sponsor approach/appetite and certain transaction-specific requirements are all factors that contribute to the form of consideration structure used in Jersey private equity deals. No predominant form of consideration structure is used in these types of transactions: fixed-price, locked-box and completion accounts mechanisms are variously seen.
The protection afforded by private equity buyers and sellers in relation to the consideration mechanism is generally the same as the protection provided by corporate buyers/sellers. This includes earn-outs, deferred consideration, antiembarrassment mechanisms and (less frequently) consideration collateral or security.
To read the full article click here
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.