In the past year, both Guernsey and Jersey have sought to improve their funds offerings by creating new private funds regimes – but what exactly are they and will they bring the benefits many expect?
Against a backdrop of regulatory and market pressures increasingly weighing on the Channel Islands’ finance industries, the funds sector has been a bright light in attracting new business and helping the islands maintain their reputation as leading international finance centres.
In revamping their fund offerings, both Guernsey and Jersey have focused on private funds that target sophisticated and institutional investors rather than the retail market. In contrast to Guernsey, Jersey has had a private funds regime since 2012, but the new offering, introduced in March of this year, is intended to be more attractive than its predecessors.
Guernsey’s Private Investment Funds regime became a reality in November 2016. It’s intended to give the island’s finance sector an entirely new regulatory framework that it hopes will bring new business to the island. Here’s what you need to know about these new offerings…
Why have Guernsey and Jersey introduced these new fund regimes?
At the end of 2016, Jersey was home to 1,195 regulated funds and 120 unregulated funds totalling more than $300bn in net asset value. At the same point, Guernsey played host to approximately 1,000 funds with an overall value of more than $250bn.
Given the clear success of the funds sector in the islands, it has to be asked why the industry hasn’t adopted an ‘if it ain’t broke, don’t fix it’ mentality, rather than choosing to tinker with its offerings.
“It’s mainly in response to demand from fund managers and investors, but it’s also a response to competitor regimes,” says Mike Byrne, Chair of the Jersey Funds Association and Partner at PwC in Jersey. “The new offering represents a move to a more private and less regulated funds regime, which reflects the institutional nature of investors in Jersey funds.”
In contrast to Jersey’s revisions to its existing regime, 2016 saw Guernsey introduce its Private Investment Funds (PIF) regime. “Guernsey introduced PIFs in response to market demand,” says Annette Alexander, Partner at law firm Carey Olsen. “The new regime ensures that fund managers have a choice of products to meet their investors’ needs.”
What are the main details of Guernsey’s PIF regime?
One of the key aims of Guernsey’s new PIF regime is to enable smaller funds to operate within a clearly defined regulatory environment whilst also allowing for faster speed to market.
“In Guernsey, there’s been a gap in the market,” says Matt Sanders, Group Partner at law firm Walkers. “Previously, funds needed to be authorised or registered and there was quite significant time and expense associated with setting them up.
“You were either a fund and therefore had to do quite a lot of work to become authorised, or not a fund, which created an incentive for smaller arrangements to be ‘not a fund’.”
Whilst the new PIF regime includes a promise that the Guernsey Financial Services Commission (GFSC) will turn around the paperwork within one working day, Sanders feels that the regulator was never the reason for the slow speed of the established regime.
“The time it takes the GFSC to turn a fund around isn’t the issue,” he says. “It’s the work to be done before then that takes the time.”
As well as the faster speed to market, Guernsey’s new regime places a limit of 50 investors on funds that operate as PIFs, but it doesn’t limit the number of people to whom you can market a fund.
The rules also stipulate that a maximum of 30 new investors may join the fund on a rolling 12-month basis. There’s no monetary definition of a ‘professional investor’ and the fund must have a licensed manager, although no rules are set against them.
What are the main details of Jersey’s new regime?
As in Guernsey, Jersey’s new private funds regime limits the number of investors to 50 – under both regimes, a single investor can be a fund with many investors itself – but it also limits the number of people (legal entities) to which it can be marketed to 50.
Jersey has had a private funds regime for some time but the new system is designed to bring a complex, three-pronged approach under one, easy-to-use umbrella.
“Simplification of the regulatory framework is the main thinking behind the new regime,” says Nick Solt, Managing Director at Moore Stephens Funds Services. “Whilst we previously had all areas covered with the COBO [Corporate-Owned Business Only], Private Placement Funds and Very Private Funds regimes, you had to explain each one to prospective clients.
“Besides simplification, the main points of interest are the 48-hour registration period, 50-investor limit, and no requirement for promoter approval.”
This last point is important and common to both islands. Rather than seeking to approve and regulate the fund promoter and manager, regulation falls at the level of the administrator, essentially putting the administrator in the position of approving the other parties.
Unlike Guernsey, Jersey has created a financial definition of a ‘professional investor’ by imposing a minimum initial investment threshold of £250,000.
So, what does the industry think?
To say that these changes have been warmly welcomed wouldn’t be overstating the strength of positive feeling coming from the islands’ fund sectors.
“The launch of the PIF has been enthusiastically welcomed by service providers,” says Annette Alexander. “They see it as increasing the choices available to fund managers to serve investors’ needs and for reducing the time and cost to launch.”
Jersey’s regime was put to stern test at the Jersey Finance funds event in London in March, but according to Alex Di Santo, Director of Funds Services at Intertrust, it passed with flying colours. “Jersey Finance spoke to a lot of fund practitioners in London and there was definitely a general sense of excitement about the new regime,” he says.
Has this positive start translated into uptake?
“Within four weeks of launch, five funds had been set up under the Jersey regime, a mixture of private equity and real estate funds,” says Di Santo. As to Guernsey, he says: “Uptake has been a bit slower, but leading private equity fund managers are showing interest.”
Guernsey’s regime was put in place four months prior to Jersey’s regime and, at the time of writing, Alexander says: “Four funds have been set up, of which Carey Olsen was involved in three.”
Will one island have an advantage over the other?
This brings a resounding “No” from Alexander. “The regimes in the two islands have slightly different features, and fund managers may be attracted to either island depending on their particular needs. For instance, in Guernsey, you need a Guernsey-based licensed manager, which lends itself to PE vehicles. At the end of the day, promoters will choose the regime that suits them best.”
“It’s good for both islands,” says Nick Solt. “There are slight nuances between the two – for instance, there’s no investor warning in Guernsey, but the new regimes give both islands something to offer investors. The only real measure will be in 18 months’ time when we look at the numbers to see how popular each island has been.”
Has Brexit had anything to do with these new regimes?
Although the new regimes don’t appear to be a direct reaction to Brexit, that doesn’t mean they won’t play a role in helping the islands deal with the aftermath. “Brexit forces us to be more nimble, so we can show we are a credible alternative jurisdiction,” says Mike Byrne. “The new regime demonstrates that Jersey offers alternatives.”
So, good news all round…
“There’s no doubt that the new regime has been welcomed by the industry,” says Matt Sanders. “There was a gap in Guernsey’s offering and there was a perception that work was being lost as a result.”
“It really is good news,” concludes Alex Di Santo. “The products are attractive for speed, efficiency and cost. And they give a positive message about the Channel Islands making it simple to set up funds. I’m certainly optimistic.”