A look at Why US fund managers are choosing the Channel Islands
For decades, when US fund managers looked offshore, they would head to their own ‘back yard’ – Delaware, the Cayman Islands, the British Virgin Islands. But in recent years, a growing number have been shifting operations to Europe – and the Channel Islands in particular.
“The statistics don’t lie,” says Alex di Santo, Group Head of Private Equity at Crestbridge in Jersey. He cites a recent Monterey Insight report, which says Jersey funds business from US promoters more than doubled between 2017 and 2022, rising from $28.5bn to $58.7bn.
US promoters are now the fourth biggest source of assets in Jersey, and a similar trend is seen in Guernsey.
The arrival of a growing number of US funds is surely welcome news for the islands. But why are US promoters choosing the Channel Islands now, and with what objective?
More than a name
“There is a thought around the fact that there is a state called New Jersey in the US – and as a result people notice [the name Jersey], which creates curiosity,” laughs Philip Pirecki, Jersey Finance’s lead in the Americas.
Pirecki spends a lot of time in the States promoting Jersey’s offerings, and the name recognition aspect certainly breaks the ice. But the reasons for the recent increase in US managers choosing the Channels Islands as a base is driven by far wider factors.
First, and probably most important, is the EU’s Alternative Investment Fund Managers Directive (AIFMD), which came into force more than a decade ago.
The purpose of the AIFMD was to regulate the activities of alternative investment managers, and it requires reporting, disclosures and other regulatory processes. It also stipulates that anyone marketing an alternative fund in Europe must be registered with the regulator.
As a result, many major US funds that wanted to raise capital in Europe set up shop in the EU, with Luxembourg usually being the first choice.
However, alternative investment funds don’t have to be domiciled in Europe. They can also be based in an EU-approved third country and follow the National Private Placement Regime (NPPR) to market their funds into individual markets.
And this is where the Channel Islands come in. In 2015, Jersey and Guernsey were included in the first wave of the EU’s approved ‘third countries’.
This allows US alternative investment funds to base themselves in the Channel Islands and raise capital in Europe, without needing to submit to all the onerous paperwork and reporting of the AIFMD.
For some fund managers, being based outside the EU wouldn’t make sense. If you’re planning to raise investment from across the continent, being under the AIFMD would probably be more logical.
However, Pirecki points out that 97% of funds only market into three European countries or less. As a fund manager, he says, “you really have to ask yourself, do I need to be onshore? What is the value of me being onshore?”.
“If you are only marketing a fund into one or two markets, the NPPR route allows you to do much the same thing, but without having to comply with AIFMD.
Besides the AIFMD, there are several other macro factors that are drawing US investors to the Channel Islands.
One influence, Pirecki explains, is that “we are in an era where money supply is shrinking”.
In the US, the majority of alternative fund managers would typically raise capital within their own country. But due to today’s high interest rates, less capital is available. And that means managers are going offshore to raise capital earlier than they would have in the past.
Europe is typically the first port of call for many, including those who’ve never gone offshore before. As they investigate possible options in the region, they will likely come across the Channel Islands.
A non-European option
The Channel Islands have several things going for them that set them apart from popular onshore European jurisdictions – those outside the EU (the UK, Switzerland) and those inside (Luxembourg, Ireland).
Pirecki points to the legal system. While there are many differences between the US and Channel Islands’ legal systems, they are both founded on common law, which feels familiar and is easier to understand than constitutional law found in much of the rest of Europe.
There’s a shared language too, which has obvious advantages. And there are cultural familiarities. The so-called Anglo Saxon mentality, where customer service is prized, also feels familiar to American businesses.
While it’s a stereotype, there is some truth to the idea that workers clock off at 5pm in other European countries, which can feel exasperating to US managers with their Protestant work ethic.
Of course, US fund managers are attracted by the Channel Islands’ classic selling points too. Di Santo points to their “political stability, economic stability and a well-respected regulator”.
The islands’ tax neutrality cannot be ignored (there is no VAT, CGT or corporation tax). The fact that the islands are not on any ‘blacklists’ and have a good reputation also counts for a lot.
The Channel Islands have strengths in fields that are relevant to US alternative fund managers, too. “Around 80% of our funds are in the alternative space,” points out Di Santo, which means US managers can find deep expertise in areas such as venture capital, real estate and private equity more generally. “It’s like a mini-London,” adds Pirecki.
A final draw held is regulatory innovation. Both Guernsey and Jersey have introduced limited liability companies (LLCs), a business structure that is almost identical to LLC structures in Delaware and the Cayman Islands. This makes it far easier for US offshore managers to shift over to the Channel Islands.
Similarly, Jersey and Guernsey also have innovative Private Investment Funds – the Guernsey Private Investment Fund (PIF) and the Jersey Private Fund (JPF).
Greg McKenzie, MD at Belasko in Guernsey, points out: “The PIF and JPF offer a lighter-touch regulatory framework suitable for sophisticated investors and most interestingly can obtain regulatory approval in 24 hours.
“They are also recognised within the EU, benefit from the NPPR regime and have no legal restrictions on structure.”
While setting up a fund in the Channel Islands would work for many US-based alternative investment managers, it’s not always right for everyone.
As noted above, larger funds that are marketing themselves to investors right across the continent might find it preferable to be based inside the EU for AIFMD compliance. And there are some countries, notably in southern Europe, that may throw up barriers to NPPR applications from the Channel Islands.
However, all the biggest allocators in the alternatives space – such as Germany, the Netherlands and the UK – are all accommodating to this approach.
Big Apple to the bailiwicks
So, what kinds of businesses are US managers setting up in the Channel Islands? Ross Youngs, Group Commercial Director at Belasko, says they’re focused on two main kinds of activity.
First, there are investments. Many US managers who wish to acquire UK assets benefit from the Channel Islands’ position as an asset-holding location for UK assets.
But perhaps a more significant activity relates to capital-raising purposes. “European investors who do not wish to invest in Delaware or Cayman structures directly often feel more comfortable accessing US products via parallel structures domiciled in the Channel Islands,” says Youngs.
Sometimes the US manager will be looking to create a feeder fund so that European investors can invest in an already successful fund based in the US or in the Caribbean. Due to AIFMD, that fund couldn’t market directly into the EU.
However, if the manager sets up a feeder fund in Jersey or Guernsey, they could still raise capital from investors on the continent thanks to the NPPR.
The fact that the Channels Islands are tax-neutral and have relatively low compliance burdens would make this an effective way of raising capital from European investors.
Another common scenario is when a US or Caribbean fund decides to move to Europe outright. They might have a specific investor who is keen to work with them but who can’t invest outside of Europe, or the manager might have spied an opportunity on the continent.
Whatever the reason, they could choose to open a fund in the Channel Islands as a way of accessing this capital.
Crucially, migrating their business from other offshore destinations is relatively easy – Channel Islands regulators are familiar with this approach, and there are plenty of legal experts who can arrange the move. There are of course other reasons and ways that US managers set up funds in Jersey and Guernsey.
There’s been clear and growing interest in the Channel Islands from US fund managers in recent years – and that growth looks set to continue. In 2019, Jersey Finance began drumming up interest in the island in the US, and this seems to have been very successful.
As Pirecki concludes: “What’s very encouraging now, compared with when we started, is that when we go into meet with people… [Jersey is] becoming more well-known year on year."