The AIFMD "passport" could see a new wave of US fund managers using the Channel Islands to access Europe
A subject that ou may have already read about on more than one occasion in BL is the introduction of third-country passports under the Alternative Investment Funds Managers Directive (AIFMD). Admittedly, it hardly sounds like the sexiest of subjects, but it"s one that could have far-reaching implications for funds businesses in the Channel Islands - bringing with it considerable opportunities that will benefit the islands some way into the future.
At the end of July, ESMA announced that Jersey and Guernsey were the only two jurisdictions to which it would consider extending the passport - the only other jurisdiction to get the potential green light was Switzerland. For the Channel Islands, this represented a significant opportunity to service overseas fund managers keen to use the offshore route to access Europe"s vast investor base.
“Directly soliciting investors in the EU will be better with the passport,” says David Porter, Deputy Director in Policy & Strategy at the Jersey Financial Services Commission. “The current private placement regime works well but it"s on a country-by-country basis. With the passport we will be able to offer optionality - to
be in Jersey and to market into the EU in either private placement or through the passport or, if they"re not going into the EU, to use Jersey"s existing funds regime to market elsewhere.”
Contrast this position with that of other offshore jurisdictions not on the list. Places such as the Cayman Islands and the British Virgin Islands don"t know when - or even if - they will be granted a similar passport. One thing is certain: they will be all too aware of the competitive advantage it currently gives Jersey and Guernsey.
“There"s a potential opportunity for the Channel Islands, should Cayman not get the passport,” says Mike Newton, MD of State Street in Jersey. “Managers want the flexibility of choice, with no desire to go via mainland EU if they can avoid it.”
Attraction for us funds
Indeed, the appeal to US fund managers in particular could be massive. The US is by far the largest fund market in the world, and its managers are keen to market to Europe"s broad investor base. And an offshore route remains appealing - they wouldn"t have the same flexibility if they went onshore, falling fully under AIFMD and facing restrictive requirements.
Not that there isn"t US business in the Channel Islands already. The list of US-based investment managers operating in the Channel Islands includes Global Infrastructure, Morgan Stanley, JP Morgan, Merrill Lynch and Sequoia.
Simon Schilder, a Partner at Ogier in Jersey, has plenty of experience of the US fund management market, having previously worked in the British Virgin Islands for more than 10 years. He reports a similar story from his experience at Ogier, saying business from the US is growing, especially on the corporate and structuring sides. “That"s evidence of a growing cognisance of the Channel Islands among people in the US and those advising around where to put funds,” he says.
While there"s already work for the islands in US funds, it"s hard to ignore the extra significance of being cleared for the passport when the US itself hasn"t even been granted one. Funds from the Channel Islands can now guarantee that a US fund manager will still be able to use an offshore route to market to the investor base in Europe, even if the existing private placement regime is switched off. While those managers could currently set up a Cayman or BVI structure to take advantage of a private placement regime, they"d run the risk of being left high and dry once that system comes to an end.
The Channel Islands can offer certainty, and that could prove crucial. “US managers do tend to use Cayman,” says Chris Anderson, a Partner at Carey Olsen in Guernsey. “It"s closer to the US and it"s in the same time zone. Plus people are conservative - it"s difficult to wrest business away from the Caribbean because of its geographical proximity. But these changes may tip the balance.”
Under AIFMD, a US fund manager may set up a management company in the Channel Islands and use the passport to market shares in funds they manage through the EU, without being susceptible to the full regulations. But it"s not just about granting managers access to investors. It"s about ensuring that institutional investors have access to invest in non-EU funds too.
There"s one other major appeal for US managers - using the Channel Islands as a route to a London listing. The London Stock Exchange is attractive to US managers because it"s not prescriptive about the investments that fund managers make. Secondary fund raising is far easier there than on US exchanges and it offers greater flexibility to distribute profits.
The islands have in fact already seen interest from US fund managers launching property funds. Last year Kennedy Wilson, a US property manager, set up a Jersey fund of £1bn to list on the London Stock Exchange. It was billed at the time as the largest real estate fund ever to list in London. Meanwhile when Apax
Partners raised €350 million on the LSE to feed into its funds, it did so by listing a Guernsey company, moving assets out of Luxembourg and into Guernsey just prior to the listing.
The Channel Islands are well placed to facilitate such listings. “Try to list a Luxembourg entity on the LSE and investors will say "what is this?",” says Anderson. “Say it"s a Guernsey vehicle and they don"t bat an eyelid. It"s the path of least resistance.” The London Stock Exchange has been actively marketing in New York to encourage US fund managers to London, and the Channel Islands are sure to benefit if this marketing pays off.
Yet there are potential hurdles. What if the Cayman Islands and BVI were handed the passport too? It"s fair to assume that they would remain US managers" preferred partner, because the benefits of proximity and time zone would remain, as would the historical precedent. But it"s important to note that at this stage there are no signs of the passport heading that way. “In the short term,
it"s unlikely,” says Schilder.
Perhaps a bigger threat is that many of the US managers that are looking to market in the EU and currently use Caribbean jurisdictions are so large that, should their preferred routes become problematic, they could simply set up their own EU structure to target this market instead, bypassing the Channel Islands altogether.
“Graham Capital just launched a UCITS fund of their own,” says Schilder. “This size of manager can just go and get a EU vehicle for their investors, so they don"t need to worry about AIFMD at all. It"s a bigger question for the smaller ones, who"ll ask how important it is for their investor base. As the EU becomes a big barrier to entry, they may even figure that they"ll focus their marketing outside the EU.”
The final potential hurdle to note is that of the timeframe. ESMA has yet to announce when it will make the passport concrete, and it may add more countries to its list before it does so - in order that Guernsey, Jersey and Switzerland don"t have a head start on everyone else.
The overall message to the Channel Islands is, therefore, to wait and see. Even
if the passport is granted, it will take time to work it through, and then a period to see if it"s attracting managers as expected.
“We should give it two years and reassess,” says Anderson. For now, the one certainty is that the Channel Islands have a privileged place on ESMA"s priority list. And that can only be a good thing.