The growth of fund management companies in Guernsey and Jersey is giving the islands another string to an already impressive bow
It’s difficult to talk about funds in the current environment without the focus turning inevitably towards the Alternative Investment Fund Managers Directive (AIFMD). While the regulation has provided its fair share of challenges to the Channel Islands, it’s also created opportunities – and notable among these has been the growth of fund management companies (ManCos).
That said, ManCos aren’t a new development. An existing body of EU regulation, known as the Undertakings for the Collective Investment of Transferable Securities (UCITS), established, among other things, the role of ManCos in ensuring important protections for investors buying into various types of funds. These funds invest in ‘standard’ asset classes, such as equities and bonds.
Another key aspect of UCITS-compliant funds is that once they and their management structure have been approved in one EU jurisdiction that conforms to EU directives, then they can be sold to investors throughout the countries of the EU – an arrangement known as ‘passporting’. Consequently, the use of ManCos for UCITS funds is well established, especially in centres such as Dublin and Luxembourg, where tax regimes and administration capabilities make them jurisdictions of choice.
When AIFMD was introduced in July 2013, it applied similar regulation to alternative funds, including hedge funds, private equity funds, retail investment funds, investment companies and real estate funds. The Channel Islands have for some time had particular expertise in managing such funds, so when AIFMD came into force, they had a head start.
Moreover, practitioners in Jersey and Guernsey believe it’s easier to adapt to the new regulatory regime there than it is for competitors in Dublin and Luxembourg to get up to speed with alternative fund management.
As it stands, the Channel Islands are approved for EU business in private placements for both EU and non-EU investors. And in July this year, the European Securities and Markets Authority (ESMA) noted that there were ‘no obstacles’ that it could see to passporting permission being granted to Jersey and Guernsey – although as yet, the islands are still waiting for the bureaucratic wheels to turn for the passport to be put in place.
Nevertheless, ManCo business in the Channel Islands has been growing. Firms such as Carne, Crestbridge, JTC, Sanne and law firm Carey Olsen are among those that now have considerable experience in the establishment and use of ManCos.
The role of ManCos
So just what is a ManCo and what does it do? Justin Partington, Global Head of Funds at Sanne, which provides services to a variety of different types of alternative funds says: “If you have a ManCo that’s an established entity, providing risk management and portfolio management services, you give substance and credibility to what the manager is doing with the fund.
“What a ManCo does is to look at the risk and portfolio management of the assets. This involves reviewing investments and then monitoring the risks around those investments. It’s about ensuring that investor requirements have been fully met, the risk/reward ratio is adequate and restrictions on what the fund can invest in have been met, and then monitoring liquidity to make sure it’s adequate.”
AIFMD is quite prescriptive about what risk management of a fund involves. Limits need to be set and monitored for exposures to market risk, credit risk, liquidity risk, counterparty risk and operational risk. That requires a high level of expertise.
“We specifically design a risk management framework in light of the strategy of a particular fund,” explains Mark Hodgson, CEO of Carne Group’s Channel Islands business. “We establish a risk register and reporting from various service providers to the fund. So the ManCo sits there as a separate regulated entity that looks specifically at the risks and portfolio management in relation to the fund’s strategy.”
An individual fund may be managed by its own ManCo or by a ManCo that manages a number of other funds as well, but the ManCo’s role will be the same. It will be authorised by regulators to act as an alternative investment fund manager (AIFM) and its role is, crucially, distinct from the portfolio manager who may, for example, be based in London, New York or an EU fund management centre where investment decisions may be taken.
The AIFM bears a number of responsibilities, as David Crosland, Partner at Carey Olsen in Guernsey, explains. “It has to have a particular level of capital adequacy. All staff are subject to a remuneration policy, there are rules about how the AIFM is organised and structured, there are policies and procedures, and the personnel qualified,” he says.
“As a trade-off for this level of management expertise and control, you’re allowed to passport your EU-based funds anywhere in the EU. We’re hopeful that once the ESMA decision is signed off, we’ll be given what’s called EU equivalency status and our jurisdictions will become fully empowered. We think Channel Islands AIFMs will become more popular, especially third-party ones that can reduce the cost to the funds by effectively sharing them.”
Looking forward
The Channel Islands face two uncertainties to the development of their role as jurisdictions for ManCo services. The first is whether or not ESMA’s full approval of third-country passporting will be handed down for ManCos based in the islands.
Stuart Pinnington, Group Head of Institutional Client Services at JTC Group, is optimistic about this. “We have strong regulators in the Channel Islands with whom we work closely and they are keen to support the ManCo industry here,” he says.
“Also, to make a ManCo structure work and be a desirable structure for funds, it’s about the skill set of the people who sit on ManCo boards and look after these structures. The Channel Islands are well placed to do this because they have very well-established industries with lots of credible professionals who’ve worked in funds for a long time.
“There is probably a deeper professional, human capital resource here than there is in other jurisdictions such as the Cayman Islands, British Virgin Islands or Mauritius, which are potential competitors. So I think these are very positive characteristics for the Channel Islands.”
The second imponderable is the impact of the UK’s exit from the EU. Clearly, its terms have yet to be mapped out. As Mark Hodgson says: “It’s too early to tell, but I can’t see how we’ll be disadvantaged by the UK’s exit. The Channel Islands are non-EU jurisdictions with a strong business link to the UK.
“Managers in the UK have a long track record in establishing funds in the Channel Islands and I expect that to continue, irrespective of how the UK landscape develops. The longstanding and ingrained expertise in the funds industry, and the development of ManCo solutions, should continue to make the Channel Islands an attractive destination for UK and worldwide asset managers.”
Meanwhile, competing EU fund management centres, led by Dublin and Luxembourg, are keen to extend their UCITS ManCo expertise to alternative funds. While Jersey and Guernsey are currently the jurisdictions of choice for many such funds from around the world, nothing is certain.
However, it’s worth noting that the major growth areas of wealth management are in emerging markets well beyond the EU, led by Far Eastern countries. With a high level of fund management and administration expertise and safe, well-regulated jurisdictions, the Channel Islands have much to offer investors around the world. Whether an alternative financial centre will emerge as a major competitor to disrupt this position remains to be seen.
But for the time being, the ManCo industry in the Channel Islands remains competitive and looks set to keep growing.