Despite stiff competition in recent years from Luxembourg and Dublin, pooled fund business in the Channel Islands has continued on a steady upward trend.
Enjoying a constitutional position that gives them domestic legislative autonomy (including matters of taxation) and places them “half in” and “half out” of the EU, the islands are well placed to provide bespoke pooled investment vehicles for institutional investors and pension funds.
While Jersey and Guernsey are not positioned to compete head on with Luxembourg and Dublin for retail and public investment fund business, the latest statistics in Jersey still disclose a buoyant £37bn (e56bn)-plus in public fund structures regulated under the Collective Investment Funds (Jersey) Law 1988. However, the area of significant growth over the past decade has been in the context of single institutional investor funds, private placement funds for small numbers of institutional and professional investors and, more recently, in private equity and venture capital funds which can take advantage of a lighter regulatory regime applied under the Control of Borrowing (Jersey) Order 1958. It is estimated there is now over £30bn held through these non-public vehicles in Jersey.
Much of this business to date has originated from an Asia/Pacific client base and been won by US and European investment banking groups but there is growing interest and enquiries from other areas. In particular, European-based managers and venture capitalists are beginning to become aware of the opportunities which exist in the Channel Islands to structure sophisticated and tax-transparent joint venture and private equity businesses. A streamlined regulatory approval procedure for these non-public vehicles was introduced in Jersey back in 1994. While maintaining the island’s high entry threshold requirements for promoters of these vehicles – in terms of the stature and track record which promoters need to be able to demonstrate – this allows great flexibility in tailoring these funds to meet the investment needs of the client. One major advantage of Jersey over larger competitor jurisdictions in the European time zone is accessibility to and the responsiveness of the regulatory authorities, who are able to scrutinise and turn around non-public scheme approvals in little more than 10 working days from submission of fund documentation.
The ability to accommodate innovation and the maintenance of a sound yet flexible regulatory approach to these non-public structures explains much of the past success. Jersey, in particular, has deliberately not emulated other jurisdictions which have formulated specific parameters and legislative restrictions for professional investor funds but has followed an open-door and pragmatic approach to institutional business proposals. Provided clear disclosures are made of the proposed investment management techniques and any ancillary risks and the vehicle is targeted for use by a restricted number of institutional or sophisticated invest-ors (maximum of 50) the investment parameters and restrictions can be set very largely by the promoting institution. Accordingly this category embraces not only orthodox securities-type schemes but hedge-type total return funds, multi-manager funds, real estate funds and venture and development capital structures. The advent of the Channel Islands Stock Exchange completes the range of services which can be provided and makes a ‘one-stop’ ap-proach possible for institutional funds which need to achieve listings to facilitate investment in their units or to satisfy domestic regulatory requirements.
One emerging trend is the spillover between securitisation work, which has boomed in Jersey in recent years, and asset allocation vehicles. Securitisation techniques and investment fund structures are now being put together to facilitate access by the insurance industry to the capital markets, to assist in re-engineering the way in which insurance risk can be actively managed and adjusted and to enable institutional investors to participate in and have portfolio exposure to insurance-linked investments. The investment activities of these funds do not constitute insurance business, so there is no requirement to register the structure under the Insurance Business (Jersey) Law 1996.
With the exception of venture and development capital arrangements structured as limited partnerships, a high proportion of the single investor and private placement funds tend to be established as unit trusts under Jersey law rather than as corporate vehicles. The unit trust format offers greater flexibility in many respects. For example, the distribution policy can be tailored to meet client needs and is not so restricted as a corporate would be by reason of company law prescriptions on maintenance of capital and the definition of distributable profits. Unit trust arrangements for non-Jersey resident investors operate as tax-exempt structures in relation to non-Jersey source income and no local withholding taxes apply on distributions or redemption proceeds paid out of the fund; there are no regulatory fees payable by private institutional and pension fund investment vehicles, no net asset value taxes and no VAT. Delegation of the investment management functions out of Jersey to investment managers associated with or selected by the scheme promoter is permitted and for non-Jersey resident scheme promoters the possibility exists to structure the in-vestment management functions so as to roll up net management fees free from Jersey income tax. The Limited Partnerships (Jersey) Law, 1994, provides a flexible alternative vehicle for those arrangements which are more suited to a limited partnership structure.
Due to concerns about the efficacy of the protected cell concept, Jersey has not followed the example of Cayman, Guernsey or Malta, each of which has introduced protected cell company legislation. In the meantime where concerns exist in multi-class structures about the risk of cross liabilities or contagion, multi-class Jersey law unit trusts have been structured as a series of separate trusts with segregated trust funds to address these concerns. Under Jersey trust law, where a trustee informs a counterparty that he is acting in a trustee capacity in relation to a transaction any claim by the counterparty in respect of that transaction extends only to the relevant trust property.
Confidence in the future of the Channel Islands as a base for institutional fund and private equity vehicles remains high. This is a niche area where the islands can capitalise on their international reputation as centres focusing on high quality business, the availability of a wide range of flexible investment structures and the presence of leading custodian banks and fund administrators. Corporates outside the EU are noting that the Channel Islands are well placed on the margins of Europe to broaden the role which they have traditionally played as a conduit for the inward investment of monies into the London securities markets (estimated at over £200bn) to become a gateway for inward investment into the euro-zone and the European securities markets generally.
Simon Howard is a partner in Jersey law firm Bedell & Cristin