Alternative Insight – June 2017

Regime Change – new private fund regimes in the Channel Islands

 

Keen to capitalise on buoyant conditions in the global funds market, Jersey and Guernsey have recently introduced new private fund regimes – the Jersey Private Fund (JPF) and the Guernsey Private Investment Fund (PIF). Both regimes aim to make it quicker, cheaper and simpler for managers to launch new open- and closed-ended funds. Early indications from the market are positive: the JPF and PIF are proving popular with fund promoters. We consider each in turn.

The Jersey Private Fund

The JPF regime, launched in April, represents a welcome consolidation of Jersey’s fund rules by providing for a single private fund product, the JPF, which replaces the array of ‘COBO Only Funds’, Very Private Funds and Private Placement Funds that Jersey had developed over many years in response to evolving market demand.

Here are the JPF’s key features:

Flexibility

The JPF can be structured as a limited partnership, company or trust, and it is available to open and closed-ended funds alike. If everything is in order, a JPF application will be processed by the Jersey Financial Services Commission (JFSC) within two business days of receipt.

Marketing

Generally, there is no requirement for a JPF to have an offer document, but all of its investors must be ‘professional investors’ or ‘eligible investors’. Full definitions of the categories are in the JPF Guide, but basically:

  • Professional investors’ include people who invest (as principal or agent) by way of business, individuals or couples with a net worth of greater than US$1m (excluding their principal residence), investment structures with assets valued at US$1m or greater, an entity which carries on fund services business, trust company business or investment business for the JPF and any such entity’s senior executives.
  • ‘Eligible investors’ include investors who make an initial investment or investment commitment of £250,000 (or currency equivalent) in the JPF, holders of founder, nominal or management interests in the JPF which have been created to facilitate the formation of the JPF, the exercise of voting or management rights or to give entitlement to performance related fees as part of remuneration arrangements and discretionary investment managers acquiring interests for or on behalf of non-professional or non-eligible investors.

A JPF cannot accept direct or indirect investments from retail investors unless as a consequence of being an involuntary transferee i.e. death or bankruptcy of a registered holder of a JPF interest or through a discretionary investment manager investing on behalf of its clients (subject to the investment manager being satisfied as to the underlying investor’s suitability).

A JPF can be marketed to (and accept investments from) up to fifty investors. Investors are counted on a look-through basis – so a feeder fund’s investors would count toward the cap of fifty as if they had invested in the master fund itself. There are no restrictions on the number of new investors so long as the aggregate number of investors in the JPF does not exceed fifty.

Each investor must acknowledge, in writing, that it has received and accepted the obligatory investment warning and disclosure statement – this is typically done in the investor’s subscription agreement.

Operations

The JPF’s management entity – depending on its structure, this may be a general partner, managing trustee or manager – is generally exempt from the requirement to be licensed in Jersey. It is also not mandatory for the JPF to be audited. However, the JPF must appoint a designated service provider (DSP) in Jersey – typically a fund administrator. The DSP would be an existing Jersey full substance entity and effectively serves as the JPF’s interface with the regulator. It oversees compliance with the KYC/AML regulations and has to submit an annual compliance return to the JFSC.

Conversion

Although no new applications for COBO Only Funds, Very Private Funds or Private Placement Funds are being accepted by the JFSC, any existing fund established under these regimes will continue to be regulated under the relevant regime. It also has the option of applying to the JFSC to convert into a JPF, subject to compliance with the eligibility criteria.

The Guernsey Private Investment Fund

In November 2016, Guernsey introduced the new Private Investment Fund regime. The PIF has some things in common with the JPF, but there are also key differences.

The PIF regime is the culmination of consultation by the Guernsey Financial Services Commission (GFSC) with industry and added a new fund product offering to Guernsey’s suite of fund solutions.

Here are the PIF’s key features:

Flexibility

A PIF can be structured as a limited partnership, company or trust, and it is available to open- and closed-ended funds alike. If everything is in order, a PIF application will be processed by the GFSC within one business day of receipt.

Marketing

A PIF can have up to fifty investors. There are no restrictions on the number of investors to whom a PIF can be marketed. Thirty new ultimate investors can be admitted every 12 months, subject to the overall cap of fifty.

Investors in a PIF need not be professional investors. There is no minimum subscription amount, but the PIF’s manager must warrant that it has assessed that the investors in the PIF are able to sustain any losses incurred on their investment (at the time of their investment).

A PIF need not have a disclosure document and, if it does, a disclosure document need not comply with any formal requirements – its contents are essentially left to the fund promoter’s discretion.

Operations

A PIF must have a Guernsey-licensed manager (generally an entity affiliated to the fund promoter). The process is quick – if everything is in order, the GFSC will license the manager within one business day of receipt of its application.

A PIF must appoint a Guernsey designated administrator (GDA). The GDA would be an existing Guernsey full substance licensed entity responsible for discharging the role traditional undertaken by a fund administrator. In addition, as part of a PIF’s registration application, the GDA gives certain warranties to the GFSC including that the promoter of the fund is suitable. In reliance of the GDA’s warranties, the GFSC will register a PIF.

PIFs are required to comply with certain ongoing requirements including rules relating to managing conflicts, audit (a PIF must appoint a qualified auditor to act as auditor of the PIF) and annual returns. The annual returns to the GFSC include details of any change to the information contained in the PIF’s registration application together with the PIF’s annual audited reports and accounts. Further, the PIF’s GDA is required to notify the GFSC immediately of certain matters, including the premature termination of a PIF or an extension of a PIF’s life.

Conversion

Guernsey funds registered prior to the introduction of the PIF regime can elect to be treated as a PIF – those wishing to do so must make an election to the GFSC no later than 16 November 2017.

Conclusion

Both JPF and PIF offerings provide managers with simpler, time and cost effective solutions for their investment fund needs, and reinforce the position of Jersey and Guernsey as innovative and responsive fund domiciles, particularly in the alternatives space.


 

Alternative Insight is produced by MJ Hudson’s private funds lawyers. We provide expert legal advice to fund managers, other financial sponsors, investors and advisers on the formation, structuring, investment into and regulation of private funds, managed accounts and similar vehicles. Our practice covers the full spectrum of alternative assets, including private equity, venture capital, hedge funds, private debt, real estate and infrastructure. Clients praise our entrepreneurial approach, commercial outlook and dedication to helping them achieve their objectives, regardless of the obstacles.