Geoff Cook explains how Jersey's real estate fund sector is facing up to the challenge of operating as a ‘third country’ under the AIFM Directive
Against a backdrop of ongoing challenging market conditions, Jersey’s funds sector has shown a degree of resilience. Despite concerns about fundraising slowing down and new regulation being introduced, the latest figures from the Jersey Financial Services Commission for the second quarter of 2012 paint a picture of relative stability, with the value of assets being administered in Jersey remaining around the £190bn (€235bn) mark.
In particular, Jersey continues to assert itself as a major player in alternative funds, with the sector accounting for around 70% – and real estate funds alone accounting for 12% – of the total value of funds under administration in Jersey.
One issue that remains in the spotlight for fund jurisdictions globally is the EU Alternative Investment Fund Managers Directive (AIFMD) and it is not surprising that, given Jersey’s strength in alternative funds, this is firmly on Jersey’s radar.
There is no doubt that its reach is broad and significant for real estate funds that are domiciled in Europe, have an EU manager, or are marketed in the EU. Whilst the Directive is intended principally to regulate alternative fund managers, it will also impact service providers, as well as the ongoing transparency, reporting and marketing of the funds themselves.
Jersey, as a non-EU ‘third country’ jurisdiction under AIFMD, its funds industry, government and regulator have been intensively engaged on AIFMD. The clear message is that, when AIFMD comes into play in July 2013, Jersey intends to maintain a ‘business as usual’ approach for funds within the EU through national private placement regimes until at least 2018.
Jersey is also committed to introducing the option of a fully AIFMD-compliant regime and obtaining an EU-wide passport by 2015 – as soon as is possible for non-EU ‘third countries’. Meanwhile, as a non-EU jurisdiction, Jersey is able to continue to offer a completely separate regime that lies outside the scope of the Directive, for real estate fund managers who don’t want to access EU capital or who don’t operate in the EU. In this way, Jersey will be able to continue operating its existing fund regime whilst at the same time offering an option that is fully compliant with the Directive, providing fund managers with the flexibility to market to investors both inside and outside the EU.
EU-Member States will need to be fully compliant with the Directive as from July 2013. However, national private placement regimes in individual EU-member states can remain from that date, until at least 2018, for non-EU funds being marketed into the EU by non-EU managers.
The continuation of private placement will require individual agreements between Jersey’s regulator and the regulator of each member state. Jersey’s regulator is already engaged with ESMA and member state regulators to ensure such agreements can be in place in good time. With bilateral cooperation agreements already in place with the majority of key EU member states, Jersey is confident that it will be able to sign the necessary co-operation agreements.
Beyond private placement, Jersey is also well on track. EU-wide marketing passports, which will allow managers to market to investors across the EU, will become available to non-EU managers, such as those domiciled in Jersey, from 2015, provided they are fully authorised under AIFMD.
In terms of obtaining a passport and introducing a fully compliant AIFMD regime in 2015, Jersey is well-placed. The directive is about regulating and authorising alternative fund managers, and this is something that Jersey already does, in accordance with IOSCO standards. Keen to fully embrace AIFMD as soon as possible, Jersey intends to have a fully-compliant regime ready to go ahead of the 2015 date for non-EU countries, with Jersey’s regulator and government ready to progress any additional agreements required by ESMA.
Jersey already has information exchange agreements, either TIEAs or DTAs, in place with 13 member states, including the UK, France, Germany, Sweden, Norway, the Netherlands and Ireland, with expected to be ratified in the coming months. With this substantial number of agreements in place and the excellent independent reports it has received on its regulation, corporate governance and stance regarding anti-money laundering, Jersey is confident that it will be able to satisfy all criteria needed to comply with AIFMD ahead of the 2015 deadline.
Between 2015 and 2018, meanwhile, non-EU funds and fund managers will have the option to benefit either from an EU-wide passport or continue marketing through the national private placement regimes.
Far from being a burden for Jersey, the directive could actually pose some opportunities. For example, it is not Jersey’s expectation that AIFMD will prompt a migration of real estate fund business away from offshore centres to onshore centres, as has been speculated in some quarters. In fact, it is anticipated that maintaining a parallel offshore option for non-European investors will make a good deal of sense.
In the current climate, fund managers aren’t just focusing on Europe, they are thinking increasingly about sourcing capital from, for example, sophisticated Asian and Middle Eastern investors – for which an offshore solution will remain attractive.
Stability and flexibility will be key considerations for property fund managers in this new alternative funds landscape, and this has been very much at the forefront of Jersey’s response to the AIFMD. The path pursued by Jersey allows fund managers choice: of a route that is fully compliant with AIFMD – whether that’s through private placement or eventually an EU-wide passport – and a route that remains outside of the EU completely.
Geoff Cook is CEO of Jersey Finance