Operating in the current European cross-border fundraising and investment market can be a regulatory minefield for private real estate managers and investors, thanks to Brexit, AIFMD, and a host of other EU directives affecting the alternatives sector. Managers are looking to park their funds in a reliable domicile to mitigate any potential disruption, and Jersey is proving to be the location of choice for a growing number of them. Jersey Finance launched in 2001 to promote the jurisdiction as a center of excellence for business. The effort is paying off. A conversation between Mike Jones, Crestbridge, and Mike Byrne, PwC Channel Islands, reveals why this small island in the English Channel provides a compelling story for the sector.
Mike Jones: There is currently a lot of uncertainty because of Brexit, not only in the UK and Europe, but in the rest of the world. It is easy to forget the impact on a Singapore, Canadian or Swiss asset manager looking to market funds across Europe. But for Jersey it is also creating opportunities. Post-Brexit, the UK will not be as constrained by EU requirements and will be motivated to develop free trade agreements throughout the world. Jersey, being a crown dependency of the UK, is well placed to benefit from the new business this will bring. It is in prime position to offer managers access to the UK market. At the same time, Jersey is likely to maintain good access to Europe too.
Michael Byrne: I agree Brexit has caused uncertainty for the UK real estate market. But in Jersey itself, some of the largest private funds raised have come in the period since the referendum because Jersey is seen as a stable jurisdiction. Brexit has caused a lot of noise, but as an autonomous, self-determining country, Jersey is somewhat Brexit proof. The island is not a pawn in that particular political game. Those large funds (raised in the last few years) have huge teams doing due diligence, and assessing multiple jurisdictions before they decide where they are going to locate. Their choice of Jersey indicates it is viewed as a safe option for managers going forward. International assessments by organizations such as the International Monetary Fund and the Council of Europe back this up; they consistently rank Jersey at the top.
MJ: Market access will be a key issue for managers post-Brexit. The dynamics in Europe in terms of third-country equivalent assessments and third-country access will change. Europe will have to look closely at its third-country regime. Managers need to think carefully about where they will domicile and market themselves going forward. Jersey’s access to National Private Placement Regimes can play an important role in offering UK and other non-EU managers continued access to Europe and European managers access to the UK market. From the investor perspective, the regulatory climate presents challenges too. US-based funds and investors, for example, struggle with the European regime. Quite frankly, sometimes they are not bothering with Europe. That is a shame in terms of investor choice and investors in Europe being able to access the best managers around the world. Europe is viewed as too difficult, too costly. The NPPR allows managers to market to two or three jurisdictions in a more effective and cost efficient manner, and to avoid a pan-European marketing effort.
Business continuity post-AIFMD
“NPPR can play an important role in offering UK managers continued access to Europe post-Brexit”
MB: Initially, the directive was badly received by mangers and investors, but it would have been more difficult to work with had it not been for the UK’s involvement under Lord Hill. This is not going to be the case with the forthcoming review of the Directive and shaping of AIFMD II. Several industry bodies, and also the EU Commission, have already surveyed the industry to gauge sentiments and concerns around AIFMD II. There is a perceived danger of the EU shutting off distribution of non-EU funds into Europe. It cannot afford to get this wrong. Investors want free choice and access to the best managers in the world. The EU must avoid creating inappropriate barriers to access.
MJ: The impact of AIFMD on Jersey itself has not been too dramatic. Looking back over the last five years, NAV in Jersey is up about $100 billion. Through NPPR there are around 150 managers marketing about 300 funds into Europe. Those stats are going up every quarter. Jersey has done everything to ensure business continues smoothly for managers and investors post-AIFMD in terms of securing market access. Jersey has proven time and time again that it can negotiate effectively with relevant EU authorities; it did this well under AIFMD I. I expect Jersey to continue lobbying for the same security and market access for managers under AIFMD II.
A secure anchor: Five reasons to domicile in Jersey
1) High regulatory standards
2) Market flexibility
3) Funds are authorized and launched quickly
4) Political and economic stability
5) Access to highly skilled financial services professionals
MJ: Jersey’s regulatory standards are a key reason why it is now one of the most favored fund domiciles. It offers proportionate responses to difficult issues. This is an important differentiator. Managers are getting flexibility but with very high standards. Couple this with speed to market. Managers can get their products authorized and launched incredibly quickly, knowing they are not going to sit with the regulator for six months. That is a huge benefit from my perspective.
MB: Those are all good reasons for locating in Jersey, but I would add product choice as to why it is seen as a safe bet for real estate fund managers. The jurisdiction offers a range of products and structures to suit every situation. Then there are soft factors. The jurisdiction has had a finance industry for 40 years. The professionals working there are true experts; highly qualified and trained. And Jersey is an easy place to do business. When we think about some other jurisdictions in Europe, it is hard to get straight answers or to achieve quick turnarounds; they sometimes lack a can-do approach. Jersey, by contrast, is very client-centric. The culture is just right.
MJ: We should also not ignore the political and economic stability Jersey offers as a reason for managers domiciling there. If you look around the world, there is little of that these days. Despite its small landmass, Jersey is a jurisdiction of substance with over 13,000 employed in the finance industry; not the perception many people have of an offshore center.
MB: PWC recently forecast that global AUM will increase 70 percent by 2025 and that alternative assets will grow from $10 trillion to $21 trillion over the same period. In terms of real estate, we are seeing more people moving to cities, and a pressing need to replace existing stock. There is more investor appetite for real estate. That is great news for Jersey, which is well placed to share in the opportunities this growth will bring. Jersey is innovating new products and services to make sure it remains relevant to that growth.
This article is sponsored by Jersey Finance. It appeared in the Regulation and Fund Domiciles supplement with the May 2018 issue of PERE.