The Channel Islands are famously secretive: almost as little known by the rest of the British Isles as they are by the rest of the world, at least until recent grisly discoveries flung Jersey into the public eye for all the wrong reasons. But, for the alternative investment fund industry, Jersey and Guernsey are more than islands suspended between France and the UK. The two jurisdictions have steadily developed their appeal to private equity, real estate and even hedge fund promoters – as well as some more exotic alternatives.
Guernsey now has £178.2bn (€225.18bn) in funds under administration and management, of which £26.6bn are hedge funds, £33.9bn private equity and £17bn property assets, according to Guernsey Finance.
Jersey Finance figures for December 2007 reveal a total of £246.1bn in funds under administration, of which “specialist funds” account for approximately £130bn. The total is up £67bn from the start of last year. However, according to at least one senior industry figure, the different methods of calculating figures make it difficult to make a straightforward comparison of the two jurisdictions.
“Alternative investment funds fit in well in Guernsey as they require people with savvy to understand them,” says Horace Camp, executive of Guernsey-based niche service provider, Anson Group, and ex-managing director of Kleinwort Benson on the Channel Islands. “Alternatives – hedge funds, private equity, property and then all the esoteric ones as well, wine, fine art and so on – don’t easily fit into a ‘sausage machine’ above the book keeping and processing level.”
People and experience, he says, are key – and Guernsey has been building up both over the last quarter century.
Jersey is as confident of its own merits. Richard Thomas, Jersey funds partner at offshore law firm Ogier, explains: “We have strong retail regulation for our retail funds, a good level of regulation for our general unclassified arena, a lighter touch for Expert Funds, and no interference for the unregulated funds. For the global market place, we have offerings that are suitable for most people.”
The new Unregulated Funds Regime, launched on 5 March, is considered a particular selling point. It imposes no audit requirements, no limit on investor numbers and no requirement for Jersey service providers.
 | According to Eve Kosofsky, Jersey funds partner at law firm, Carey Olsen, it “has catapulted Jersey into market recognition”. |
Separate jurisdictions
Jersey and Guernsey are separate jurisdictions, although, as Mr Thomas acknowledges: “Most of the world thinks of the Channel Islands as one place. There’s only a small and very familiar market that understands there are differences and nuances between the two.”
There are distinct legislative and regulatory frameworks. Jersey categorises funds according to number of investors (those with 50 or more investors fall under the Collective Investment Funds law), while Guernsey does so according to whether they are open or closed ended.
But they are not so very different. For example, while Jersey has its Expert Investor funds, for those with more than $100,000 (€63,100) to commit, Guernsey has its Qualifying Investor Funds system, which, as Mark Huntley, managing director at Heritage Investment Fund Managers, puts it, “allows for open ended funds with a very high degree of investor expertise required”.
Mr Thomas describes the relationship between the islands as “competition but very friendly competition”. According to Andrew Dann, partner at Ernst and Young Jersey, it is “more collaboration than working together”. Mr Thomas adds: “We both share the same stock exchange, which has been enormously successful over the last number of years.”
Ian Hunt, director at the Guernsey office of Fortis Funds Services, says, pragmatically: “There is a mutual understanding that the islands are not trying to outdo each other. We are trying to maintain a high profile in the market as the Channel Islands.”
Ms Kosofsky points out that, as with any two offshore jurisdictions, “there is going to be competition.” However, she adds that the representation of service providers in both islands has led to “increased cooperation and a meshing of interest of the two islands – more so than other jurisdictions that are further apart geographically.”
The regulators, she says, are comparatively close: “They communicate, and they try to maintain the same standards. One initiative in one island is very quickly followed by another initiative in the other island.”
Mr Camp adds that while, “without a doubt, Guernsey and Jersey ‘PLC’ compete with each other”, this helps both to develop. For example, he says: “Ten years ago, Guernsey introduced the PCC (Protected Cell Company) and Jersey now has PCCs, and then Jersey had ICCs (Incorporated Cell Companies), and Guernsey now has ICCs.” Jersey now has its Unregulated Fund Regime, leaving the next move up to Guernsey (see box).
To some extent, the choice between the two islands may be a personal one for fund houses. The two islands rarely fight over a particular client, according to Ms Kosofsky. “Generally, the market players will have a preference,” she says, but adds that “it may be for a strange reason, like the managing director used to go there on holiday”.
Mr Dann adds: “Generally, the choice of individual service provider will determine which island they choose to go to.”
Inevitably, there are differences between the main alternative asset classes. Both islands think they have the upper hand in property. Jersey is “absolutely dominant when it comes to real estate,” according to Ms Kosofsky. “Jersey has been the first-choice jurisdiction over a sustained period for certain types of UK real estate funds, and benefited again from the herd mentality as competitors sought to replicate the successes of their peers.”
However, Mr Hunt maintains that, “from a real estate point of view, they really seem to be targeting Guernsey, probably more than Jersey at current times. It is very much a specialism.” He adds, though, that a major incentive for real estate funds is the geography, which applies to both islands: “With the expansion into European and Asian time zones, the ability to operate in those quickly and accurately is very important.”
Vying for specialisms
Jersey’s Unregulated Regime, although primarily designed to attract hedge funds, has so far proved most attractive to private equity, Ms Kosofsky says. “It is perfect for them,” she explains, “as they typically don’t need a regulated fund and have institutional investors who satisfy the eligible investor criteria.”
Ben Morgan, a Carey Olsen partner on Guernsey, is also confident of attracting private equity business. Indeed, he expects firms to commit even more completely to the island. “Guernsey is very likely to be very attractive to fund management operations looking to relocate out of the UK following the recent tax changes,” he says. “For private equity vehicles, where the most important payment is receipt of carried interest, the carry will be treated as capital and not taxed.”
Both islands are actively pursuing hedge fund business although, according to Ms Kosofsky, it has always been more elusive. This is down to the lead of jurisdictions such as the Caymans, “in terms of the number of hedge funds they set up”.
As well as appealing, through a convenient, tax neutral jurisdiction and the new unregulated regime, to funds looking to domicile themselves on Jersey, the island goes out of its way to make itself attractive to hedge fund (and indeed private equity) managers looking to relocate. Ms Kosofsky explains that managers are given general advice and help arranging housing. “They move for lifestyle reasons,” she adds, “then they think about centring more of their business here.”
AN UNREGULATED FUTURE
The Channel Islands have a confident industry, and a constantly updating regulatory framework to entice alternative houses from high tax jurisdictions. But they are competing against some big name jurisdictions, and they do face challenges.
Not least, according to Mark Huntley, managing director at Heritage, is raising their international profile.
“Communication is the key,” he explains, “within the European Union in particular, where the Channel Islands are painted in a rather inaccurate picture from time to time.”
Moreover, with small islands, there is a limit to the resources available locally. Says Richard Thomas, Jersey funds partner at Ogier: “The Expert regime clearly has some difficulties, especially for the hedge fund market: the problem is requiring a Jersey administrator and Jersey business centre for the operation, but without the same range of service providers with competence and experience of running hedge funds as there are in one or two other centres, notably Dublin and Luxembourg.”
Jersey’s solution was announced last month: an Unregulated Funds Regime, which does not require Jersey-based administrators, directors, custodians or service providers.
Promoters, Mr Thomas argues, can now appoint service providers wherever in the world is best, and Jersey administrators can focus on marketing the specialisms they do have, competitively with overseas players.
Given the Islands’ record of keeping up with each other, Guernsey can be expected to come up with its own rival unregulated structure before too long. However, according to Mr Huntley, “there are wide ranging views on both islands about whether or not it is the right way to go”. He himself is sceptical: “Why spend 40 years building up a reputation with a high degree of regulatory control, only to go for a system where you don’t have that control?”
Certainly, Guernsey prides itself on its regulatory system. As Ben Morgan, partner at Carey Olsen, puts it: “Guernsey does operate at a pretty high level, in terms of regulation. There haven’t been any big scandals concerning any big Guernsey vehicle.”
Horace Camp, executive at the Anson Group in Guernsey, “certainly hopes” that Guernsey will introduce its own unregulated fund system, but has his own caveats: “I personally believe that the Jersey unregulated regime doesn’t leave enough of a footprint in Jersey. If we are going to maintain our position as a domicile with a real infrastructure, with good corporate governance and regulation able to pass any mind and management test, then we have to be wary of having funds with too light a touch.”
