Jersey funds Overview

As an international financial centre of choice for global investments primarily into the UK and Europe, Jersey is currently home to over 620 regulated funds with aggregate net assets under management of approximately £440 billion (Q3 2023) and almost 1,900 separate pools. Unsurprisingly, given the global macro-economic climate over the last 18 months, this is a slight decrease from 2022, which saw the end of a record-breaking period of funding raising across the sector.

Despite this, the ever-popular Jersey Private Fund (a lightly regulated vehicle for up to 50 investors) continued its stellar growth with 645 now registered, for the first time exceeding the number of fully regulated funds. This is an increase of 34% since June 2022, which was in turn an increase over 22% since June 2021.

The slightly suppressed funds market has had an inevitable impact on the fund finance market, which, throughout 2023, has focused primarily on amendments and extensions and new GP facilities and NAV facilities for existing funds.

From a purely legal perspective, work continues behind the scenes on the first round of consolidated amendments and updates to the Security Interests (Jersey) Law 2012 (the 2012 Law) (the law pursuant to which Jersey law security is taken). Among other things, the amendments are expected to clarify and codify current practice as well as provide clearer guidance on the obligations and duties of secured parties on enforcement in line with Jersey’s position as a leading finance centre.

Jersey Fund formation

As a leading financial centre, the fund and financial services regimes are well established and there have been no substantial changes that impact on fund formation, lending or security in recent years. The most commonly used fund structures in Jersey follow well-established patterns and remain as companies, limited partnerships or unit trusts.

The newly introduced Jersey limited liability company (LLC) is now available for use and is expected to prove popular with US investors and managers, building on the strong transatlantic ties Jersey already enjoys. The Jersey LLC has been designed to be as attractive as possible and will be very familiar to those who already use Delaware or Cayman LLCs in their structures, allowing great flexibility while still protecting Jersey’s reputation as a leading, regulatory-compliant finance centre. Somewhat uniquely, a Jersey LLC can be established as either a body corporate or not to ensure maximum flexibility. Series LLCs are still to be introduced at a later date.

Security and collateral

Security is taken under and governed by the 2012 Law. In force since January 2014, the 2012 Law is a stable and well-trodden security regime specifically designed for the needs of financial services. Perfection requirements for a Jersey law-governed security depend on the collateral, and range from possession of the certificates representing certificated investment securities, control of deposit or portfolio accounts by way of notices and acknowledgments with the relevant account bank or custodian, to registration on the public Security Interests Register (the SIR), which will perfect security over any collateral and is the most common, and highly recommended, means of perfection.

A registration fee of currently £165 is payable for each security document registered on the
SIR. No other stamp duties, taxes or registration fees are due in Jersey for the taking and registration of security.

In a fund finance context, lenders commonly take as transaction security:

  • Collateral: Call rights

    Market practice comment: These rights will usually be under the relevant fund documents (e.g. partnership agreement, subscription agreement, articles of association or LLC agreement). Investors are usually notified of the security interest and may be asked to sign an acknowledgment of the notice. The notice and acknowledgment provide an “estoppel” argument, but neither is required to perfect the security interest.
    Usual perfection method(*): SIR registration

  • Collateral: bank accounts

    Market practice comment: Notice is served on, and an acknowledgment obtained from, the account bank. In this context, a “bank account” could be a deposit account or a portfolio/securities account. Bank account security, combined with call rights security, is still the most common security package sought.
    Usual perfection method(*): Control over bank
    account via notices and acknowledgments and/or SIR registration

  • Collateral: Contract rights regarding a custodian agreement

    Market practice comment: Notice is served on the custodian and an acknowledgment obtained. This is generally combined with a security over any relevant portfolio/securities account – but not often seen in a fund finance context.
    Usual perfection method(*): SIR registration

  • Collateral: Contract rights regarding management or GP fees

    Market practice comment: Notice is served on the relevant contractual counterparty and an acknowledgment obtained.
    Usual perfection method(*): SIR registration

  • Collateral: Shares, partnership interests, units or llc interests

    Market practice comment: Notice and acknowledgements are generally obtained but not required for perfection. Share or unit certificates and blank transfer instruments are delivered at completion.
    Usual perfection method(*): Possession of share or unit certificates (for certificated securities) and SIR registration

In general, there is no legal or regulatory impediment to lending to funds in Jersey. The fund manager and directors/controllers of the fund can agree limits and restrictions in the constitutional documents of the fund and the investment manager agreement, if they so choose. In particular, the ability of the fund manager to borrow additional sums or grant security over the fund’s assets is an important commercial point to consider.

There are no regulatory restrictions on borrowing for Very Private Funds, funds under the Private Placement Funds Regime, Unregulated Funds or Jersey Private Funds.

For slightly more regulated Expert Funds, Listed Funds and Eligible Investor Funds, no legal restrictions are set in stone but the Jersey Financial Services Commission (the JFSC) reserves the right to additional scrutiny if the fund is permitted to borrow money in excess of 200% of its net asset value (NAV). For open-ended certified collective investment funds offered to the general public, which are more heavily regulated, the JFSC provides guidance on borrowing restrictions of the following fund type:

  • General Securities Fund

    Limits on borrowing: Not more than 25% of the fund’s total net asset value.

  • Fund of Funds

    Limits on borrowing: May borrow up to 10% of its total net asset value, but only on a temporary basis for the purpose of meeting redemption requests or
    defraying operating expenses.

  • Feeder Fund

    Limits on borrowing: May borrow up to 10% of its total net asset value, but only on a temporary basis for the purpose of meeting redemption requests or defraying operating expenses.

  • Money Market Fund

    Limits on borrowing: May borrow up to 10% of its total net asset value, but only on a temporary basis for the purpose of meeting redemption requests or defraying operating expenses.

  • Warrant Fund

    Limits on borrowing: May borrow up to 10% of its total net asset value, but only on a temporary basis for the purpose of meeting redemption requests or defraying operating expenses.

  • Real Property Fund

    Limits on borrowing: May borrow for the purpose of purchasing real property and for short term purposes such as defraying expenses or to facilitate redemption. The maximum aggregate amount that may be borrowed is 35% of the total net asset value. Borrowing for the purpose of purchasing real property must not exceed 50% of the purchase price of the real property. For real property funds with a net asset value of less than £5 million, and especially during the early life of the fund, some relaxation of the above limits may be granted by the JFSC.

  • Futures and Options Fund

    Limits on borrowing: Must be discussed with the JFSC.

  • Guaranteed Fund

    Limits on borrowing: Must be discussed with the JFSC.

  • Leveraged Fund

    Limits on borrowing: Must be discussed with the JFSC.

Economic substance

The economic substance regime is now well established in Jersey and the comparative ease of demonstrating substance has led to an influx of activity.
The economic substance regime applies to limited partnerships as well as companies and LLCs. Collective investment vehicles (but not their subsidiaries) remain outside the scope of the economic substance regime, save in the case of self-managed funds who are subject to the regime in respect of their fund management activities only.

Green and environmental, social and governance

Environmental, social and governance (ESG) issues have moved firmly into the mainstream across the globe, and Jersey has taken proactive steps to acknowledge the importance placed on ESG by investors and managers alike. The JFSC has published disclosure requirements applicable to Jersey Funds who reference sustainable investments in their offering materials with the intention of combatting the risk of greenwashing.

When a fund is marketed on the basis of investing in a sustainable investment as part of its investment objectives, it must disclose all material information in relation to the sustainable investment, which may help simplify matters when setting key performance indicators for sustainability-linked lending.

The year ahead: A glimpse into the future of Jersey Funds for 2023/24

The ongoing macro-economic and political uncertainty is likely to colour the market for at least Q1 and potentially Q2 of 2024. We therefore expect to see this year’s patterns continue into the early parts of 2024 with a focus on amending and extending any facilities that have not yet been dealt with and a continued demand for creative ways to access leverage, including more complex NAV, hybrid and concentrated NAV facilities. More generally, we expect to see a continued uptick in continuation funds and other secondary transactions.

 

First published by Global Legal Group as the Jersey chapter for Global Legal Insights – Fund Finance 2024, January 2024

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