comment - 17 June 2015

What next for the Channel Islands?

Since the introduction of the AIFMD in July 2013, it has become increasingly difficult for non-EU based structures to raise capital from EU-based investors. The Channel Islands (CI) have for many years been the preferred domicile for EU-based private equity funds but could their position outside the EU jeopardise their future? In this article I look into this question and whether there is a ‘bright solution’ for the CI?

Most people will agree that the introduction of the AIFMD has had a mixed effect on the ability to raise capital in the EU. Although large EU based managers can take advantage of the supposedly harmonized pan-European regulatory regime that the AIFMD creates, those with a non-EU base are currently locked out of the benefits that the AIFMD offers.

Whilst the AIFMD does introduce the benefits of the passport for EU managers of EU funds, for non-EU managers, the AIFMD actively discourages fundraising by non-EU managers from EU-based investors and this difficulty is reflected in the number of US managers who have simply abandoned the EU as an active fundraising market for the time being. Although ESMA is in the midst of a consultation on whether there is enough evidence to extend the current passport arrangements to non-EU managers, it is not yet clear when and how this will materialise, if at all. We wait to hear from ESMA. In the meantime, increased investor regulation, including Solvency II, Banking Structural Reform and the IORP Directive, is supplementing a growing pool of domestic legislation which seeks to restrict the ability of EU-based pension funds, insurance companies and banks to invest with non-AIFMD authorised managers.

In the light of this protectionist framework, the position of the CI has to be considered. Anecdotal evidence suggests that at present not a huge amount has changed. Managers continue to use CI-based structures availing themselves of national private placement regimes and/or reverse solicitation whenever possible to raise money from EU based investors. In fact, we have seen a slight upturn in interest so far. It seems unlikely that this position will last forever though; a number of Swedish promoters have already made the decision to launch EU-domiciled funds at the expense of their traditional CI-based structures and regulators are increasingly focussing on the fundraising process. We are also hearing many Continental promoters express a preference for Luxembourg as a jurisdiction of choice, as AIFMD-compliant structures can be established there and, now that the use of partnership structures is becoming established in Luxembourg, a gradual shift away from the CI may materialise.

Notwithstanding these points, however, Jersey and Guernsey remain strong structuring jurisdictions and over the last few months we have been working in conjunction with leading firms developing a ‘bright solution’ to the challenges that new EU legislation is creating for the CI. The idea behind the solution is to allow both EU and non-EU managers to be able to establish an AIFMD compliant fund structure that can be operated from the CI for affected investors alongside other, more efficient, funds that are better placed to accommodate international investors. The intention is that managers will be able to operate on and offshore structures simultaneously and by doing so, save significant costs and accommodate the entire investor-universe.

We believe that, notwithstanding the challenges presented by more recent EU legislation, and regardless of what happens with the third country passport, this ‘bright solution’ should create an attractive option for industry and for European-based investors to access some of the best funds. If you would like to know more, please feel free to contact me in the first instance.

Useful Links

+ EVCA summary of investor regulation - follow this link
+ Article by Nabarro on changes to German legislation - follow this link
+ ESMA call for evidence - follow this link 


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