For decades, Luxembourg has been viewed as the centre of the European alternative investment fund industry. But the Channel Islands of Jersey and Guernsey have been, quietly, carving an alternative asset class path of their own, not least with cryptocurrency and sustainable themes already launched there. In this piece, we look at how this complimentary mix of old and new is giving investors and promoters access to a wider and more dynamic choice of asset classes.
Luxembourg is the epicentre of the European investment funds industry. The country has long attracted large cross-border investment platforms and reputable prominent fund and asset managers. Today, assets managed in Luxembourg are estimated to come in at around €5 trillion.
Luxembourg has secured its reputation as one of the world’s leading financial centres through a well-evolved regulatory regime which has attracted the growth and development of highly structured funds which are available to retail investors.
But investors and asset managers, ever looking for the next big thing, are being urged to consider the complimentary regime offered by the Channel Islands of Jersey and Guernsey.
The region appears to be squaring up as a viable alternative for private funds but also for alternative investment funds wanting access to EU investors.
The Channel Islands have become more open minded in terms of asset classes and this makes the region a perfect incubator for some of the world’s most dynamic emerging asset classes.
The launch of a cryptocurrency EFT in Guernsey earlier this year is evidence of the region’s emerging dynamism.
The regulatory landscape in place allows to establish the appropriate structures and bring them to market quicker than other regions.
It’s also easier for a first-time manager without a track record to get funding, and that drives innovation too.
In Jersey and Guernsey, you are more likely to see an alternative way of setting up funds. Quite often, they are backed by friends and family who get them to market. Then they start to attract institutions and are launched into the retail space.
The Channel Islands have also been instrumental in pushing the launch of sustainable investments, including solar panel and forestry asset classes. Medical cannabis funds are also launching in the region.
For investors more familiar with the UK’s approach to regulation, the Channel Islands may be a good steppingstone towards a Luxembourg listing, but then maybe the region is an investment centre in its own right.
Last year, the Guernsey Financial Services Commission reported a 23.7% year on year increase in the net asset value of Guernsey funds.
This means the net asset value of funds surpassed £300bn for the first time.
In neighbouring Jersey, the net asset value of alternative investment funds totalled £450.2bn.
Of all asset classes, private equity and venture capital grew the most with 27% year on year.
Although for seasoned watchers that should be no surprise, the Channel Islands' experience of serving private equity dates back to the early 1980s when the private equity asset class was just starting.
The introduction of Jersey Private Funds (JPFs) in Jersey and Private Investment Funds (PIFs) in Guernsey in 2016 has helped the Islands square up to mainland Europe as innovative, flexible and accessible centres for managers of alternative assets additionally looking for a hands-on approach to manage their funds, in spite of their increasingly complex strategies.
The subsequent enhancement of the Private Investment Funds (PIF) in April 2021 with three different options to choose from has helped attract the record fund inflows mentioned earlier.
With all necessary due diligence in place and a registration turnaround time of under a day, compared with the Authorised Fund process, which can take several months to approve a fund or fund manager in Luxembourg, the Channel Islands offer an adequate degree of flexibility and investor protection.
The guidance is even faster than Guernsey’s Registered Fund regime, which has a three-day approval process.
1. European - but non-EU
European private equity investors tend to originate from the UK, Switzerland or the Netherlands, two of which are not part of the EU. This makes the non-EU Guernsey and Jersey attractive on a regulatory as well as geographic basis. Furthermore, capital can continue to be raised from within the EU via the well-trodden National Private Placement Regimes of each country.
Guernsey and Jersey adhere to the EU’s Alternative Investment Fund Managers Directive but they are not signatories to it and therefore avoid some of the higher costs associated with Luxembourg private funds. Regulation in Guernsey and Jersey is more inclined towards an appropriate level of investor protection and confidentiality - while details of ownership are shared with authorities, they are not made publicly available.
3. International reputation
Guernsey and Jersey funds have been established by some of the world’s largest private equity managers with more US managers considering the region.
Both islands are just 45 minutes away from the City of London which places them in easy proximity to international travel routes.
The region has attracted some of the world’s most qualified and experienced accountants, lawyers, fund administrators, bankers and directors. The regulatory system and its professionals have a track record in shaping a system which is geared to professional, institutional, and high net worth investors.
Luxembourg is a global centre which attracts huge expertise and the fund inflows reflect this. Luxembourg does benefit from the EU’s marketing passport regime, which means alternative investment fund managers are covered by the same authorisation regime and can market their investment vehicles across the European Economic Area (EEA).
But for some investors, the Channel Islands regime may be more advantageous and it’s worth noting that the regulatory environment means Luxembourg can be more costly because of these AIFMD requirements.
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