Bucking the trend
30 July 2001
There has been some comment in the financial press that the flow of underlying investments available for acquisition by private equity and venture capital funds is beginning to slow down.
While this may be a reaction to the general gloom pervading the equity markets, Jersey is experiencing a buoyant private equity market, certainly in terms of total deal value, although there has been a decrease in the volume of deals. The use of Jersey structures as private equity funds has continued to increase, and although deal flow and exits have slowed, the appetite for interests in private equity funds indicates that it is merely a question of time until the deal cycle recovers.
Limited partnerships continue to be the preferred vehicles for most private equity structures, and Jersey is the predominant establishment jurisdiction for European investors. A number of jurisdictions have enacted limited partnership legislation, but not all offer the same advantages there is no limit on the number of partners in a Jersey limited partnership, for example, and investors can also take advantage of the island's tax-neutral status.
The Jersey regulator, the Jersey Financial Services Commission (JFSC), continues to be flexible when considering the establishment of these funds. The nature of private equity business is such that the promoters will not necessarily have a track record in fund management, which can be a prerequisite in other jurisdictions, and when considering applications the authorities can take into account other factors, such as the identity of the major institutional investors who are investing in the fund.
The executive of the JFSC is always approachable during the application and review process, and has been organised into dedicated teams specific to particular areas of business. This helps the lawyers during the consent process. The review is limited in respect of offerings to a restricted circle of investors who will be required to commit a minimum £250,000 and have the capacity and ability to undertake their own due diligence in relation to the promoters of the proposed fund.
Jersey has a modern, flexible framework of commercial legislation, which has proved less cumbersome in areas that have caused difficulty under the English statutes. Jersey structures, then, can meet the specific requirements of ever more inventive originators.
Some schemes have become more layered in order to meet the specific needs of the partners in the scheme. Jersey has the specialist skills and experience to tackle these more complex requirements; for example, the structures transferring carried interest to the promoters and the incentives required for the investment managers are also established and administered in Jersey. In addition, the funds sometimes take advantage of the available tax-exempt status of Jersey companies (and other vehicles) for investment holding structures in their portfolios.
Schemes are also being repackaged to open them up to different types of investors who are unable or unwilling to make a direct investment. A recent example is a groundbreaking collateralised debt obligation (CDO) transaction, worth more than euro150m (£91.6m), on behalf of Deutsche Bank. The complex cross-border deal is described as the first private equity fund-of-funds securitisation using leverage. It is also the first asset-backed transaction with a standalone rating on unwrapped private equity fund collateral from rating agency Standard & Poor's, a significant factor in attracting investor support.
The transaction was set up through an Irish special purpose vehicle (SPV), Prime Edge Capital, but the servicer (portfolio manager) Prime Edge Management and the administrative sub-adviser Capital Dynamics Services are Jersey-incorporated companies.
The huge spectrum of private equity work has the backing of governments that value initiatives that ultimately help inward investment in their own country. Jersey has the necessary legislative and flexible regulatory framework in place and the skills required to administer successfully these massive pooled investment vehicles, and as a result they are contributing to the smooth flow of international capital in support of business growth.
Jersey has established such a predominant position in part because of the consultative process that exists on the island between the lawmakers, the regulators and the tax authorities. This three-way dialogue, combined with the quality of regulation
and the range of experience the island professionals have gained from servicing investment funds through the years, makes Jersey an attractive centre for private equity business. n
Jacqueline Richomme and Julia Chapman are partners at Mourant du Feu & Jeune in Jersey.