Group partner Emily Haithwaite and partner Josephine Howe discuss

Jersey private funds and what structures may be most appropriate for

family office structures. Their article first appeared in HFM Jersey

2019 Special Report.

Wealth is increasing exponentially among some of the world’s richest

families, many of which have their own bespoke (single) family office

which looks after key operations and functions of the family.

Ordinarily the establishment of a family office also goes hand in hand

with succession planning and provides a framework to ensure an orderly

transfer of wealth to the next generation. To this end family offices

may also provide family management services, which includes family

governance, financial and investment education for future generations

and philanthropy coordination.

A family office will typically include teams responsible for the

management of investments, property, and other assets, as well as the

management of the family's legal and tax affairs. In addition, some

family offices provide softer 'concierge' services connected with travel

and managing household staff. Increasingly, however, the concierge

functions of the family office are being separated from the key

investment functions as the trend towards professionalism and

sophistication of investment platforms within family offices continues.

For a number of reasons, ultra-high net worth families are choosing

Jersey as their jurisdiction of choice to locate not only their family

office but also their investment structures. Jersey is politically

stable and, while it is neither part of the UK nor a member of European

Union, it has close links with the UK and Europe as well as strong legal

foundations and a robust and respected regulatory framework. We have

assisted a number of wealthy families from different parts of the world,

including the US, Middle East and East Asia, establish family offices

and investment structures in Jersey. Founders from these jurisdictions

are increasingly looking to protect wealth in the face of global

financial, regulatory and political instability.

This article considers the way that the assets of a single family

office might be managed and the type of investment or holding structures

which might be most appropriate.

Direct investing by family offices outside the public markets is increasing year on year

Key wealth management reports have shown that direct investing by

family offices outside the public markets is increasing year on year.

Commercial and residential real estate are particularly attractive

assets, providing both capital appreciation and solid investment returns

in the form of rental income. And private equity investments have

reportedly delivered the greatest returns for family offices, compared

with indirect investments in the asset class. Some of the reasons for

the appeal of direct investing include the ability of family offices to

manage their assets internally by hiring investment professionals, the

desire to retain greater operational control over their investments,

their ability to be agile and gain priority access to deals. Compared

with investing indirectly via traditional investment funds, direct

investing allows family offices to be patient investors, hold

investments for longer and significantly reduce service provider fees

associated with pooled structures. In addition, for most family offices,

the regulatory overlay associated with investment funds is

unnecessarily burdensome and costly, given that they are investing their

own money. For all of these reasons, the trend towards direct

investments by family offices is proving to be very a disruptive force

for fund managers.

We are increasingly asked to advise on the most appropriate holding

structures for family office investments. These will differ depending on

whether it is intended to acquire a single asset (for example a real

estate asset) or a portfolio of assets (such as a number of private

equity investments). Jersey provides a variety of structures which are

familiar to investors, namely companies (including protected and

incorporated cell companies), unit trusts or limited partnerships

(including separate and incorporated limited partnerships). The

regulatory treatment of such structures will depend on the number of

participants (investors) in the structure and the nature of the assets

acquired.

Single asset holding structures, for example, do not meet the

definition of a collective investment fund for Jersey regulatory

purposes and can therefore be established without the need to obtain any

additional consents from the Jersey regulator, the Jersey Financial

Services Commission (JFSC). Structures which are established to hold

multiple assets, however, may, in principle, fall within the definition

of a collective investment fund and, subject to certain exceptions which

are set out below, are likely to be subject to regulatory oversight by

the JFSC, the level of which depends on the sophistication of the

participants in the structure.

Due to the popularity and ease of establishment of Jersey Private

Funds (JPFs), we are often asked to advise whether they are an

appropriate vehicle for the purposes of structuring family office

investments.

An investment fund structure provides a number of benefits for entrepreneurial families

Using an investment fund structure for family office investments

provides a number of benefits for entrepreneurial families – the ability

to organise the family assets into different pools which can benefit

all or some members of the family, to define the rights and interests of

family members in relation to those assets, to engage with professional

service providers in relation to the management of the structure, set

parameters to measure and reward their performance and the appointment

of third party administrators and independent directors with expertise

in the relevant asset classes to drive institutional behaviour and

ensure high standards of corporate governance are maintained.

JPFs are private investment funds requiring at least two investors

pooling their capital to acquire a number of assets, such that there

would be ‘risk spreading’. Offers for investment in a JPF cannot be made

to more than 50 potential investors and investors must qualify either

as professional investors or eligible investors (which includes those

investing at least £250,000).

There is no requirement for a JPF to issue a formal offer document,

though participants must acknowledge in writing their receipt and

acceptance of an investment warning and disclosure statement. A Jersey

regulated service provider (the "designated service provider") must be

appointed for the purposes of providing certain initial and annual

confirmations to the JFSC with regard to the JPF, as well as ensuring

the JPF's compliance with Jersey's legislation for the prevention and

detection of money laundering and the financing of terrorism.

Specific considerations in relation to JPFs

A number of considerations specific to family offices arise in

relation to JPFs and, as mentioned above, to advise fully, an analysis

of the participants in the structure is required. Because, even if the

structure has most of the features of a collective investment fund, if

it is established for the purpose of investment by a single family

office then, more often than not, it will benefit from a specific

exemption on the basis that each participant in the scheme is connected

by way of a ‘family connection’. Care is required in assessing the

precise connection between the participants and that they are able to

rely on the exemption, but the definition is otherwise relatively broad

and includes blood and other relationships such as adopted or

step-children, or children born outside of marriage.

Multi-family office co-investment structures might also be exempt,

for example where the structure is essentially a joint venture between

separate families. In this case, however, it will be necessary to

examine the features of the arrangement in order to be certain that it

may properly be categorised as a joint venture. If it is not truly a

joint venture or a single asset holding vehicle and the ‘family

connection’ exemption is not available, the presumption will be that the

arrangement is, in fact, a JPF.

On the other hand, where a structure is established for the purpose

of enabling a family to pool their capital with selected third parties

or where it permits co-investment by employees of the family office, it

is likely to be registered as a JPF. Such structures are frequently

managed by an external manager if, for example, the family office lacks

the resources to employ their own asset managers or in order to obtain

independent asset allocation advice. In this case, the JPF will be

subject to a very straightforward regime which largely dis-applies the

more onerous regulatory and compliance requirements applicable to Jersey

collective investment funds and exempts service providers to the fund

from local licensing requirements. JPFs can be authorised within a

streamlined 48-hour process once the necessary submissions have been

made to the JFSC.