One of the main attractions for top sponsors looking to maintain a stable of coveted assets is the ‘best in class’ investor return prospects which those assets have the potential to achieve.

It has been suggested that the mid-market deal space (and within that the secondary and tertiary landscape) has been the most competitive and possibly overcrowded segment of the global PE market in recent years. The considerable pressure on increasing investor returns continues unabated. Among mid-market dealmakers the constant pace and number of participants involved in preemptive bid and conventional auction processes persists.

Strong top sponsor appetite continues to exist for investment opportunities that attract greater potential for value creation over the lifetime of an asset, even where such transactions may involve more upfront cost and complexity. Another trend developing among top sponsors and larger asset managers involves the acquisition by them of minority stakes in smaller rival PE operations. Drivers behind these types of investments include increasing management and performance fees across the sector, a need for permanent capital by mid-market buyout groups and a different and more creative way of deploying uncommitted equity.

The most commonly commented upon challenge for sponsors of all sizes remains (and is not going anywhere), that the level of undeployed capital, or ‘dry powder’, available in the market is so steep that you could ski off it. How PE houses continue to put investor capital to hard work requires innovative and creative investment strategies supported by the use of investment holding vehicles with sufficient flexibility to implement such strategies.

Jersey holding companies: structural neutrality Rather than using vehicles from the ‘home’ jurisdiction of a sponsor or the jurisdiction(s) where a target business is located, structuring via a neutral venue that provides a level playing field for investors is generally preferred.

A primary motivator for selecting an international finance centre like Jersey for a tiered investment/acquisition holding structure is being able to take advantage of fiscal regimes that do not result in corporate, capital gains, and other tax leakage on the profits of the investment-holding vehicle itself. Often, onshore tax is incurred at the asset or portfolio company level or on income or gains accruing to ultimate investors.

Examples of Jersey featuring in some of the most significant top sponsor PE investments in 2019 include:

(a) A joint venture between two of the largest North American global investment management firms in Abu Dhabi oil pipeline. The first western investment of this nature in Abu Dhabi infrastructure ($4bn).

(b) The multibillion-dollar acquisition of a market data platform from a top sponsor syndicate by an international global financial markets business.

(c) A permanent capital investment by North American asset manager in an established private equity platform.

Jersey investment vehicle benefits The main commercial and structural benefits to using a Jersey investment holding company for downstream investment structuring include:

(a) Jersey company law being based on English company law but with greater flexibility (for example, see below in relation to capital extraction);

(b) An extremely favourable corporate tax regime;

(c) No stamp duty on the transfer of shares and so should not be subject to tax/stamp duty on future disposal;

(d) Jersey’s close proximity to London and same time zone makes closing transactions simpler;

(e) Can achieve structural subordination of intra-group / acquisition financing;

(f) Target group management / MEP friendly, i.e. facilitates the alignment of target management objectives with those of the PE investor; and

(g) Allows for simplified dividend flows to PE investment vehicles and therefore ultimate PE investors.

The growing emphasis on investment vehicles maintaining substance in well-regulated international finance centres mean the air links to and from Jersey and its domestic infrastructure put it in an excellent position.

As an alternative form of exit, Jersey companies are also suitable vehicles for IPO and have been listed on all the world’s major exchanges. Corporate flexibility: investor return One of the key advantages of using a Jersey investment company is the flexibility of Jersey company law in relation to returns to investors – whether by means of dividend, redemption or buy-back of shares or capital reduction. In particular, monies payable on the redemption or buy-back of shares may be funded from any source, including certain capital accounts.

A Jersey company may also make a distribution from a wide range of sources, not merely from distributable profits/reserves.

Tax regime

A zero rate of income tax applies to virtually all Jersey investment holding companies. However, if required, it is possible to ensure that a Jersey company is tax resident in another jurisdiction provided that:

(a) It is centrally managed and controlled in another place outside of Jersey;

(b) It is resident for tax purposes in the other place; and

(c) The rate of corporate tax to which the company will be chargeable in that other place is 10% or more.

Evolution and structuring utility As Jersey has kept pace with the changing nature of both mid-market and top sponsor buyout transactions as well as alternative investment strategies, it has played a useful role in connection with structuring for senior management / executive incentivisation arrangements and also intra-group debt financing.

Management incentivisation: MEPs/EBTs Rewarding, motivating and retaining senior employees and attracting new high profile executives to portfolio companies requires a well-structured, tax efficient and effectively administered equity incentive plan. As part of the conventional buyout process, it is usual for share based incentive plans to be designed to align the activities of executives and senior employees with the requirements of the PE group investor. Typically, share plans operate in conjunction with either a management equity plan (MEP) framing how and when equity interests are issued to executives and senior management by the top acquisition holding company or an employee benefit trust (EBT). An EBT is generally an offshore trust where the trustee’s duty is to act in the interests of the employees (and certain qualifying former employees) who are beneficiaries under the EBT.

MEPs attaching to Jersey holding companies and Jersey EBTs that form part of downstream PE investment models fulfil a number of functions depending on the plan structure, the stage in its life-cycle and the target company structure. It is common for EBTs to allow for multiple share plans to be managed through a single trust arrangement for larger groups of companies.

Incentive plans for the PE management team are often more creative and can be tax efficient depending on the individual manager/executive’s country of residence and domicile. Plans include structuring of carried interest, share incentives, bonus deferral and partnership interest management.

Debt listing

The International Stock Exchange (TISE) in the Channel Islands has seen a dramatic increase in the listing of quoted Eurobonds used to finance downstream PE investment. This has been in line with the significant volume of secondary and tertiary auction processes conducted in the past seven to eight years.

Designation as a recognised stock exchange by HMRC has enabled TISE to facilitate the tax efficient listing of debt securities issued as part of a large number of mid-market buyout transactions. The HMRC designation is important because qualifying debt securities listed on TISE are eligible for the quoted Eurobond exemption. That exemption allows an issuer within the UK tax net to make interest payments on listed securities gross, i.e. without deduction of withholding tax at a rate of up to 20%. Similar exemptive regimes apply in Ireland and elsewhere.

There are a number of other key advantages of listing intra-group PE debt on TISE including:

(a) Unlike other European stock exchanges, TISE is not bound by any EU directives, including Market Abuse Regulation, and is able to be considerably more flexible in its approach;

(b) TISE does not require an issuer to appoint a local paying agent in the Channel Islands or for the notes to be issued in a clearing system;

(c) TISE is aware of transaction time constraints which affect issuers and will commit to meeting an agreed transaction timetable; and

(d) Listing fees levied are competitive with other Eurobond exchanges. n This update is intended to provide only general information for the clients and professional contacts of the Maples Group. It does not purport to be comprehensive or to render legal advice.

Guernsey’s funds sector is not alone in clearly seeing the merging of the private equity and private capital space. Private capital has become a normalised source of financing, while the investment management sector is seen increasingly as a gateway to a direct investment opportunity.

A survey carried out by Guernsey Finance earlier this year at the SuperReturn conference in Berlin showed that jurisdictional choice would be increasingly dominated by specialists whose substance can support this convergence, the rise of private capital and the desire for bespoke structuring.

Guernsey is well placed to service the growing trend for attracting and securing private capital investment, whether that money is drawn from family offices, high-net-worth individuals (HNWIs), private client customers of banks, and other non-institutional money. Private wealth is estimated to exceed $170tn worldwide in the next 18 months, against total institutional assets under management of $100tn. That growth has driven more investment into alternatives.

In the past decade, since the global financial crisis, returns to private capital investors just have not been there. Liquidity has been generated by central bank policies and high-net-worth individuals have been the beneficiaries of that. However, liquidity is an obvious challenge for private capital looking at private equity or infrastructure long-life funds, and so there is a growing focus in the market on building structures to offer a degree of liquidity.

Private wealth is a very different market to dealing with institutional money. New structures and different distribution methods are coming into play as institutional clients are interested in democratising traditional institutional private fund illiquid products to secure greater access to the private capital community.

With the increasingly sophisticated demands of clients, the Guernsey funds industry has developed, with its renowned flexibility able to provide different solutions for different people in different circumstances. It is yet another stage of Guernsey’s 50-year funds journey, from primarily a retail fund domicile to an alternative assets specialist, using our key attributes of being agile and responsive to the market. Guernsey certainly retains the flexibility to satisfy the requirements of sophisticated investors.

The introduction of the Guernsey Private Investment Fund, which has proved popular both for new managers looking to launch a first fund, and existing promoters wanting to offer a simple product to investors quickly. A PIF can be open- or closed-ended, is flexible in its formation, and is restricted to a maximum of 50 investors. Our SuperReturn survey also showed that private capital and family offices are looking for bespoke structures to address specific commercial, legal, regulatory, taxation or operational concerns over their investment. The PIF is an ideal vehicle for private capital to invest in private equity.

At the Guernsey Funds Forum in London earlier this year – an event which attracted more than 500 delegates – David Williams, partner at Simmons & Simmons in London, described the Guernsey funds suite and environment as ‘coherent, stable, well-regulated, neatly defined, flexible and responsive’.

Guernsey certainly offers distinctive solutions in the funds world – private capital, green funds, and bespoke, tailored product, in a world-leading business environment, for those looking for a more sophisticated approach to private equity.

Family offices have been through a period of evolution in recent years. What used to simply be a private office set up to deal with a wealthy family’s investments, usually fairly safe and traditional in nature and decided by one single family leader, is now more complex and much more exciting than ever before.

Over the last decade, Jersey has seen a significant increase in the number of family offices, not only establishing on-Island, but also migrating to Jersey from other jurisdictions. This is because families are seeing the numerous benefits of having a bespoke, personal and professional service at their beck and call, particularly given the 24/7, on-call and international lifestyles many wealthy individuals now lead.

A New Definition of ‘Family’

Jersey Finance’s 2018 report ‘Flourishing Futures: Making Succession a Success’, in partnership with Bedell Cristin (click this paragraph to view) highlighted that around US$30 trillion of wealth will change hands in the next 30 to 40 years.

The recipients of this wealth transfer are vital in shaping the way family offices operate, due to the considerably different dynamic of families compared to that of the previous generation. Families now are much more tech-savvy and expect to be able to access information whenever they need it, demonstrating a preference for communicating digitally, transacting online, and managing their finances via apps. Furthermore, new generation families are more international, with members living further apart from each other and they tend to feature more complex relationship arrangements such as same sex marriages, non-marital long-term relationships, pre-nuptial agreements and divorces.

Of course, with such a multifaceted dynamic, there is a higher chance of disagreements in where and how the family’s wealth should be invested and for what purpose. This is pertinent, given that the last year saw a continuation of family offices’ drive towards higher risk, more illiquid investments in their pursuit of yield, according to the Global Family Office Report 2018 (click here to view). As part of this, nearly half (46 percent) of the average family office portfolio is now allocated to alternative investments.

This is where the new, innovative family office comes into play; with professionals on hand to advise on a wealth management plan best suited to the whole family, with the future firmly in mind.

A Jurisdiction of Substance

High-net worth families understandably place a huge amount of importance on their jurisdiction of choice, with regulatory substance and cutting-edge professionalism coming top of their must-haves list.

In Jersey Finance’s ‘Jersey: A Clear Choice for Family Offices’ (2019) (click here to view), it is noted that there are four key aspects to a modern family office, based on demand and trends: wealth preservation, asset protection, philanthropy and privacy. Within these, technology and infrastructure, regulation and legal certainty play a vital supporting role in a successful family office arrangement.

Jersey offers a modern and sophisticated legal framework and a world-class offering of private wealth solutions, designed to suit the increasingly varied situations which families now face. These range from simple trusts and underlying company structures for UK families, through to high value and complex structures working with trusts, companies, limited partnerships and foundations for international families. In addition, the establishment of ‘virtual’ offices for ultra-high net worth families are also available, as are structures for corporates looking to support and reward staff.

Jersey has £400 billion in trusts which have been established by private individuals (Capital Economics, 2016), and an ever-increasing uptake of the Jersey Foundation. The Jersey Foundation has become a popular choice, created for charitable or non-charitable purposes, or a mixture of both. A foundation has a number of benefits. It is flexible and infinite in duration, if necessary. Foundations are clearly and unambiguously registered with the Jersey Financial Services Commission. Their council of members structures are flexible in terms of composition, and Foundations provide a ‘guardian’ safeguard, making certain that the council of members maintain a clear charitable focus. Since their launch in 2009, 384 Jersey Foundations have been formed (as at August 2019) and it is expected that with the upward popularity of philanthropy these will see further interest.

Jersey’s trust and private wealth offering is incredibly substantial, with the jurisdiction’s business community holding 1,282 members of the worldwide membership for The Society of Trust and Estate Practitioners (STEP) – one of the largest branches globally – and is gradually becoming one of the most popular destinations for seeking private wealth expertise, from across the globe.

Supporting the finance and legal sector as a whole is Jersey’s robust regulatory framework and flexible yet solid legal system, which many clients find reassuring when deciding where to manage their wealth. As one of the best regulated international finance centres (IFCs), Jersey has been acknowledged by independent assessments from some of the world’s leading bodies, including the World Bank and IMF, as well as scoring top marks from the OECD on tax transparency. The jurisdiction was also subject to a Mutual Evaluation by MONEYVAL in 2016 and found to be ‘compliant’ or ‘largely compliant’, with 48 out of 49 of the FATF recommendations, the highest score amongst all states assessed.

No Longer One-Size-Fits All

Family offices come in all shapes and sizes, with varying designs and intentions, which is what has brought them back into popularity for high-net worth individuals.

Jersey Finance’s publication ‘‘The Clear Choice for Family Offices’. ’ (click here to view) highlights both the diversity of family offices currently present on the Island, as well as the compelling reasons why they have chosen to base their offices in Jersey. For instance, when discussing the legal certainty of basing a family office in Jersey, one Principal said:

“We did not choose Jersey as a jurisdiction for tax reasons. Instead, we wanted reassurance that we would be able to preserve the foundation’s wealth and make sure the assets are protected.”

Another noted that the IFCs strong connectivity credentials helped them decide Jersey was the right jurisdiction for them: “Jersey feels like an extension of London – I can leave Jersey and fly to London and be at the London family office within 2 ½ hours. The family members also visit often and can fly commercially or fly over in their private plane.”

Family offices, though differing in nature, all tend to have one or two things in common. One is that, while they may have several family offices in multiple jurisdictions, they see Jersey as the main hub for their family’s wealth as well as the additional concierge services which manage travel, schooling and other family-based administration. Another common thread is that of philanthropic investment, which is often a key consideration for modern ultra-high net worth families. This is usually included in the overall work of a family office based in Jersey, and some family offices specifically choose to base their philanthropic arm in the jurisdiction due to its clear expertise and investment in this area.

According to the Global Family Office Report 2018, nearly two-thirds of next generation heirs are expected to take over within the next 10 to 15 years, and the future of how wealth is managed is becoming increasingly intertwined with purpose. The report found that more than 1/3 of family offices already invest in impact investing, and 39% expect that the next generation will increase their allocations to socially responsible or environmental, social and governance (ESG) investing in future.

With such trust in Jersey’s talent pool and professionalism as an IFC, wealthy families frequently find themselves coming to see Jersey as a safe, secure and private jurisdiction to set up a home in too. One example, the patriarch of a first generation ultra-high net worth family, moved to Jersey with his family over 10 years ago. They chose Jersey due to lifestyle, the high-quality education options available and the ease of travelling to and from the UK, and then set up a private company in Jersey, which subsequently became regulated.

It seems that with many of the next generation of investors gradually taking up management or executive roles within the family office structure, the new trends for philanthropic and alternative investments must be considered key priorities within the private wealth community. Legal professionals, in particular, need to ensure they are ahead of the rapidly developing impact investment space as well as being aware of the complex dynamic which wealthy families now present.

It may be evolving faster than ever before, but family offices are probably going through their most challenging and exciting time yet and jurisdictions like Jersey are ready and armed with specialist knowledge to help families look to the future with confidence.

With a career in financial services spanning four decades, Joe has a strong commitment to the future success of the industry in Jersey.

Joe commenced his professional life in the banking sector, rising to the position of CEO of Jersey and the Isle of Man for a major bank, which included responsibilities for trusts and investments. In recent years, he expanded his focus as Director of Financial Services within the Government of Jersey, where he worked closely with industry and regulator to ensure the Island’s position as a leading international finance centre (IFC). Before joining Jersey Finance in February 2019, Joe was working to establish high-reputation regulatory frameworks and business models for IFCs in the Middle East and Africa.

The Isle of Man is widely considered to be a well-regulated jurisdiction with a robust regulatory framework overseen by the Financial Services Authority (FSA). Businesses across a variety of fields are licensed, regulated, and overseen to undertake business by the FSA or alternatively are, since the introduction and implementation of the Designated Businesses (Registration and Oversight) Act 2015, regulated by the FSA in relation to compliance with the Island’s anti-money laundering (AML) and countering the financing of terrorism (CFT) legislation.

Businesses caught by the expanded level of regulation are not just financial businesses but a whole array of non-financial businesses and professions, such as lawyers and accountants as well as estate agents and tax advisors, to name just a few. With tighter regulation there are, however, more chances of breaches occurring within businesses. There also appears to be an ever-increasing number of regulatory offences hitting the statute books, many of which remain within the criminal courts and have custodial penalties. It is not only companies and businesses, however, that are at risk, directors and officers can be held personally liable for breaches in addition to the company or other legal structure.

The FSA message is that it is not sitting waiting to catch businesses out and its overall intention is to achieve compliance and foster good working relationships. However, if a breach occurs within your business you need to act in a careful and considered manner.

The FSA has publicly committed to working alongside regulated entities to ensure compliance and, where regulated entities are open and transparent with the regulator, they will not necessarily use the heavy powers of enforcement available to them. But, with international pressures from the Financial Action Task Force (‘FATF’) and MONEYVAL and the UK and Europe more generally, with regard to tighter regulation, will Isle of Man regulators really put their money where their mouths are? In January 2017, MONEYVAL published its initial mutual evaluation report on the Isle of Man which commented on the effectiveness of island-wide AML and CFT measures as well as the Isle of Man’s compliance with the recommendations by FATF. While the island was found to have robust legislation in place, there was some criticism made with regard to the enforcement of the same. Therefore, across industry, there was a concern the FSA may seek to take more regulatory action, simply to increase the enforcement numbers to satisfy international pressures. A number of amendments to the regulatory framework have also been implemented over the course of the last two years, to address other concerns and criticisms from MONEYVAL.

As anticipated, since the 2017 MONEYVAL report, there has been an increase in regulatory prosecutions coming before the court. Thus far, however, the success rate has been poor and the FSA was heavily criticised in its approach in the recent case of HMAG v MBC Limited and others. The prosecution withdrew the case against the four defendants in that case, following an application for a stay on the grounds of an abuse of process, arising from the unfairness of the FSA’s investigation into the company’s alleged breaches of the AML and CFT Code. The court similarly criticised the manner in which the FSA conducted itself in its investigation which was, it was said by the Deemster (Judge), to be wholly prejudicial to the company. Prior to any judgment being issued, the prosecutor applied to withdraw the case, although a significant costs application was made by the defendants.

More recently, the FSA initiated a prosecution against a company director for failure to report suspicions under the Proceeds of Crime Act 2008 – HMAG v Monk. The Deputy High Bailiff (Summary Court Judge) dismissed the case at the committal stage, on the basis of there being insufficient evidence to support a case. The prosecution was heavily criticised for the lack of evidence of money laundering, or any criminal offence, in fact, having been committed. The dismissal has recently been upheld on appeal.

Therefore, if there was any indication of a run on prosecutions to satisfy international bodies, the lack of success and public criticism that has followed, may well have poured cold water on the same and the FSA appears to have reverted to its cooperative compliance approach.

That said, there has been an increase in the number of restraint orders being sought under the Proceeds of Crime Act 2008, many of which are on an international cooperation basis. The process for obtaining such orders is carried out through the criminal courts and the Attorney General’s Chambers has now set up a separate arm of its prosecutions department to focus on international cooperation and mutual legal assistance requests and recover assets. There is no requirement for there to be a predicate criminal offence in the Isle of Man in order to obtain such an order. However, once again the court has heavily criticised the approach taken in these applications and in particular the lack of disclosure and transparency from the prosecutions department to the respondent. One big problem in the Isle of Man is the lack of legal funding available to challenge proceedings brought under the Proceeds of Crime Act 2008. The court, pursuant to the legislation, has a significant restriction on its powers to allow the restrained assets to be used to fund legal advice and representation in relation to the restraint order proceedings. Unlike in England and Wales, legal aid funding is not available for such proceedings in the Isle of Man, and this begs the question as to whether the Isle of Man is compliant with its international and local human rights obligations.

In September 2019, the FSA issued its new Enforcement Decision-Making Process and Settlement Procedure.

This, for the first time, documents the FSA’s approach to enforcement and how regulated entities are expected to work alongside the FSA in cases of breach. It is positive to note that this procedure continues to follow the same theme of cooperation and working alongside regulated businesses to achieve compliance. The key message from the FSA is that it is committed to further develop its culture of constructive, open, and transparent engagement with industry and other key stakeholders. There have been no known deferred prosecution agreements entered into in the Isle of Man as yet, but this step appears to be a move forward in relation to such approach, where of course the same would be appropriate. Additionally, legislation was introduced this year in order to introduce civil penalties to the enforcement powers of the FSA and there is further legislative change in progress to further widen the FSA’s enforcement powers.

Therefore, while regulation is being tightened and there appears to have been an initial flurry of activity, perhaps to satisfy external international bodies, the waters now appear to be calming and moving back toward mutual cooperation and assistance between regulated entities and the FSA, which can only be described as a positive move. There must be mutual confidence and respect between industry and the regulator to achieve good compliance across the board. Industry must have the ability to approach the regulator for assistance and report breaches, without fear of an iron fist. The recent steps taken by the FSA, if followed through in practice, should assist in such approach.