Back to Basics | Private funds - An introduction to Jersey

In brief

• A variety of vehicles are available to suit sponsor and investor requirements.
• The legal system is different but there are many similarities with UK law for fund structures.
• Private funds established in Jersey can benefit from a light touch regulatory regime and improved tax profile, but may require one or more Jersey service providers to be appointed.  Jersey service providers frequently work with the UK and other advisers, such as lawyers, setting up private fund structures. 
• The Jersey private funds industry offers an extensive network of professional service providers, though the costs of appointment should be factored in.
• Being outside of the EU/EEA/UK, Jersey AIFMs can only market into the EU/EEA/UK on a private placement basis (to the extent it is available), as AIFMD marketing passport is not available to such managers.

Which Jersey vehicles are typically used for private funds?

Jersey based private funds generally take one of the following legal forms:

• a limited partnership (there are three kinds in Jersey, with and without legal personality);
• a unit trust, sometimes known as a Jersey Property Unit Trust, “JPUT” or “JUT”; or
• a company (including a cell company).

Limited Partnerships

Limited partnerships in Jersey offer similar benefits to limited partnerships established in the UK, namely limited liability for limited partners, tax transparency and limited filing requirements. There are three kinds of limited partnership in Jersey:

• Ordinary limited partnership: similar to English LPs, with no legal personality and established under the Limited Partnerships (Jersey) Law 1994.
• Separate limited partnership: separate legal personality in the same way as Scottish LPs, established under the Separate Limited Partnerships (Jersey) Law 2011.
• Incorporated limited partnership: separate legal personality and bodies corporate similar to LLPs in the UK, established under the Incorporated Limited Partnerships (Jersey) Law 2011.

All limited partnerships in Jersey will have one or more general partners who are jointly and severally liable for all the debts of the partnership and one or more limited partners, who are not liable for any debts of the partnership beyond the amounts they have committed, provided they do not participate in the management of the partnership. Similar to the private fund limited partnership in the UK, Jersey partnerships also benefit from a “white list” of activities which limited partners may participate in without losing their limited liability, giving certainty over an investor’s ability to take certain decisions. The general partners of Jersey limited partnerships need not necessarily be domiciled in Jersey, which can save the sponsor administration fees, though this may affect the principal place of business of the partnership and should be carefully considered.

In common with limited partnerships in many other jurisdictions, Jersey limited partnerships benefit from limited restrictions on the scope and nature of the terms that can be included in the fund's constitutional documents. The fund's limited partnership agreement does not need to be filed in Jersey. In particular, Jersey limited partnerships are not subject to the more stringent requirements around distributions of income and capital that often apply to corporate vehicles, making them ideal for funds looking to distribute receipts on a regular basis.

Unit Trust

A unit trust might be thought of as a hybrid between a limited partnership and a company. Like a limited partnership it is not a separate legal entity but contracts through its trustee(s) (in a similar way to how a general partner contracts on behalf of a limited partnership). It is constituted by a trust instrument which sets out the terms on which an investment in the trust is made and the provisions of the trust instrument will also govern the relationship between the trustee, the manager (if separate to the trustee) and the investors. The fund's trust instrument does not need to be filed in Jersey.  However, unlike a limited partnership an investor in the trust will receive units in the same way an investor in a company receives shares, and these give investors a fixed interest in the trust property. The trust’s units may be flexibly redeemed by the trustee or manager, making unit trusts an ideal choice for open-ended funds.

Unit trusts are particularly tax efficient vehicles for investing in UK property as no stamp duty/stamp duty land tax is payable in the UK or Jersey on the sale of units in the trust, thus potentially allowing an indirect sale of property through the transfer of units without the buyer being subject to stamp duty/stamp duty land tax, which may represent a substantial saving.  Like a partnership, unit trusts are also generally tax transparent for income purposes provided they are correctly structured.  Unit trusts also have the option to elect to be treated as exempt or transparent for UK capital gains tax, which gives a manager the flexibility to accommodate the tax requirements of the fund’s investor base.

Companies

Although a less common choice for fund vehicles, Jersey based companies may be used. Unlike many European jurisdictions, Jersey fund companies resident for tax purposes in Jersey are subject to zero percent income tax in Jersey and dividends may be paid without withholding tax, potentially avoiding the typical tax drawbacks of corporate funds vehicles.  Jersey companies can also facilitate redemptions required for open-ended funds by issuing redeemable preference shares but this would still be subject to any restrictions on distributions of income and capital applicable to corporate vehicles.

Umbrella funds may also established in Jersey using a cell company structure, popular with insurance and securitisation structures. The cells all share the same registered office and company secretary but can have different boards of directors, different capital structures and different articles of associations. The assets and liabilities of each of the cells of the cell company remain segregated. 

Jersey Funds Regulation

Jersey funds typically fall under either the “Jersey Private Fund” or “Expert Fund” regime , with the Jersey Private Fund regime being the more light touch of the two regimes.

Jersey private fund regime

The Jersey private fund regime is fast (with a 48 hour streamlined authorisation process) and flexible with the following minimal requirements:

• Up to 50 investors may be admitted and 50 initial offers may be made
• No limit on fund size
• No investment or borrowing restrictions
• No requirement for an offer document, subject to any AIFMD/SFDR disclosure requirements
• No auditor needed, subject to any AIFMD reporting requirements
• Open or closed for redemption by investors
• Open to ‘professional’ investors and/or those investing £250k
• A Jersey regulated ‘designated service provider’ must be appointed to ensure that the necessary criteria and applicable anti-money laundering legislation are complied with, to carry out due diligence on the promoter and to file an annual compliance statement
• A separate fund administrator can be appointed (may not need to be from Jersey)

Depending on whether the fund will be marketed in the EU/EEA/UK and whether the AIFM is sub-threshold, there are slightly different regulatory consent requirements and approval timeframes. Sub-threshold AIFMs only marketing within the UK, for example, will not need to prepare an offering memorandum.  Whilst the JPF guide does not require Jersey directors, the JFSC will expect that Jersey resident directors are appointed, and the implementation of the economic substance regime in Jersey makes it very difficult to avoid any Jersey appointments.

Expert funds

If the fund will make 50 or more offers for investment (or if more than 50 investors are anticipated), the fund will need to comply with the Expert Fund regime.

Expert Funds are for “Expert Investors” only (including an investor with a minimum commitment of US$100,000 or more) and must comply with the Jersey Expert Fund Guide. The following are some of the requirements imposed on Expert Funds:

• Two Jersey resident directors with appropriate experience must be appointed to the board of the general partner/trustee/fund company.
• A licensed Jersey administrator, manager and/or trustee (as applicable).
• For open ended funds, a custodian must be appointed (similar to the depositary requirement under AIFMD).

• An offer document must be prepared setting out all material information in respect of the fund.
• Investors must sign an investment warning.
• The fund must be audited.

AIFMD

Jersey is outside of the EU/EEA meaning AIFMD does not apply to Jersey AIFs and AIFMs, albeit Jersey has introduced its own AIFMD regime. This brings both benefits and drawbacks. On the plus side the full requirements of AIFMD do not need to be observed, thus saving significant costs and time. However, this also means Jersey is a “third country” for AIFMD purposes and Jersey funds cannot therefore access the marketing passport for placement into the EU/EEA/UK, meaning placements must be made under the relevant national private placement regime or “NPPR”. Placement under the NPPRs can – depending on the jurisdiction – be both complicated and time consuming, and often requires compliance with many provisions of the AIFMD. In addition, some EU jurisdictions require Jersey AIFMs to comply with the AIFMD pre-marketing notification requirements despite them not being directly caught by the Directive.  This should be factored in if sponsors intend to market to a wide European investor base.