Cadwalader has recently seen growth in the number of funds incorporated in Jersey and Guernsey participating in the underwriting and NAV facilities. Trent Lindsay and Cassandra Best spoke with Julia Keppe, Senior Counsel at Walkers in Jersey, and Zoe Hallam, partner of Walkers Group in Guernsey, to find out more about the fund finance market in the Channel Islands.
FFF: Julia and Zoë, thanks again for speaking with us and for the crash course on Jersey and Guernsey bottoms. To start with, what are the recent fund formation and fund finance market trends in Jersey and Guernsey?
JK: Thank you very much for inviting us! Glad to chat with you. In terms of trends, in the Channel Islands we are of course local councils, and so the trends we see tend to follow what is happening on land. So I’m sure a lot of this will be very familiar to your readers.
ZH: Recently, and as you mentioned, there has been a real increase in our transactions from the United States. We regularly work with European clients and legal advisors; however, it has been great to see more and more Jersey and Guernsey vehicles alongside US vehicles on US sourced contracts. I spent eight years in the fundraising team at Walkers Cayman before moving to the Guernsey office in 2019, and it’s great to be back working more frequently with my US network.
JK: Yes, okay. More generally, the number of funds and the amount of capital committed in the two jurisdictions are increasing. Jersey Finance reported that the value of total fund activity earmarked in Jersey increased by 15% in the first half of 2021, with total fund asset value reaching a new record high of £436.3 billion in the first half of 2021. middle of the year. This was driven by private equity, which grew 24% over the same period.
ZH: The Guernsey Financial Services Commission has released third quarter statistics for 2021. The net asset value of Guernsey funds increased by 6.4% during the quarter and stood at £290 billion at the end of the year. end of it. Of this, £238bn is in closed-end funds, showing the importance of closed-end funds to the industry as a whole. To briefly touch on the fund funding space, the main trend we are seeing is an increase in the number of NAV installs. We heard a lot about NIVs in 2020, but only saw them come to fruition in 2021. There is no doubt that they are now a strong feature of the landscape, alongside traditional underlines.
JK: Okay again, and they also seem to be getting more complicated. I’m certainly not complaining, because it’s great to work on the complex fundraising solutions that are coming to market.
ZH: And the market on both islands continues to be innovative – we are seeing the creation of crypto funds here, which keeps regulators busy! And the cannabinoid healthcare market has been an area of focus since the first fund was established in Guernsey in 2020.
FFF: What are the advantages or disadvantages of setting up Jersey and Guernsey funds from the point of view of a sponsor or a fund lender?
ZH: The advantages of the Channel Islands are very similar to those of some of the more traditional US-oriented offshore markets, such as the Cayman Islands. Basically, it is tax neutrality, a stable legal environment and the presence of all the necessary professional advice. Specifically, there is a light regulatory regime in both jurisdictions, where funds can be approved within 2 days in Jersey and 24 hours in Guernsey (not that this is a competition)! Marketing Channel Island funds in the UK and Europe under the AIFMD is also a well-trodden path and can be much cheaper and faster than some onshore jurisdictions.
JK: Interestingly, financial institutions in Guernsey and Jersey are reporting an increase in capital flows from the United States to Channel Island funds and then to the United States. Unsurprisingly, more than two-thirds of inbound investment in Guernsey is in private equity. While our time zone is convenient for European managers, investors and assets, I assume for US transactions, time difference can be an inconvenience in terms of liaising with directors and directors, but certainly not insurmountable. The professional services industry is global in outlook and accustomed to dealing with all time zones.
ZH: In terms of lenders, in addition to Julia’s earlier points, there is certainty and stability in the use of the Channel Islands around security and contractual rights. In particular, there is abundant case law on litigation and enforcement, with ultimate recourse to the Privy Council (if necessary, etc.).
FFF: Are there any material differences in the way the capital call guarantee is granted and perfected in relation to the underwriting facilities in Jersey and Guernsey respectively? Is it possible to rely on security documents governed by New York law or are local law documents required to be signed, or both?
JK: In Jersey and Guernsey we would need locally regulated security for capital calls and bank accounts (assuming of course the accounts are located here). While there is no problem in also providing security governed by New York law, when it comes to enforcement, we will rely on local security that has complied with local laws of creation and perfection.
ZH: Yes, the basic position of local law security is common to both islands, although there are differences between the two jurisdictions in creation and perfection. The main conversations we have with our lead counsel on this point revolve around investor notices. In Guernsey, the position is clear: opinions are necessary to create security; therefore, they are sent simultaneously with the conclusion of the call for funds guarantee contract. However, in Jersey opinions are not required for the creation, perfection or priority of security, so it becomes a business decision.
JK: That’s correct, and market practice varies, although we tend to see notifications sent out, with more discussion of timelines. I’m sure most people will be very familiar with this conversation! Additionally, it is worth mentioning that Jersey (unlike Guernsey) has a public security interest registry, so any security interest governed by Jersey law, regardless of the grantor’s jurisdiction, is registered here.
FFF: What about improving the security of collateral accounts based in Jersey and Guernsey? Do you have a concept similar to account control agreements?
ZH: We don’t tend to use control agreements in either jurisdiction. We have the concept of “blocked” and “unblocked” accounts. In subscription line installations, the account is unblocked, until a default event. Following this, the security agent can “block” the account so that the borrower is no longer authorized to make withdrawals or give instructions to the bank from the account. With respect to what is signed at a closing, for priority purposes, the grantor and the secured party will send a notice to the account bank, which is usually recognized on the same day. This is always done in the standard form of the relevant account bank and is a very well established process on both islands.
FFF: Are there aspects of Jersey and Guernsey law that lenders taking collateral under a NAV facility on equity and debt securities held by funds should consider?
JK: Not really. Jersey and Guernsey law is quite similar to English law when it comes to taking security over equity and debt. Share certificates, share transfer forms and annotated member registers are required for perfection and priority purposes. Most often, problems arise when the constitutional documents of the underlying investments do not allow (or impose consent requirements) the granting of security – but these problems are not unique to the Channel Islands. !
ZH: Perhaps one thing to note is the inability of Guernsey to take any asset guarantees under Guernsey law (similar to a US security agreement or an English debenture). We must therefore identify each underlying asset located in Guernsey and take out a specific guarantee on this asset. Jersey is a bit more flexible in this regard.
JK: Indeed, we have the ability to take security over all intangible personal property located in Jersey, although we generally tend to see asset specific security (typically shares, contractual rights or bank accounts ).
FFF: Are there any significant differences between the laws of Jersey and Guernsey that affect the fund finance market?
ZH: Again, not really. As noted, both Acts have much in common with English law, and English case law would be persuasive in our courts. Although there are still differences with English law and also between the two jurisdictions, none are really significant or would necessarily steer a sponsor towards one jurisdiction or the other. It’s great to be able to say that both islands offer such a stable environment for funds and fundraising.
FFF: What do you think the coming year will bring?
JK: Let’s hope for continued expansion in the fundraising market which has been reportedly so resilient over the past few years affected by COVID. We expect continuous innovation of the products offered, especially in the NAV space. Unfortunately traveling to Miami isn’t possible for me or Zoë this year, but I’m keeping my fingers crossed that the FFA Summer Symposium in London continues and we can cross the Atlantic again next year. We are waiting for this with great anticipation.