Jersey Expert Funds are an excellent way to allow investors and the promoters of funds to take advantage of the streamlined process for establishing a new fund in Jersey. Introduced in 2004, Jersey Expert funds are particularly attractive when there is a need to create a flexible investment structure which is targeted at high net worth, professional, sophisticated and institutional investors as well as hedge funds. Sapphire Capital have advised numerous Expert Funds and most recently structured and promoted a Jersey Expert Fund which seeks to purchase UK distressed residential and commercial property. We found it to be a fairly straightforward process.
Although the Expert Fund classification has reduced the regulatory burden which in turn has resulted in creating a more flexible fund structure, the funds do need to be established in accordance with a strict step-by-step process.
From our recent experience of setting up Jersey Expert Funds, here are the six key issues that you should keep in mind if you are considering setting up a Jersey Expert Fund.
1) Do you understand the type of investors the Jersey expert fund is targeting?
Expert Funds can only be offered to investors which conform to the rules as set out in the Jersey Expert Fund Guide. One of the main requirements is for an investor to commit to investing at least US$100,000 (or its currency equivalent) in the fund. In the world of fund raising - I can assure you that the amount of US$100,000 (circa £75,000) is a large amount for the typical investor. Most funds accept minimum investment amounts around the £25,000 - so having to restrict investors to a minimum of circa £75,000 rules out a lot of potential investors. This becomes especially relevant if an Independent Financial Adviser ("IFA") will only recommend a client invest a small percentage in the proposed fund in order to spread their clients risk within their portfolio. For example, a 2% portfolio allocation would mean that an investor would have to have a portfolio valuation of circa £3,750,000. This obviously rules out a lot of investors. Now you know why it is called an "Expert Fund".
2) How quickly do you need the expert fund set up?
In theory, the authorisation of Jersey expert funds is tailored for speed. Expert funds can be self-certified and are not limited by complex policy requirements and intensive scrutiny. By acquiring approval from the JFSC for the fund's proposed directors and principals before submitting documentation, the entire application process can be accelerated pre-emptively. Application and statutory fees are paid during this process. The JFSC website even states that authorisation can occur "...3 working days from receipt of complete application."
Put simply - the truth is that it is not going to happen within 3 working days. It might not even happen within three months. It may take much longer. A recent property focused expert fund we got approved took nearly eight months to get clearance from the JFSC. While discussing this issue with a very well known legal firm in Jersey (who do many expert fund applications each year) it became very clear that in all their experience of doing expert funds - there has never been a case when an expert fund was approved within three days. It just does not happen. Sure, if you have submitted all the necessary documentation perfectly and the principal persons and directors are pre-approved by the JFSC you might have a chance of getting it approved quickly. My guess is circa three months. The point is, just don't rely on getting it done quickly (and definitely not three days).
3) Who is writing your offering documents?
Make sure you choose an experienced adviser to help you write the offering documents. Don't just rely on the Jersey legal team to do this work but seek help from an investment adviser who has experience in this area. The offering document needs to present clear financial information which highlights potential returns, borrowing restrictions etc. and it also needs to confirm to the strict Jersey legal requirements such as those set out in the Collective Investment Funds (Jersey) Law 1988 or the Control of Borrowing (Jersey) Order 1958. We have worked with good and some not so good Jersey legal advisers, so be careful who you pick. We can recommend very good Jersey based legal advisers and / or trust service companies. We also recommend you engage an adviser who will draft all the documents first before passing them onto the Jersey legal team thereby saving you time (forgive us - we of course would recommend this approach as this is one of our key service areas).
4) Are you sure you have picked a good investment manager?
As with all funds, extensive due diligence must be performed when selecting the fund investment manager. The role of the investment manager is to ensure that sufficient returns are made to investors by operating on their behalf using the experience they have in managing funds and investments. So it is vital that you make sure you have selected a good investment manager. It is not enough to rely on the fact that investment managers must conform to the Jersey Financial Services Commission ("JFSC's") required criteria and will have to sign confirmation forms that establish their positions. It is much more than this. It is the investment managers track record and ability to perform in a particular niche market that will make all the difference to the performance of a fund. Therefore, be very careful when selecting the fund manager.
5) Do you understand the Jersey regulatory environment?
When compared to other possible fund locations such as the Cayman Islands, BVI, Luxembourg or Malta, in terms of regulation and perceived quality of jurisdiction, our view is that Jersey would be regarded as the leader. The Jersey Financial Services Commission is responsible for the regulation, supervision and development of the financial services industry on the island of Jersey. They are very easy to work with, but can take their time if they perceive the fund to be higher risk. Our advice is to make sure you understand the timescales involved and consider having an exploratory meeting with the JFSC (and your legal adviser and/or trust operator) prior to embarking on a Jersey Expert Fund to make sure you understand the timings and potential bottlenecks.
6) Do you really understand the costs involved in setting up an Jersey expert fund?
As with all funds, if you are not careful, the setup costs can quickly accumulate. The normal figure quoted for establishing a Jersey expert fund is circa £20,000. I doubt that is correct. I think you have to budget at least £30,000. Perhaps £40,000 if it is a very complex fund structure. Situations can also arise where you get three quarters of the way through the JFSC application process and an adviser says they need more money in order to complete the process. It is hard to say no when you are so close to getting approval. This is an area to be very careful off. It is important to stress that fixed fees are very important to set at the start.
If you need a second opinion on quoted costs from Jersey fund providers - just ask us and we will tell you if they are reasonable.
Sapphire Capital Partners LLP is authorised and regulated by the Financial Conduct Authority to conduct investment business. We assist our clients to structure and obtain finance via funds such as a Jersey Expert Fund or Jersey Listed Fund. We typically draft the offering documents for clients prior to a formal review by the Jersey legal team or trust provider, thus saving our clients valuable time and expenditure. If we can help you in any way - please let us know. Use the contact us form below or call 0870 7348 912.