The passporting regime for private funds in Europe that was intended to replace country-by-country national private placement regimes (NPPRs) – which have been widely viewed as too fractured – “hasn’t gained the momentum” policymakers were hoping for, according to a leading lawyer.
With Brexit on the horizon, the status of offshore fund jurisdictions such as Jersey and Guernsey has come under the spotlight, with the Channel Islands continuing to rely on NPPR while rival on-shore domiciles such as Luxembourg tout the benefits of the EU passport in line with the Alternative Investment Fund Managers Directive (AIFMD).
“Passporting hasn’t gained the momentum that perhaps the AIFMD draftsmen had hoped for, while national private placement regimes continue to be used as a matter of course by funds and managers in Guernsey and Jersey,” said Craig Cordle, Guernsey-based group partner at Ogier law firm.
Under the AIFMD, European alternative fund managers can apply for a passport to distribute alternatives funds within the EU, where funds were previously sold on a private placement basis with different rules for different countries, known as NPPR, which allowed alternative investment fund managers to market their funds to Europe without going through a passport regime.
Soon after the passage of AIFMD, the European Securities and Market Authority (ESMA) indicated that NPPRs would be rapidly phased out and the passport would become the primary tool for funds marketing into the EU. Guidance on the Luxembourg Private Equity and Venture Capital Association website states that national placement regimes will be replaced. While that appears to still be the plan, the pace of change has been slow.
Cordle said indications that private placement will be phased out anytime soon are likely “some way off the mark” – in fact, he’s starting to see more parallel structures leveraging the passport through Luxembourg for some investors, and NPPR for others who do not wish to invest through an EU vehicle. “With the backdrop of Brexit, nobody really knows what will happen to NPPR,” he said. “But EU investors will not wish to be effectively cut off from investment outside of the EU.”
ESMA has previously said the AIFMD passport regime would be extended to Jersey, Guernsey and other offshore jurisdictions, but there has been little progress in the last two years. Until third-country passporting is up and running, the private placement regime looks set to stay. In fact, data from Jersey Financial Services Commission show that registrations to market in Europe via Jersey have increased.
“There are no signs private placement is due to be phased out any time soon,” says Geoff Cook, chief executive officer of Jersey Finance, who believes the regime is “providing a vital option for non-EU managers looking to access EU investor capital.”
“Private placement will remain in place at least until a good while after third-country passporting is made available, and that is still some way off, with all attention currently on Brexit,” Cook added. “When passporting is made available, Jersey will be front of the queue, having received the green light from ESMA in 2016. We firmly believe that private placement can give managers some much needed certainty and a future-proof option, without being caught by the full compliance requirements of AIFMD.”