Although the major trends in the Jersey private equity market tend to track those in the UK (London) market, some Jersey-specific recent developments are:

The Jersey private equity market typically tracks the London market in fundraising, investment, transactions, and exits, with the following trends:

There has been increased use of Jersey incorporated UK tax resident acquisition "stacks" for European deals lead out of London or undertaken by US private equity/venture capital funds. This is due to a combination of Jersey offering certainty of tax treatment, flexible maintenance of capital rules, familiar corporate structures, and additional options on exit through the ability to directly list on more exchanges than most other jurisdictions.

Those transactions typically use the same three-tier holdco, midco and bidco structure as are familiar to UK private equity practitioners, with senior financing being lent in at bidco level, mezzanine financing at midco level and equity (often multiple share classes, and possibly also with loan note financing) at holdco level. Management roll-over tends to be structured through a roll-up of loan notes.

The same structure tends to be seen in all transaction types, including secondary transactions, with the exception of bolt-on acquisitions, where the existing structure tends to be used (with either bidco or a member of the original target group making the acquisition). Most activity is currently in leveraged buyouts and secondary transactions.

There has been an increase in the number of exits by way of secondary sale, and fewer exits by way of trade sale. Exits by way of initial public offering (IPO) appear to be less prevalent than pre-Brexit, where there have been a number of exits within the financial services sector by way of UK listing.

Exits tend to be structured through the sale of the target entity (or its holding company), being the same entity that was initially acquired. Where a business has undertaken bolt-on acquisitions through the original bidco, or the original acquisition financing is to remain in place, there may be sales of the original bidco. Business sales are seen less frequently. Mergers may also be used, although again these are rare.

No distinction is drawn between private equity and venture capital funds for Jersey legal and regulatory purposes, and the information in this Q&A applies equally to both fund types.

The typical sources of funding for both private equity and venture capital funds vary according to the asset class and investor base concerned, but usually include institutional investors, family offices, sovereign wealth funds, and/or pension funds. There has been an increasing use of bridge funding to ensure that assets can be acquired with a short turnaround time.

Jersey fund investment vehicles are generally tax neutral or tax transparent (see Question 6).

Although there is a great range of fund structuring options (including limited companies, cell companies and unit trusts), the most commonly used vehicles for private equity and venture capital funds in Jersey are limited partnerships (LPs) and separate limited partnerships (SLPs).

LPs are established under the Limited Partnerships (Jersey) Law 1994 (LP Law). The liability of limited partners for the debts of the partnership cannot extend beyond their agreed capital contributions, provided their activity does not constitute management under the LP Law. The LP Law provides a safe harbour for certain activities that would otherwise constitute management and permits the limited partner a greater degree of involvement in the management of a LP than some other jurisdictions.

Other advantages of a Jersey LP include that:

Both incorporated limited partnerships (ILPs) and SLPs (introduced in Jersey in 2011 by the Incorporated Limited Partnerships (Jersey) Law 2011 and the Separate Limited Partnerships (Jersey) Law 2011, respectively) have separate legal personalities (allowing each form of LP, for example, to own assets, and sue and be sued in its own name). An ILP is also a body corporate (SLPs do not have this status). These entities provide greater flexibility for fund managers in structuring their fund's general partner and carried interest vehicle, particularly where the fund is an English LP.

A fund, whether established as a company, unit trust or LP, is not generally subject to any local Jersey tax. In particular, there is no capital gains, capital transfer, wealth, or inheritance tax payable in relation to the issue or realisation of investments in a Jersey investment fund (unless the fund invests in Jersey property or buildings). In addition, no corporation tax, profits tax, or stamp duty is payable. Funds structured as unit trusts and LPs are fully exempt from tax. Fund companies are subject to a 0% rate but can become fully exempt.

Jersey-resident administrators and custodians are generally liable to Jersey income tax at the rate of 10%. However, Jersey-administered entities, such as general partners and managers that provide services to a fund, are taxed at 0%.

Jersey-resident investors must pay tax at up to 20% on income received from a fund. There is no capital gains tax in Jersey.

Non-resident investors are generally not subject to Jersey tax.

A fund, whether established as a company, unit trust, or LP, is not generally subject to any local Jersey tax (see Question 6). Jersey offers a choice of investment vehicles to suit individual requirements in terms of taxation treatment.

Generally, the average life of a private equity fund in Jersey is seven to ten years, and the typical rate of return (hurdle rate) is around 6%. There are significant variations in the number of investments made by these funds.

The investment objectives for private equity and venture capital funds vary from client to client. The current market tends to be dominated by global brands or niche players (rather than those in between those two categories), which usually has an impact on the investor base and, therefore, the proposed objectives.

Although requirements vary according to the fund's regulatory classification, Jersey service providers to a private equity fund or venture capital fund are generally required to hold the appropriate class(es) of fund services business licence under the Financial Services (Jersey) Law 1998, as amended. Non-Jersey entities are generally not required to hold a Jersey licence but may be subject to other requirements (see below).

Depending on the fund's Jersey regulatory classification, the promoter may be subject to the promoter policy published by the Jersey Financial Services Commission (JFSC). Under that policy, the promoter is described as the driving force behind the scheme, and the criteria for approval are:

Additionally, investment managers of certain categories of fund must provide a confirmation to the JFSC regarding matters such as:

The confirmation must be counter-signed by an appropriate Jersey service provider, such as the fund's manager or administrator.

The directors of a public Jersey fund (or, where the fund is structured as a limited partnership, the directors of its general partner) are subject to the approval of the JFSC and are required to submit online personal questionnaires to it.

Like other offshore jurisdictions, Jersey has introduced economic substance legislation, which requires fund managers (and "self-managed" funds) to ensure that they are, among other things, directed and managed in Jersey and undertaking certain "core income generating activity" in Jersey. Typically, any Jersey-regulated manager will already comply with any applicable substance requirements. Further, most unregulated managers/self-managed funds do not have difficulty in complying with any applicable requirements as they usually align with tax structuring advice.

All Jersey funds are regulated according to matters such as whether they are public or private and the proposed investor base (for example, sophisticated/retail), regardless of whether they are structured as limited companies, LPs or otherwise.

Public funds. All funds that can be offered to more than 50 people and which are not recognised funds (see below, Recognised Funds) are considered public funds. There is no limit to the number of investors. Public funds can be established as:

Recognised funds. These are public funds that must meet highly prescribed standards in relation to most aspects of the fund's structure, operation, and prospectus content. These funds can:

Private funds. The JFSC has established a Jersey private funds regime, under which both:

Unregulated funds. These are also available for certain funds or where investors will each subscribe at least USD1 million (or currency equivalent), with no investment or borrowing restrictions, and with no regulatory supervision. This regulatory classification should not be selected for Jersey funds that are intended to be sold into Europe, as this would cause issues from an AIFMD perspective.

Jersey private funds that are not classified as alternative investment funds for the purposes of the AIFMD are unregulated, other than the need to obtain consent under the Control of Borrowing (Jersey) Order 1958 on the establishment of the fund vehicle. The manager and other service providers to these funds also benefit from certain exemptions to the need to become regulated in Jersey.

Non-fund entities (such as joint ventures) fall outside the scope of Jersey's funds regime.

For details of restrictions which apply to the various categories of Jersey funds, see Question 10.

For minimum investment amounts, see Question 10 (this depends on the fund's regulatory classification).

There are no maximum amounts that can be invested in any fund type, no set criteria for investment periods, and no restrictions on transfers beyond those set out in a fund's constitutional documents (although transferees of interests in funds must meet any relevant investor criteria for that fund type).

The relationship between an investor and the fund is governed by the fund's constitutional documents, together with any side letters. Typical investor protections sought include the establishment of investor committees and no-fault removal of the general partner by the investors.

The JFSC has issued policy statements, guidance notes, and codes of practice setting out structural and other requirements for each category of Jersey fund. Where Jersey funds may be offered to the general public (see Question 10), the JFSC is more prescriptive in terms of the requirements that apply to these funds, in the interests of investor protection.

The most common form of investment for private equity and venture capital funds is through shares (usually either ordinary shares and/or preference shares) and loan notes. Loan notes can be advantageous as they rank above the equity capital in an insolvency situation and can be easily structured as convertible instruments. They may also offer greater repayment flexibility.

The advantage of holding shares is that they offer greater direct control over a company. If loan notes issued by a Jersey body corporate are to be issued to more than ten people (or are capable of being held by more than ten people) then a consent to the issue of those notes will be required from the Jersey Financial Services Commission under the Control of Borrowing (Jersey) Order 1958.

There are no statutory pre-emption rights in Jersey but these are often included in a Jersey company's articles of association.

Jersey does not levy any withholding tax on dividends and there is no Jersey stamp duty on share transfers. Jersey-resident individuals and companies are not subject to any capital gains tax in Jersey.

The Jersey market typically tracks the London market in this regard. An auction process allows selling shareholders to obtain a range of offers and to evaluate competing bids, to ascertain which is the most advantageous for the seller either in terms of price or other considerations.

For more details, see Private Equity in the UK (England and Wales): Overview.

There has been some interest in public-to-private transactions involving Jersey listed companies. The UK Takeover Code also applies to Jersey companies listed on the AIM, as well as the main market of the London Stock Exchange, regardless of where the company's central management and control is. The Takeover Code may also apply to Jersey companies listed on other exchanges, if their central management and control is in the UK, Channel Islands, or Isle of Man. Squeeze-out processes are undertaken under Jersey law. Takeovers of Jersey companies by a scheme of arrangement are through a Jersey court process (which is very similar to a UK scheme process). While mergers can also be used for takeovers, this is not typical (although the increase use of Special Purpose Acquisition Companies (SPACs) may cause this to change in the medium term).

The principal documents are the same as for a UK buyout. For example, typical documents for a private buyout include:

Aside from a company's constitutional documents and any special resolutions passed to redesignate share classes (which must be filed on Jersey's public companies registry), all of the principal documents are private.

The principal documents required for a public buyout are materially dictated by the choice of structure (for example, scheme of arrangement, tender offer, or merger), applicable market rules and (where applicable) the UK Takeover Code. Public takeovers tend to require a much greater level of public disclosure, and if they involve a prospectus issued by a Jersey company, it must be filed on the public register in Jersey.

The Jersey market typically tracks the London market in this regard. Private equity investors expect warranties and indemnities from the sellers and from the management team. Indemnities typically cover specific items uncovered during the due diligence process. Private equity buyers can also be protected to some degree by the use of completion accounts and staging the consideration payable. Risk allocation tends to be highly deal-specific, and takes into account the manner in which consideration is structured, the type of business being bought or sold, and the nature of the seller.

Buyers can also seek protection in the form of contractually restricting the activities of the sellers under restrictive covenants.

Warranty and indemnity insurance is available, and is generally sourced through UK brokers. Where used, it is generally negotiated alongside the transaction and implemented on completion. However, most transactions do not feature warranty and indemnity insurance.

A director, in exercising the director's powers and discharging the director's duties, must:

(Article 74(1), Companies (Jersey) Law 1991.)

These are the key general duties owed by directors as a matter of Jersey law.

The common law (referred to in Jersey as the customary law) is also an important source of law in the area of directors' duties, as it expands on and provides a more detailed understanding of the general duties and obligations of directors.

The Jersey market typically tracks the London market in this regard. Typical terms include:

The Jersey market typically tracks the London market in this regard. Whether the protections are included in the articles of association or in a shareholders'/investment agreement (or both) can vary from transaction to transaction. The private equity fund can obtain a level of control through, among other things:

There has been an increase in lending from Jersey banks to private equity structures, which have required Jersey-law governed facilities and finance documents as well as facilities written under foreign law. These have often taken the form of secured multi-option term loans or unsecured revolving subscription facilities.

There has been an increase in debt financing to private equity structures containing Jersey entities (most commonly Jersey LPs with Jersey general partners) over the past 18 to 24 months. Typically, a fund seeks to borrow amounts ranging from 50% to 100% of the undrawn commitments that may be drawn down from the investors of the fund.

Where the relevant private equity structure involves a Jersey LP, a debt provider usually aims to protect its position by taking both:

If the borrowing is to be used to finance acquisitions, security may be taken over the assets to be acquired, but this is usually ringfenced within a subsidiary entity. This borrowing is more likely to be in the form of an amortising term loan.

Where there is competing finance in place, debt providers usually seek to protect themselves contractually by agreeing the terms of any subordination through an intercreditor agreement, to rank the priority of debt and security.

Debt providers seek to include covenants in respect of the following, among other things, to trigger events of default (and accelerate loan repayment) if these term(s) are breached:

Debt providers may also seek to impose consent requirements in respect of the same.

Structural mechanisms are also common in acquisition structures, using the same, often three-tiered, structure as is common in the UK market, with senior funding being provided closer to the asset.

The prohibition on Jersey companies (including public companies) granting financial assistance has been abolished. Despite this abolition, directors still need to bear in mind:

Two of the processes that can be followed in an insolvent liquidation are:

The order of priority is essentially the same:

On a company's dissolution, the remaining monies, if any, are distributed among the shareholders. A shareholder can claim as a creditor in respect of a shareholder loan made by it.

Secured creditors in respect of immovable property are entitled to be repaid as a preference from the realisation of the property to which their security (hypothec) relates, less the costs, fees, and charges incurred in the sale.

A creditor holding a pledge over tangible movable property can retain or sell the asset.

Secured creditors who have a security interest over intangible movable property granted under the Security Interests (Jersey) Law 2012, in respect of the debtor's property, are entitled to various enforcement options in respect of the collateral in preference to general creditors.

Priority between creditors can also be dealt with contractually by means of an inter creditor agreement. Close-out netting, set-off, and contractual subordination provisions are generally enforceable under the Bankruptcy (Netting, Contractual Subordination and Non-Petition Provisions) (Jersey) Law 2005. Despite any enactment or rule of law to the contrary, a close-out netting provision, a set-off provision, or a contractual subordination provision of an agreement is enforceable on the bankruptcy of a party to the agreement. Structural subordination can also be used.

A company (not being a company in respect of which a declaration has been made (and not recalled) under the Désastre Law) can be wound up by the court if the court is of the opinion that it is just and equitable to do so or it is expedient in the public interest to do so (Article 155, Companies Law). In that case the priority of creditors is as set out in the court order.

A debt holder can hold convertible debt instruments that can convert into equity, and it is possible for it to hold options and warrants.

Management can be incentivised through share option plans, warrants, equity ownership, and contractual bonuses. Certain types of option schemes may require Jersey regulatory consent (in particular, where securities are issued to non-group employee participants), but management equity schemes are not generally regulated in Jersey.

Jersey provides a stable, tax-neutral environment in which to establish and maintain corporate structures. Jersey-resident companies (apart from locally regulated financial services companies and utility companies) are, typically, zero rated for income tax and are not subject to capital gains tax in Jersey. In addition, Jersey does not levy any withholding tax on dividends and there is no Jersey stamp duty on share transfers. Jersey-resident individuals and companies are not subject to any capital gains tax in Jersey.

Dividends can be paid from any source other than a nominal capital account or any capital redemption reserve, provided that the directors of the company have given a 12 month forward looking solvency statement. This means that a Jersey company does not require distributable reserves to make a dividend payment provided the solvency test is met. Par value companies with no nominal capital accounts are not available, and in all cases it is not mandatory to create capital redemption reserves.

The payments of dividends can also be contractually restricted in any investment documentation and/or debt financing documentation.

The main anti-corruption/anti-bribery legislation is the Corruption (Jersey) Law 2006, under which a broad range of corrupt conduct can be prosecuted if there is a link to Jersey. Potential penalties under this law include ten years' imprisonment and/or an unlimited fine. Like the UK Bribery Act 2010, it creates the statutory offences of accepting or offering bribes. It applies to acts in Jersey, perhaps only requiring funds to pass through a Jersey bank account. Beyond that, it applies to the worldwide activities of Jersey companies and Jersey residents who are British citizens.

Under the UK Bribery Act, bribery offences committed outside the UK can be prosecuted in the UK if the person offering or accepting the bribe has a "close connection" to the UK. A close connection includes being a British citizen, which means many individuals resident in Jersey are subject to the UK Bribery Act as well as the Corruption (Jersey) Law 2006.

Jersey has no equivalent of the UK offence of failing to prevent bribery. However, where an offence is committed by a body corporate with the consent, connivance, or neglect of any director or officer, those individuals are also guilty of an offence (Corruption (Jersey) Law 2006). Similarly, under Jersey law generally, where an offence is committed by an individual it may be possible to attribute liability to an associated company.

The UK Bribery Act does not by its terms extend to organisations in Jersey. However, they are capable of being caught by it. The definition of a relevant commercial organisation includes, as one would expect, companies registered in the UK. However, it also includes non-UK (that is, Jersey) companies that carry on a business, or part of a business, in any part of the UK.

The implementation of an anti-corruption policy may assist with attempting to avoid breaches of the relevant Jersey law.

There are many exit strategies that could be used to realise a private equity or venture capital fund's investment including:

The advantages and disadvantages of each are the same as those in respect of the UK market. The most advantageous method varies from deal to deal. For example, when the IPO market is buoyant a seller may be able to raise more money than through a trade sale or sale to another private equity fund. In addition, a disadvantage to selling to another private equity firm could be that the acquiring firm makes a large premium on their investment on an exit after a relatively short period of ownership.

If the private equity or venture capital fund's investment is unsuccessful then its options to exit are limited to a certain extent. However, it is possible that any of the routes described in Question 31 could be used.

The main area of reform is in relation to the AIFMD. As a "third country" non-EU jurisdiction, Jersey has been working hard to ensure it can continue to offer professionals a blend of stability and flexibility.

Jersey's strategy in relation to the AIFMD is to have the right frameworks in place to continue to provide fund establishment, management, and administration services on a business as usual basis.

Jersey is committed to:

As a non-EU jurisdiction, Jersey can offer investors the choice of maintaining a separate regime that lies outside the scope of the AIFMD, for managers who do not wish to access EU capital or operate in the EU.

Combined, this range of options means that Jersey continues to operate its existing fund regime while at the same time offering an option that is fully compliant with the AIFMD, providing managers with the flexibility to market to investors both inside and outside the EU.

Jersey hedge fund managers can also act for managed accounts that meet certain criteria without the need for further regulation, provided that those accounts' investment strategies replicate (or comprise material elements from) one or more hedge-fund strategies currently employed by the manager in respect of its existing Jersey public funds.