Structuring family office investments using Jersey private funds

Ogier | View firm profile

Group partner Emily Haithwaite and partner Josephine Howe discuss
Jersey private funds and what structures may be most appropriate for
family office structures. Their article first appeared in HFM Jersey
2019 Special Report.

Wealth is increasing exponentially among some of the world’s richest
families, many of which have their own bespoke (single) family office
which looks after key operations and functions of the family.
Ordinarily the establishment of a family office also goes hand in hand
with succession planning and provides a framework to ensure an orderly
transfer of wealth to the next generation. To this end family offices
may also provide family management services, which includes family
governance, financial and investment education for future generations
and philanthropy coordination.

A family office will typically include teams responsible for the
management of investments, property, and other assets, as well as the
management of the family's legal and tax affairs. In addition, some
family offices provide softer 'concierge' services connected with travel
and managing household staff. Increasingly, however, the concierge
functions of the family office are being separated from the key
investment functions as the trend towards professionalism and
sophistication of investment platforms within family offices continues.

For a number of reasons, ultra-high net worth families are choosing
Jersey as their jurisdiction of choice to locate not only their family
office but also their investment structures. Jersey is politically
stable and, while it is neither part of the UK nor a member of European
Union, it has close links with the UK and Europe as well as strong legal
foundations and a robust and respected regulatory framework. We have
assisted a number of wealthy families from different parts of the world,
including the US, Middle East and East Asia, establish family offices
and investment structures in Jersey. Founders from these jurisdictions
are increasingly looking to protect wealth in the face of global
financial, regulatory and political instability.

This article considers the way that the assets of a single family
office might be managed and the type of investment or holding structures
which might be most appropriate.

Direct investing by family offices outside the public markets is increasing year on year

Key wealth management reports have shown that direct investing by
family offices outside the public markets is increasing year on year.
Commercial and residential real estate are particularly attractive
assets, providing both capital appreciation and solid investment returns
in the form of rental income. And private equity investments have
reportedly delivered the greatest returns for family offices, compared
with indirect investments in the asset class. Some of the reasons for
the appeal of direct investing include the ability of family offices to
manage their assets internally by hiring investment professionals, the
desire to retain greater operational control over their investments,
their ability to be agile and gain priority access to deals. Compared
with investing indirectly via traditional investment funds, direct
investing allows family offices to be patient investors, hold
investments for longer and significantly reduce service provider fees
associated with pooled structures. In addition, for most family offices,
the regulatory overlay associated with investment funds is
unnecessarily burdensome and costly, given that they are investing their
own money. For all of these reasons, the trend towards direct
investments by family offices is proving to be very a disruptive force
for fund managers.

We are increasingly asked to advise on the most appropriate holding
structures for family office investments. These will differ depending on
whether it is intended to acquire a single asset (for example a real
estate asset) or a portfolio of assets (such as a number of private
equity investments). Jersey provides a variety of structures which are
familiar to investors, namely companies (including protected and
incorporated cell companies), unit trusts or limited partnerships
(including separate and incorporated limited partnerships). The
regulatory treatment of such structures will depend on the number of
participants (investors) in the structure and the nature of the assets
acquired.

Single asset holding structures, for example, do not meet the
definition of a collective investment fund for Jersey regulatory
purposes and can therefore be established without the need to obtain any
additional consents from the Jersey regulator, the Jersey Financial
Services Commission (JFSC). Structures which are established to hold
multiple assets, however, may, in principle, fall within the definition
of a collective investment fund and, subject to certain exceptions which
are set out below, are likely to be subject to regulatory oversight by
the JFSC, the level of which depends on the sophistication of the
participants in the structure.

Due to the popularity and ease of establishment of Jersey Private
Funds (JPFs), we are often asked to advise whether they are an
appropriate vehicle for the purposes of structuring family office
investments.

An investment fund structure provides a number of benefits for entrepreneurial families

Using an investment fund structure for family office investments
provides a number of benefits for entrepreneurial families – the ability
to organise the family assets into different pools which can benefit
all or some members of the family, to define the rights and interests of
family members in relation to those assets, to engage with professional
service providers in relation to the management of the structure, set
parameters to measure and reward their performance and the appointment
of third party administrators and independent directors with expertise
in the relevant asset classes to drive institutional behaviour and
ensure high standards of corporate governance are maintained.

JPFs are private investment funds requiring at least two investors
pooling their capital to acquire a number of assets, such that there
would be ‘risk spreading’. Offers for investment in a JPF cannot be made
to more than 50 potential investors and investors must qualify either
as professional investors or eligible investors (which includes those
investing at least £250,000).

There is no requirement for a JPF to issue a formal offer document,
though participants must acknowledge in writing their receipt and
acceptance of an investment warning and disclosure statement. A Jersey
regulated service provider (the "designated service provider") must be
appointed for the purposes of providing certain initial and annual
confirmations to the JFSC with regard to the JPF, as well as ensuring
the JPF's compliance with Jersey's legislation for the prevention and
detection of money laundering and the financing of terrorism.

Specific considerations in relation to JPFs

A number of considerations specific to family offices arise in
relation to JPFs and, as mentioned above, to advise fully, an analysis
of the participants in the structure is required. Because, even if the
structure has most of the features of a collective investment fund, if
it is established for the purpose of investment by a single family
office then, more often than not, it will benefit from a specific
exemption on the basis that each participant in the scheme is connected
by way of a ‘family connection’. Care is required in assessing the
precise connection between the participants and that they are able to
rely on the exemption, but the definition is otherwise relatively broad
and includes blood and other relationships such as adopted or
step-children, or children born outside of marriage.

Multi-family office co-investment structures might also be exempt,
for example where the structure is essentially a joint venture between
separate families. In this case, however, it will be necessary to
examine the features of the arrangement in order to be certain that it
may properly be categorised as a joint venture. If it is not truly a
joint venture or a single asset holding vehicle and the ‘family
connection’ exemption is not available, the presumption will be that the
arrangement is, in fact, a JPF.

On the other hand, where a structure is established for the purpose
of enabling a family to pool their capital with selected third parties
or where it permits co-investment by employees of the family office, it
is likely to be registered as a JPF. Such structures are frequently
managed by an external manager if, for example, the family office lacks
the resources to employ their own asset managers or in order to obtain
independent asset allocation advice. In this case, the JPF will be
subject to a very straightforward regime which largely dis-applies the
more onerous regulatory and compliance requirements applicable to Jersey
collective investment funds and exempts service providers to the fund
from local licensing requirements. JPFs can be authorised within a
streamlined 48-hour process once the necessary submissions have been
made to the JFSC.

More from Ogier