Following on from the article about Family Offices – the rise of popularity of alternative structions – part 1, Ian Rumens reviews some of the popular vehicles for structuring family office investments.
Jersey Private Fund (JPF)
Over the last 12 months, the private wealth and private equity teams in Jersey have seen JPFs rocketing in popularity as a vehicle for the purposes of structuring family office investments. The JPF provides a relatively low-cost, efficient and streamlined fund solution with light-touch regulation, which suits many family office investment strategies looking to establish an agile, cost-effective fund to pool capital and invest in a number of assets.
So why’s a JPF attractive to family offices? Some of the main benefits of a JPF lend themselves to being the perfect vehicle for families to invest through as it can be established as a Jersey company, cell company, LP or unit trust.
However, should the family office wish to use a non-Jersey entity, the required control of borrowing consent is obtained in Jersey. Given the desire of family offices to maintain some element of control, the benefit of a JPF is that it doesn’t require Jersey resident directors, a Jersey resident GP or a Jersey based trustee.
On the other hand, a JPF must appoint a Jersey based Designated Service Provider (DSP), basically a Jersey regulated service provider, who’ll act as administrator. The DSP’s role includes ensuring that the JPF meets the required eligibility criteria by making sure all necessary due diligence has been carried out regarding the JPF and its promoter (the family office in most cases) and compliance with local AML/CFT requirements is being adhered to. The reliance on the DPS is advantageous to family offices, as it alleviates the regulatory burden from themselves and allows them to focus on wealth generation.
Offers for investment in a JPF cannot be made to more than 50 potential investors. Investors must qualify either as either professional investors or eligible investors, which includes those investing at least £250,000. The administration burden is further reduced in that there’s no requirement for a JPF to issue a formal offer document, although investors must acknowledge in writing confirmation of receipt and acceptance of an investment warning and disclosure statement.
An easy and simple task for a family office to perform.
Skin in the game
Attracting star talent to the family office environment, co-investment or “skin in the game” and financial rewards for key employees are key for both families and employees. Here a JPF structure enables a family to pool their capital and co-investment with the employees of the family office in suitable investments. For investments where the family office lacks the skillset or resources to employ their own asset managers, investments are often managed by an external manager.
Jersey Property Unit Trust (JPUT)
Historically, many family offices have opted to hold commercial real estate in a private trust structure with the trustees either directly owning the property or, as has been more common, an underlying company owned by the trustees.
This traditional route is now being challenged by the JPUT , previously the sole preserve of institutional commercial property investors.
So, what’s a JPUT? A JPUT is a specific type of Jersey trust which is commonly used to acquire and hold interests in UK commercial real estate. Unlike a company, a JPUT doesn’t have a separate legal entity. Its assets are held by the trustee of the trust for the unitholders (potentially different family members) of the JPUT.
The unitholders hold units in the JPUT, similar to shareholders holding shares in a company. As the JPUT is a trust, the trustee will be the legal owner of the assets of the JPUT, with the unitholders being the beneficial owners of the assets. This is different from the position with a company, where shareholders have no direct ownership interest in the company’s assets.
Protected Cell Company (PCC)
An alternative vehicle attractive to both single and multi-family office asset management is the PCC. A single-family office can find it useful to segregate the assets and the liabilities into distinct cells, be that by sector, asset class or risk.
Where the family offices don’t have the relevant expertise for a diverse range of liquid assets, it may appoint different specialist investment managers and segregate each investment from one another in a structure which they control. The family office could simply provide one cell of the PCC to each family member or use a cell for a club deal funded by a pool of investors. This gives each family member the option to invest or not in a family venture. Such investment cell arrangements can used as part of an education program whereby the family introduces the next generation to the investments.
Family office chief financial officers tend to favour PCCs because cost saving benefits are achieved by utilising the vehicle rather than establishing multiple fund structures. Legal fees in relation to the set-up costs can also be minimised if a PCC is used because adding additional cells to an existing PCC is more cost effective than incorporating a new legal entity. A further cost advantage is that PCCs operating costs can be lower as these are shared across the cells.
Consider the alternatives
As the wealth held by private family offices increases, we’ll continue to see the growing trend of alternative structures being utilised in the preservation, enhancement and the structuring of managing family assets. Ultra-high net worth families will increasingly use a range of bespoke structures which may include trusts, private trust companies and foundations investing via alternative structures like JPFs, JPUTSs, PPs and LPs to achieve their aims.
The challenge for both professional trustees and specialist fund administrators is ensuring that offshore service provider family office client teams have the requisite combination of skills coupled with the integrity to service the demands of the modern day, evolving family office.
If you have any questions about Family Office structures or would like to discuss any of the points raised above, please get in touch.
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