Companies analysis

Jersey’s experiment with incorporated cell companies

Bill Gibbon, of Volaw in Jersey, explains how ICCs is designed to attract the alternative investment funds industry

Jersey introduced a new concept in segregated cell company structures to the financial world in February 2006. The product, the incorporated cell company (ICC) looks like becoming the product of choice for Jersey's alternative investment funds industry. New developments in Jersey's Companies Law in January 2008, allied to the increasing use of ICCs for listed funds and fund of hedge funds products means that the ICC looks set to transform Jersey's fund landscape.

The ICC has provided fund managers and transaction sponsors with a flexible and cost effective structuring option. New changes in Jersey's Companies Law allowing different boards of directors for the various cells of an ICC has reinvigorated the market for these hybrid vehicles. ICCs have, of course, been adopted in umbrella funds, hedge funds and structured equity products. They are also being used extensively in capital market transactions including medium term note programmes.

ICC/PCC directors and January 2008 changes

Changes in the Companies (Amendment No 2) Jersey Regulations 2008 allow individual cells of ICCs to have different boards of directors from the ICC itself. This means that experts in a particular field can sit on the board of an incorporated cell (IC) without necessarily being on the board of the main ICC. This is likely to lead to a development in the use of ICs as listing and note issuing vehicles. Both PCCs and ICCs are proving to be popular vehicles for investment funds, as well as in capital markets and other corporate finance areas where legal segregation of assets is vital. Following this latest change in the law, ICCs may be increasingly used in what were formerly group holding company structures and securitisations, as well as funds.

The ability to appoint the most appropriate directors for individual ICs (coupled with the ease of set up of an IC) will mean that an individual IC will be able to appoint directors that are especially knowledgeable in the particular investment strategy pursued by an individual IC. If the IC is a property fund, it can have a real estate expert on the board. If the IC is a derivative, long/short or arbitrage fund, it can have an experienced equity and derivative expert on the board of that cell. It should be noted that in January 2008 Arch Guernsey ICC Limited became the first Guernsey ICC to list its cells on the Channel Islands Stock Exchange. This development in Guernsey is a fair indication of the acceptance of the ICC model and its development.

Corporate directors and the ICC

Additional changes now allow a Jersey regulated financial services business to act as a corporate director to a Jersey company and/or IC. In practice, many directors of structured finance ICs will be provided by Jersey businesses regulated under the Financial Services (Jersey) Law 1998. It, therefore, makes sense that those regulated businesses, rather than its officers, should act as directors. The Jersey Financial Services Commission may, as a matter of policy, wish to restrict the use of corporate directors on regulated entities such as expert and other funds. However, the facility to use corporate directors in Jersey from January 2008, should add great flexibility to the ICC vehicle.

IC successes

As an example of the recent successes of the ICC product, in November 2007, it was announced that the Principal's Absolute Alpha Portfolio IC was a finalist in The Most Innovative Fund of Funds product section at the Hedge Funds Review Europe Fund of Hedge Fund awards. The Principal Absolute Alpha Portfolio IC was one of the first fund of hedge funds to be established as an IC in Jersey. It was, in turn, listed on the Channel Islands Stock Exchange and was one of the first ICC fund products to be listed.

The product is an open-ended Jersey fund investing in a portfolio of hedge funds whilst using additional derivatives for hedging purposes. The product provides a flexible and innovative platform and the IC status has added significant value to the product. It is likely that similar IC products will be developed with similar risk return characteristics.

The development of the ICC

Jersey's protected cell company (PCC) sought to develop the classic vehicle while avoiding some of the early perceived pitfalls. In consequence, Jersey's PCC has been described as a second generation protected cell structure. New features are that the non cellular assets of the PCC are beyond the reach of creditors of an individual cell and cells can invest in one another. The ICC is seen as taking the cell product one stage further.

Each cell in the ICC is separately incorporated. Therefore, ICs are, in law, separate companies with their own legal identity. As a result, ring-fencing is assured within an ICC structure and assets and liabilities can be apportioned as effectively as they would be among subsidiaries in a corporate group structure. Article 127YC of the Companies (Jersey) Law, 1991 states that "a cell of an incorporated cell company, is a company". The advantages of ring-fencing are most easily demonstrated within hedge funds since these tend, of course, to invest in options, futures, forwards and other derivative assets to effect their overall investment strategies.

Jersey cell companies in practice

Jersey's PCC concept was actually used for a fund structure within days of the law coming into force. One of the motivations was the importance of keeping distinct classes of assets segregated. MARS Portfolio Management PCC was Jersey's first PCC. This was an expert fund containing individual cells focusing on differing strategies including emerging market debt and general equity linked investments. MARS Portfolio Management PCC also made use of the ability of cells to invest in other cells. Generally, cells in a Jersey cell company can buy and sell assets to one another, provide guarantees and borrow and lend to one another.

The very first Jersey ICC was set up as part of a structured financing arrangement for Societé Générale. The ICC was chosen as the most appropriate structure as the complex asset financing transaction needed to ring-fence the assets and liabilities attributable to the initial part of the financing in a multi layered project. The ICC structure has subsequently been used for multi-currency asset-backed commercial paper programmes and continues to be used in pension related products (where it has been vital for the individual pension plans which need to be held within separate corporate vehicles, but with a low expence ratio).

Confirming that part of the appeal of the ICC was to fund managers, the ICC was used to set up a suite of funds managed by a local Jersey hedge fund management group in the early part of 2006. Altis Master Fund ICC was the first fund to use the ICC. This expert fund seeks to use the segregated ICs to ensure the ring-fencing of portfolios within an alternative strategies product.  

Advantages of the ICC

In many ways, the ICC is a hybrid of the PCC and a conventional company group. The ICC ensures a high standard of limited recourse and insolvency protection. Due to these factors and the separate cells' individual legal personality, ICs can more easily obtain a credit rating. This is particularly important for SPV cells in securitisation and captive insurance structures.

When particular future transactions are envisaged for a fund - for example, adding a vehicle to invest in a specific sector (or indeed, a new vehicle to acquire receivables in a securitisation product) - a tag on cell can be created specifically to act in that defined role. For promoters and lawyers alike, one principal advantage is that once an ICC structure is in place, repeat sub fund/transactions can be completed in a much reduced timescale using many of the existing documents (merely with the new IC acceding to the documents).

Recent statistics show that the growth of the island's fund sector is being driven by the alternative investment classes, such as property, private equity and hedge funds. Promoters in these particular sectors are the most enthusiastic of those embracing ICs. The product allows for the segregated set up and operation of multi-strategy umbrella type structures, suiting each of these asset classes. One advantage of the ICC is that individual development or property projects (or private equity holdings) can be segregated and eventually easily exported from the ICC structure when the asset is sold.

Conclusion

The existence of cell companies has dramatically changed the thinking of promoters and fund managers developing product ranges in Jersey. Lawyers and administrators on the island have witnessed many new developments through the guise of ICCs in both multi strategy funds and capital market operations.

For further information on this matter, please contact Bill Gibbon - Group Partner at Voisin, who has advised on the set up of a large number of funds and Islamic finance related transactions. Bill has led Voisin's Investment Funds and Shariah Funds department since 1996. He has over twelve years' experience in setting up all forms of fund and capital markets structures. Such experience includes advice on Hedge Funds, Private Equity Funds, Shariah Funds, Securitisations, Tier 1 Capital Schemes, Sukuk Offerings and CISX Listings.