Reputational Advantage Key in New Era For Fund Domiciles

*This article was originally featured in the September edition of  Real Deals.

For any private equity fund manager, the choice of jurisdiction for their fund is critical – but what has become clear over recent years is that it is investors who ultimately determine where a fund is domiciled and who therefore have a significant say in the success, or otherwise, of fund centres.

Reputational advantage and understanding the significance of reputational risk from a domicile perspective in relation to the investor and manager ecosystem is therefore absolutely key.

Looking Back

What investors look for, however, has evolved considerably over time too. There is logic, therefore, in looking back at how jurisdictions have developed their offering to better predict where future opportunities may lie.

Jersey, for example, was once perceived as over-regulated, inflexible and expensive when it came to the alternative investment funds space. Some 20 years ago, there were laudable reasons for this, with Jersey’s regulator and government embracing new regulation and legislation, to cement the jurisdiction’s reputation as a well-regulated jurisdiction.

Reputational context changes, though. While such a funds ecosystem was seen as a barrier back then, in the context of today’s modern private equity space, Jersey is now viewed in a very different light – as proportionately regulated and innovative.

Two key driving forces have prompted this perspective shift.

The first was the tightening of international regulatory standards, especially around BEPS and substance requirements, demanding that fund managers operating in IFCs evidence demonstrable operational presence. For some jurisdictions this was problematic; inadequate infrastructure and a lack of local personnel uncovered sizeable flaws that have left some IFCs playing catch-up, or worse, being negatively listed.

Secondly, major geo-political upheaval has uncovered instability in other jurisdictions – it’s telling that, according to S&P’s Global Market Intelligence 2023 Private Equity Outlook Survey, 45% of executives expect fundraising conditions to deteriorate this year. This has resulted in a flight of fund managers and vehicles to IFCs that can provide the requisite quality, stability and certainty.

This is reputational advantage in action, with these two attributes that once seemed over-bearing, now viewed as reassuring and proportionate.

It is an approach that has been acknowledged by some of the world’s leading bodies, including the OECD, the IMF and the World Bank, while the Island’s substance legislation in 2019 codified pre-existing best practices as opposed to introducing new ones.

Notably, Jersey’s political and fiscal stability combined with its minimal change outlook from a regulatory, legal and economic perspective – all underpinned by world class infrastructure including one of the fastest broadband connections in the world, and by the deep expertise of the almost 14,000 people who work in the industry – has led to its increasing popularity for the facilitation of alternative investment fund activity.

Today, Jersey is seeing record inflows of assets under management, with a sizeable 142% increase in a decade, evidencing an impressive growth rate and underlining the importance it attaches to reputation.

The reality is that jurisdictions that do not evolve, that do not understand the importance of reputational risk, and who do not place critical importance on engendering trust amongst managers and investors, will simply die out.

Complex environment

So where do we go from here?

In 2023, an increasingly complex macro environment, from instability in Europe and the rapidly shifting landscape of international regulation to the growing focus on ESG and digitisation, continues to pose questions of private equity managers.

The evolution we have seen of Jersey over the past two decades, however, is that its understanding of the importance of reputational advantage has positioned it well, as a domicile at the heart of Europe with global reach, specialising in alternatives – which today represent some 80% of its total book of funds business.

There’s no doubt that Jersey will need to continue to evolve and innovate to maintain this leading position, but it has form, having honed its offering, blending targeted innovation with a stable, reliable platform for more than 20 years.

The Jersey LLC, aimed squarely at the US fund manager market, is the most recent example of regulatory innovation, while Jersey is also forging ahead in areas such as sustainable investment and digital assets.

The overriding trend in the real assets space, for which Jersey is so well known, is towards digitalisation and we are seeing the market gear up towards this eventuality. This puts Jersey’s innovative edge and its core competencies on a converging path.

The relationship between a domicile and the managers and investors it serves must be symbiotic. With stability and certainty set to drive investor – and manager – choices for the foreseeable, the indications are that Jersey is well placed to capitalise on its established reputational advantage and use it to continue to enhance its specialist private equity ecosystem to support high quality cross-border private capital.