The asset management landscape has changed considerably in the decade since the global financial crisis.
The effects of quantitative easing and a persistent low interest rate environment as well as, in recent years, growth in high-net-worth populations in emerging markets and recognition in developed economies of an urgent need to respond to pension gaps, have all led to a rise in allocations towards the alternative asset classes.
This has translated positively for Jersey, where the value of fund assets serviced rose 10% in 2018 to reach a new record high of £320bn, with alternatives representing 86% of total funds business in the jurisdiction.
While the expectation is that alternatives will continue to rise in popularity, however, this rise will not be without challenges.
As far as real estate is concerned, the indications are that appetite to allocate to the asset class remains substantial, but investors are modifying their behaviour and are generally looking to put less money towards fewer funds than they were a year ago.
In the long-term, the indications are positive, with more than a third (36%) of investors planning to increase their allocation to real estate (Preqin Investor Outlook H1 2019).
However, in the shorter term, while just over half (52%) of investors are planning to make a single new commitment to the asset class over the next year, investors are also expecting to commit less capital, suggesting a more cautious approach (Preqin, Quarterly Update, Real Estate, Q2 2019).
For fund managers, the year ahead looks set to be a challenging one in terms of fundraising – while a large number of new private real estate funds have been brought to market in the first half of 2019, almost one in five funds have been in market for more than two years.
From a jurisdictional point of view, understanding these subtle trends is vital. As managers respond to investor behaviours, successful fund centres will need to provide a stable platform that affords managers the flexibility they need in the short to medium-term and that are forward-thinking enough to help maintain investor confidence in the longer-term.
For its part, Jersey’s ability to offer a certain, global solution for servicing private real estate funds puts it a strong position to support those needs.
It’s no coincidence that Jersey’s appeal has been heightened in the face of global uncertainty. It is precisely because of Jersey’s economic, regulatory and fiscal stability that managers and their investors continue more than ever to put their faith in Jersey – the value of real estate funds serviced in Jersey has grown by more than 70% over the past five years.
While interest rates and asset valuations remain big challenges in the eyes of investors, it’s telling that for one in five investors, the geopolitical landscape remains a key concern too (Preqin).
Nowhere else is this more evident than in the context of Europe, as the UK continues to look for a political solution to its withdrawal from the EU.
Jersey has read the political climate prudently to the extent that stability has become one of its key strengths. As far as Brexit is concerned, being outside of the UK and the EU but with strong ties to both, Jersey is able to bridge the gap between the UK and EU, regardless of the outcome of Brexit.
As a result, the number of managers choosing Jersey to structure their EU-focused funds through targeted, cost-effective private placement grew by 13% last year. These are strong figures that sustain a growth trajectory Jersey has been seeing for some time.
A stable and straightforward fiscal base is vital too and managers have consistently found that Jersey’s tax neutral model works very well for capital pooling. Jersey companies are taxed at 0% whilst limited partnerships are tax-transparent, which is simple for managers and investors to understand.
This compares well to other jurisdictions, where there is often a need for complex hybrid instruments or double taxation rulings to achieve similar results. Ultimately, it is simplicity that will resonate with managers.
Political and market uncertainty is, of course, not just restricted to Europe, and Jersey has seen increasingly that managers from markets further afield, including the US and Asia, are looking to future-proof their funds through a jurisdiction that can offer them long-term guarantees.
Managers need to be ready to adapt to these subtle trends and being able to rely on a jurisdiction that can blend certainty of global market access with flexibility will be pivotal in enabling them to do so.
With real estate investors targeting predominantly developed markets in the months ahead, Western Europe is set to remain the most targeted region – however, a substantial proportion of investors are appearing to shift their geographic preferences towards North America (Preqin).
It’s one reason why Jersey is launching a new office in New York this year. It’s a move that is based on the conviction that Jersey can act as a high-quality pan-Atlantic servicing location, offering a compelling proposition as a gateway into Europe for US managers – in fact, US promoters’ assets under administration in Jersey have increased by 148% over the past five years according to Monterey.
While there is strong interest in the European market among US managers, there is not always a clear understanding of the EU’s Alternative Investment Fund Managers Directive (AIFMD) regulation, how the market works or the most cost-effective way to access it. With that in mind, Jersey’s message to US managers is that its private placement solution can provide them with quick, straightforward and cost-effective access to EU and UK capital and assets.
And because Jersey is outside of the EU, it offers an attractive level of flexibility if managers are also interested in targeting investor markets beyond Europe. Doing so from an onshore European location would be more costly and burdensome.
Maintaining an ecosystem that is alive to the behaviours of investors and the needs of managers, against a backdrop of geopolitical uncertainty is, of course, absolutely vital, and Jersey is absolutely committed to achieve that by focusing on regulatory and digital innovation.
It’s the case that robust standards of regulation are increasingly important among both manager and investors decisions, and this has become a significant advantage for Jersey, which has in recent years scored extremely highly on standards of regulation, featuring as a top-tier jurisdiction when assessed by global authorities such as the OECD, IMF and the EU.
The introduction in January of economic substance legislation is a case in point – legislation that reflects Jersey’s ongoing commitment to nurturing a substance-driven environment for fund managers.
Meanwhile, Jerseys’ focus on creating a digitally-led environment – the Island has the world’s first full fibre telecom network delivering speeds of 1Gbps and is currently third in the world broadband speed ranking, behind Taiwan and Singapore only – means it is able to provide the sort of reliable, quick and always-on platform managers need. This advanced framework is positioning Jersey really strongly as a fintech centre on the international stage,
Indeed, Jersey has a good track record when it comes to digital – it was home to the world’s first-ever regulated bitcoin fund; last year global crypto exchange Binance established an operation in Jersey; and applications for the Jersey Private Fund – rapidly becoming the go-to vehicle for institutional investors – went ‘online only’ last year.
Maintaining this sort of forward-thinking environment is vital. The long-term future for private real estate funds looks bright, but with market uncertainty and geopolitical instability threatening to disrupt the sector, those IFCs that can provide managers with a stable, innovative and certain fund servicing platform have an opportunity to play a critical role.
The article can also be read in full on the PERE website.