Buyouts Interview: Staying Ahead

Elliot Refson: If you take the view that a jurisdiction is a business, and just like any other business it needs to stay ahead of its customers’ needs, then it’s clear that regulatory innovation is vital. Jersey’s customers are investors, allocators and managers, so the jurisdiction’s role is to keep up with market trends and international regulatory requirements, to position Jersey as the best place for those funds to operate from. If you look at the tokenisation of real-world assets, for example, Jersey first issued guidance relevant to that market, with its Initial Coin Offerings Guidance, back in 2018. Jersey’s regulator is now in the process of updating that guidance to reflect prevailing market conditions and the latest innovations, which will become the Tokenisation of Real Asset Guidance 2024. That updated document will position our jurisdiction, set out our stall and help us take that proposition to market. Over the past couple of years, Jersey as a jurisdiction has won close to 350 new collateralised debt obligation and collateralised loan obligation structures as a result of weaknesses in the regulatory framework in Cayman, which, for a time, placed the jurisdiction on certain black and grey lists. This in turn forced European investors to move elsewhere. This clearly demonstrates that regulatory innovation is critical to a point where if you don’t do it, you are in danger of ceasing to be relevant. Another example like this was when the hedge fund managers that had flocked to Bermuda back in the day upped and moved overnight, as Cayman came along with a better product.

Philip Pirecki: The foundational question here is really why international financial centres exist and what is the use case for them. We need to provide regulatory services and the ecosystem to support these financial institutions, and regulatory innovation is about keeping step with what investors, allocators and managers need to be able to do their jobs. Many of those things are driven by the onshore priorities, in terms of the onshore regulators and onshore tax authorities that are putting demands on transparency and on substance. If you are not able to meet the needs of all those stakeholders, you are going to become irrelevant. Stakeholders want no surprises, minimum upheaval and innovation that continues to give them what they need.

PP: What US managers want first and foremost is a solution that works and avoids uncertainty; they favour stability and predictability as the most important pieces. That doesn’t mean that a jurisdiction should avoid change, but they want to be able to rely on a pragmatic regulator that is forward thinking, wrestling with issues early, listening and meeting their needs. That is the same for the large, institutional scaled managers and the smaller more entrepreneurial funds that are still run by their founders. Both are looking for a jurisdiction that they know is going to be responsive to what they want to accomplish.

ER: There are plenty of examples. A few years ago, we introduced new Limited Liability Company (LLC) rules for US managers specifically and, as mentioned, we are just about to introduce an update to the guidance on the tokenisation of real assets. That follows our work on a white paper, The Tokenisation of Real Assets, alongside IFI Global last year, which highlighted how the tokenised assets market is predicted to become a more than $16 trillion industry by 2030. The Jersey Financial Services Commission has also recently published an update to the Jersey Private Fund Guide, which has proved to be really successful since it was introduced in 2017. The update includes a number of changes aimed at making the regime even more appealing to the funds industry, giving managers more flexibility to structure carried-interested and Jersey Finance co-investment vehicles, widening the definition of professional investors, and making family office and employee incentive arrangements easier. Alongside tokenisation, the retailisation of funds and broadening the investor base is another big theme for jurisdictions like Jersey. One reason is that the retail market is around 50 percent of the $295 trillion assets under management globally, but only some 16 percent of that is being invested into alternatives. That creates a massive opportunity for alternative asset managers to tap that market.

PP: The LLC rules are a great example of how Jersey is actively trying to respond to the needs of US managers. It is not an easy task to create new law, but Jersey actively brings together industry, government and the regulator to address pain points and make things easier. A lot of innovation can be done quite quickly if there is a spirit of collaboration and pragmatism. Jersey’s focus on innovation is also about much more than just regulation. Jersey saw this some time ago and recognised the need for a 21st-century infrastructure in order to be able to service our financial services industry as it advanced. As a result, fibre was run to every dwelling on the island and Jersey’s broadband speed is now one of the fastest in the world (Worldwide Broadband Speed League 2024).

ER: Stability and certainty are what underpins the business of a jurisdiction, and it is innovation that drives it forward. If you didn’t innovate, you wouldn’t be servicing the needs of your clients, the managers and investors. Likewise, if you didn’t have stability, you wouldn’t have those clients coming to your jurisdiction in the first place. Twenty years ago, Jersey was maybe viewed as an expensive and heavily regulated place to do business. Since then, the world has caught up with the decisions we made some time ago, with our innovation building on that business case through a process of iteration and evolution, not revolution.

PP: Stability, certainty and predictability mean different things to different people. If you have stable and predictable regulations that never change, then you will not be making progress and keeping up with the market. The key is giving stakeholders the confidence that your jurisdiction is actively engaged in forward planning, making sure it evolves and grows so that it remains a place where businesses want to operate.

PP: It comes down to a number of things, with a key one being the mindset to underpin the creation of institutions that facilitate innovation and agility. Collaboration has to take place intentionally, and that requires institutions like Digital Jersey, Jersey Finance and the Jersey Funds Association, which all work with government, industry and regulators. There has to be that intention that by working together, we will always be wrestling with the issues, really considering what needs to evolve, and then clearly articulating the reasons behind our decision-making. That is how you solve clients’ problems.

This article was first published in the September issue of Buyouts.