In October 2020, our Head of Funds, Elliot Refson, took part in Funds Europe’s Jersey Roundtable. The resulting report, originally published on funds-europe.com, found that Jersey is well placed as the demand for alternative funds continues, but some of the industry panellists have questions about the implications of the UK’s departure from the EU.
Simon Burgess, Ocorian – In the ten years since the previous crisis, institutional investors, particularly pension funds, have found liability-matching returns in private markets – private equity, real estate and also infrastructure and debt. Boston Consulting Group has forecast that half of all global asset management revenues will come from alternatives by 2024 – but alternatives only account for 17% of assets under management (AuM) by value.
In Jersey, we’re seeing a shift in the types of funds launched. We’re witnessing AuM per fund increasing in alternatives, but there is management fee compression. As a result, fund managers and fund administrators are looking to create economies of scale. This drives larger funds but fewer of them.
You need a different operating model for larger funds. Fund managers are targeting service providers with the highest level of technical specialism, in terms of assets but also tax, finance and fund operations.
Increased investor scrutiny is driving that – and the digital agenda is accelerating focus on data mining and performance analytics. We’ll see more fund manager consolidation, so they can accommodate these larger funds. Fund managers will look to work with transformational partners.
Elliot Refson, Jersey Finance – A report we commissioned earlier this year highlighted there is increasing regulatory uncertainty, reporting requirements and costs in international financial centres.
The number-one takeaway from that report was that investors – and it is predominantly investors who determine fund domiciliation – want political and fiscal stability with a no-change outlook from a regulatory, legal or economic perspective. We have worked hard to achieve those requirements – the necessary respectability, stability, ease of doing business, and local expertise. Because of this, we are exceptionally well placed to benefit from the future growth of the alternatives industry.
Emily Haithwaite, Ogier – I want to focus on venture capital (VC) and fundraising by VC funds as a private equity financing mechanism. The pandemic has encouraged us to adapt our living and working patterns. Reliance on technology has led to a startling rise in innovations, particularly in health and education. VC has and will continue to serve an important function in funding progress in those industries.
Early-stage businesses and start-ups that can demonstrate fast growth rates or potential are attractive opportunities for VC investors. It’s speculative, so risky. But for institutional investors wishing to diversify, the risk is balanced by potentially high returns. We anticipate continuing appetite for VC funds, particularly in healthcare and educational tech.
Malcolm Macleod, IQ-EQ – Real estate is a more challenging environment, particularly in specific sectors like retail. Other sectors have thrived, such as logistics, which play into the challenges. So, I think that although the type of real estate asset within a fund’s portfolio might change, Jersey’s status as a jurisdiction of choice for real estate funds will not.
Jersey has a track record of being quick to react to challenges, for example the proactive response to the capital gains tax consultation, which ultimately resulted in some very positive changes to the proposed legislation, meaning that vehicles like JPUTS [Jersey Property Unit Trust] continue to remain attractive structuring tools.
James Coughlan, TMF Group – I read an article recently which confirmed that the AuM for European-based alternatives had recently exceeded €2 trillion for the first time in history, which highlights the growing commitment to alternatives. In Jersey, recent changes to legislation to allow us to redomicile are interesting from an AuM perspective, particularly given the current headwinds in Cayman and other offshore jurisdictions. I believe that the long-established and well-tested Jersey alternatives regulatory and legislative frameworks have established Jersey’s position as a safe and well-established alternatives jurisdiction of choice.
Refson – Jersey is outside the EU and the UK. Within the EU, we have strong, longstanding bilateral agreements with member states and established market access arrangements via the national private placement regimes. These are not going to be impacted by Brexit. Our access to the UK is guaranteed under our private placement agreement there, and that was recently augmented by our regulator in the event of a no-deal Brexit.
By the EU’s own statistics, only 3% of managers market in more than three European countries. If you are one of the 3%, then you’ll go elsewhere and be regulated under the AIFMD [Alternative Investment Fund Managers Directive] or Ucits Directive, but if you’re one of the 97%, then Jersey and its private placement arrangements offer a more cost-effective, faster, more efficient solution outside AIFMD.
According to a KPMG report into AIFMD II, there is strong demand for private placement to continue. This differentiates us from the other European jurisdictions. We are complementary rather than competitive. We’ve got over 180 fund promoters marketing over 320 funds into Europe. That figure has risen 76% since December 2015.
Haithwaite – Whatever the final Brexit deal is, it will impact Jersey – certainly in terms of its ability to trade with the EU. In financial services, however, the position remains unchanged. We are treated as a ‘third’ country. National private placement rules are available to Jersey, and they work well.
The number of managers using Jersey vehicles to market into the EU has risen consistently year-on-year, and for good reason: they’re tried and tested, cost-effective, and they enable access without the burdens of full AIFMD regulation. Jersey structures can also be marketed worldwide, so you get the best of both worlds.
While the Brexit negotiations are uncertain, the Jersey regime is well known. If you were ready to raise a fund, Jersey was a good place to do that unaffected by whatever Brexit brings.
Coughlan – Clearly communicating to the global market that our position is largely unchanged is certainly important and a point that we need to continue to reiterate to remove any misconceptions that may exist within the wider industry.
My greatest Brexit-related concern is the uncertainty over the stance that the UK may take post-Brexit. As part of the Budget 2020, the UK government are committed to a review of the UK funds regime with a view to ensuring that the UK is a competitive domicile for fund managers. VAT on management fees was specifically mentioned as an area of focus, which I found interesting from a Jersey perspective as this is clearly a key benefit of structuring real estate (RE) in Jersey. The benefits of RE structuring in Jersey have certainly diminished recently, given the inclusion of RE within the corporation taxation regime and also the more recent amendments to stamp duty rules.
Post-Brexit, does the UK see itself as a competitor to Jersey and other offshore jurisdictions? That’s the big question in my mind.
Burgess – Jersey has strong relationships with UK-based fund managers. In 2016, we saw many moving to European locations like Luxembourg, but that has slowed. In July, the Financial Conduct Authority and European Securities and Markets Authority announced that the Memoranda of Understandings that was agreed in February 2019 to cover a hard or no-deal Brexit scenario would continue after the end of the transition period on December 31. That supports current fund management structures in London. There’s a great opportunity for Jersey to continue to work with UK-based fund managers to build out not only their activities in Europe – and bear in mind that 50% of UK fund managers’ foreign activity is in Europe, so it’s material – but also globally.
For UK managers, a split model will inevitably arise. UK managers that want to raise funds in Europe will apply one set of rules, and the UK AIFM for managers raising funds outside Europe will happen separately. Jersey is in a perfect position to offer fund managers a one-stop shop of private placement in Europe and platforms outside Europe.
There is a UK review of VAT on fund management fees. If they get that right, it’s going to make the UK a more interesting place to be a fund manager. There’s also a review on how special purpose vehicles (SPVs) are taxed. We see SPVs used underneath funds. And in addition, the possibility of a UK professional investor fund (PIF) could offer an alternative to the JPF.
Refson – One of Jersey’s key strengths is that government, regulator and industry can come together, address issues and innovate collaboratively within an overriding, robust and globally respected framework. There have been many milestones achieved this way and, over the past six months, this triumvirate supported business continuity. This has been vital to the jurisdiction and applies to local firms working remotely and to the establishment – for example, our registry remained open.
While there was inevitably some slowdown in new fund launches, we continued to see funds listing and to a degree it was business as usual.
Burgess – Jersey’s service providers ensured we have robust business continuity plans. We were able to move to working from home rapidly. Ocorian has over 300 staff in Jersey. Over the first weekend, we deployed them all from home.
Jersey was able to deal with non-wet-ink signatures quickly. Also, another unsung hero is Jersey Telecom’s decision to deploy fibre throughout Jersey instead of copper, supporting the resilience of the island’s finance industry.
Coughlan – The Jersey government deserves great credit for having the infrastructure in place to facilitate a majority, island-wide, work-from-home operating model. The responsiveness of the island’s various Wi-Fi providers to upgrade, upload and download speeds was very refreshing and a great help.
The speed of reviewing and temporarily amending the economic substance test was also very helpful to our clients who physically could not get to the Island.
Refson – Jersey has the second-fastest broadband in the world!
Macleod – We are home to some of the world’s largest alternative funds and now, perhaps more than ever, alternative fund managers and investors attach real value to a jurisdiction like Jersey that is stable, well-regulated and has a well-understood funds regime.
Haithwaite – Jersey has always been known for legal and regulatory stability. Being a small jurisdiction, we can be nimble in reacting to world events, quickly bringing in measures that give comfort to managers and investors. A good example of this is the wrongful trading guidance for directors, who struggled with aspects of company legislation that could potentially impose personal liability on them.
Jersey’s commitment to being a substance jurisdiction came into its own. The availability of on-island expert directors meant limited disruption to boards which were affected by travel restrictions.
Macleod – There continues to be a huge cultural shift in attitude towards ESG, driven by a transfer of wealth to millennials and Generation Z who see sound ESG credentials as a prerequisite to investing. Managers also recognise that it’s good for returns.
From a Jersey perspective, there is a real opportunity to play to our strengths and help general partners and limited partners manage some of the risks associated with ESG such as ‘greenwashing’. As a jurisdiction, Jersey lends itself well to the G within ESG. Our track record of governance brings with it a comforting level of scrutiny and rigour, which ESG managers will see as vital when selecting their jurisdiction.
We also see increased demand for sophisticated and automated investor reporting solutions that pull together meaningful data including metrics around ESG.
Haithwaite – Increasingly, investors are scrutinising funds they invest in and the presence of ESG policies is becoming a key component of due diligence. The Jersey regulator has issued a consultation paper on proposals to enhance disclosure and governance requirements for sustainable investment funds. If you say you’re a sustainable fund, you must show you are and have the systems to monitor that.
Those changes – aimed at combatting greenwashing – will potentially impact all Jersey funds and service providers.
If adopted, the requirements will drive an increased demand for ESG advice. That will require skilled people at board level and in the legal and administration community. Everybody in the fund management industry will have to upskill to meet that demand.
Burgess – More clients are focusing on social impact investing, which ties in with greater investor demand for ESG. Millennials have been great at driving this. People who have been around longer and sit on boards need to understand what questions they should be asking and how to test the veracity of statements made in prospectuses and annual accounts.
The challenge in alternatives is where the data is held and the different layers of it. A real estate fund might have multiple layers of entities and data held in a multitude of places. There is a movement towards having one source of truth and a data flow from the underlying asset to the investor’s own personal interest.
Coughlan – In my experience, the alternatives sector has been slower at adopting technology mainly due to the complexity and subjectivity involved, thereby making automation quite difficult. However, we need to identify and implement solutions in a space where there is certainly downward pressure on margins and funds are getting larger with greater reporting requirements. ESG is here to stay as Generation Z continues to represent a greater percentage of investor pools. If larger managers are not focused on ESG, I personally feel that they are on the back foot.
From an administration perspective, I view ESG as an area of significant opportunity given the inevitable reporting requirements and expectations from Investors. Added to everything else that managers are currently trying to manage, it’s proving more and more difficult. I therefore expect to see an increase in the use of outsourced partners.
Haithwaite – Increasing pressure on no- or low-tax jurisdictions by the OECD [Organisation for Economic Cooperation and Development] and the EU. Substance will continue to be key, and I expect jurisdictions to align more closely on that over the next few years. Jersey’s white-list status means we should be confident investors will continue to support us, and we expect a flight to quality. Legislation passed earlier this summer to enable the migration of limited partnerships into Jersey from foreign jurisdictions was partly to satisfy investor demand to exit from blacklisted jurisdictions.
The PIF [Guernsey’s Private Investment Fund] potentially will compete with our private funds. Certainly, we are going to see increasing competition between fund jurisdictions. Whether the PIF has international appeal remains to be seen. It could become a vehicle of choice for the domestic market but not for international investors.
ESG will continue to move the regulatory agenda internationally. Jersey is nimble, and the industry can influence the legislative programme.
Macleod – On the European side, regulation is going to run in one direction, meaning there will be more of it.
That isn’t necessarily an issue for Jersey. We’re an uncontroversial funds jurisdiction. We’re tax-neutral, we don’t have multiple double tax treaties and we’re not particularly prone to BEPS-heavy [base erosion and profit shifting] arrangements like hybrids.
Outside Europe, I see a levelling of playing fields. Cayman is a good example where changes in legislation to satisfy a higher degree of regulatory expectation could potentially provide some practical challenges.
Refson – The key issues are Brexit, BEPS, substance and transparency, and how regulators handle them. While some jurisdictions have an evolving regulatory landscape, we were early adopters and offer stability and certainty.
Burgess – Jersey is an international finance centre with the highest reputation that will weather the current environment. In the coming quarters, we’re going to see increased distress in investments held by Jersey funds and elsewhere. With its intellect and governance, Jersey can offer clients expertise and professionalism in handling these distressed situations.
Coughlan – Jersey’s resilience to significant global challenges faced in the recent past, and our ability to proactively embrace new and amended regulation and legislation, is a unique selling point for the island and positions us well to embrace further change.
Anti-money laundering and combatting the financing of terrorism (AML/CFT) is at the forefront of everyone’s minds.
We expect continued tightening of regulation, certainly ahead of the local Moneyval [the Committee of Experts on the Evaluation of Anti-Money Laundering Measures] visit in 2021/22 and beyond. Our ability to assist our clients with managing the inevitable increased requirements will be key to our success.
Embracing technology is imperative in order to remain competitive. Flexibility and a continued shift towards electronic identification and verification processes is vital. We can also expect to see more enforcements by our regulator. However, in my opinion, that is a positive in that it highlights the strength of our framework.
Coughlan – Embracing technology and challenging how processes are preformed currently is imperative. The likely increased focus on AML and CFT will mean that the use of automation within these processes is becoming more important. Obtaining satisfactory customer due diligence (CDD) is a challenge within the funds industry, particularly as the number of investors per fund continues to increase. The requirement for wet-ink documents is a challenge, so embracing technology to assist in identification and verification processes is a must.
Generally, I believe that when we consider the use of technology, we need a clear roadmap to avoid a situation where you end up with multiple independent systems not connected therefore not working efficiently. A material commitment to automation is required within the industry.
We have challenges with resourcing at certain levels in Jersey. Automation can play a significant part in assisting us with managing that challenge and allowing us to focus our professional, knowledgeable and experienced people on real value-add tasks as well as lead our client relationships proactively.
Haithwaite – Technology plays a huge part in times of turmoil, not only in reducing margins but enabling business to carry on as usual.
Lockdown has been a challenge, but jurisdictions like Jersey that adapted have fared well. In Jersey, the authorities adopted fully electronic filing, implemented flexibility to comply with substance requirements and amended legislation in areas like electronic powers of attorney and certification requirements. As a result, we’ve seen significant funds launched through Jersey during lockdown.
Burgess – Technology can help with margin pressure by making operating models more efficient. But deploying good technology costs money, which must be recouped. To recoup it, you need enough clients to spread the cost. That’s driving the size of individual funds and fund managers – and fund administrators. The size of individual fund services businesses has grown substantially, and we’re likely to see further consolidation in the market.
Direct investment platforms are an interesting development. Over the last ten years in Jersey, we’ve seen an increase in direct investment platforms for the kinds of investors – pension funds, sovereign wealth funds – that want direct control of the underlying asset. Jersey’s fantastic at that type of work.
Macleod – With a focus on margin, GPs are definitely turning towards technology and many rely on their service provider to provide scalability rather than having to make all of the investment themselves. Off the back of this, we are seeing real demand for sophisticated technology solutions that cater to real-time data reporting and analysis. But Jersey will not be alone in offering these types of technological solutions, particularly where such solutions are being rolled out globally across multiple jurisdictions by well-integrated fund administration groups. So, although the tech side is vital, Jersey must not lose sight of the many other factors we have discussed that differentiate it from other jurisdictions, not least the reputation it has for high service levels. Technology will undoubtedly create efficiency and create the opportunity for better margins, but GPs will want to ensure that they select a jurisdiction where an increased margin does not come at the expense of service quality and I think that’s why Jersey will continue to thrive.
Coughlan – I see a continued increase in restructuring and refinancing, as managers reassess exit plans and attempt to react to the unprecedented challenges they have faced recently. ESG will be key, and that is a real area of potential for us. With it comes additional reporting and complexities, all of which could yield further outsourcing. Continued outsourcing by managers is almost inevitable given the ever-increasing volumes and reporting obligations on managers.
Macleod – Looking to 2022/23, an opportunity for Jersey is in the family office space and how this interacts with alternative funds. A white paper IQ-EQ recently produced looks at the ‘great wealth transfer’ over the next ten years in ultra-high-net-worth family offices. In the US$100 million-plus bracket, we estimate there’ll be a $7 trillion movement of cash from generation to generation. We also anticipate that the generation inheriting the wealth will be much more interested in alternatives than the previous generation. We are already seeing this driven by negative interest rates on fixed income and cash returns. This plays into Jersey’s hands as a leading jurisdiction for the servicing of alternative funds and family offices.
Burgess – Over the coming year, there’s going to be a huge capital requirement for businesses that have great prospects but don’t have capital to invest. Investment managers are good at separating the wheat from the chaff to identify opportunities for long-term returns.
Look at the growth of the private debt fund market. There’s a huge amount of lending that is secured on assets that are currently or about to be in distress; some of those private lenders may not be set up to handle a lot of distress, so that creates opportunity for sophisticated managers with new capital. There’s going to be musical chairs, and that involves activity that people in Jersey are good at.
Before March, we were all talking about the amount of capital ready to be invested into the type of assets we specialise in. That capital is still there, and the distress we’re going to see over the next six to 12 months will create new opportunities for it to find a home.
If you’re a vanilla organisation, you’re not wired to think about the problem-solving that goes into a distress situation. Jersey is a standout at having the intellect to handle those complicated matters.
Refson – It is the role of Jersey Finance to take a more macro approach. Over the past year, we’ve been working to diversify our global funds footprint by both asset class and geography. In terms of geography, we’ve harnessed the network of our local representation around the globe, which until now has predominantly been private client-focused, in order to take our funds message into new markets, specifically the United States, Asia, the Middle East and Africa. We will continue to expand our global footprint while at the same time doubling down our messaging in our key European markets.
Our ease of doing business, stability, and respected regulatory environment should help Jersey stand out in a world where many other international finance centres are facing increasing challenges. As the alternatives sector continues to grow, we’re well placed to capitalise on that growth.
Simon Burgess (Head of Alternative Investments, Ocorian)
James Coughlan (Head of Funds, TMF Group)
Emily Haithwaite (Investment Funds Partner, Ogier)
Malcolm Macleod (Head of Funds and Institutional, IQ-EQ)
Elliot Refson (Head of Funds, Jersey Finance)