What will the next generation of private equity firms expect from fund jurisdictions?
In 2022 we commissioned a survey that found that the biggest challenges facing managers are marketing, brand awareness, fundraising, regulation and, always in the background, cost.
Meanwhile, some 47 percent of survey respondents ranked service quality as the most important factor for choosing a fund domicile, citing access to specialist support and advice as paramount.
There are two sides to this finding: specialist support at the jurisdictional level, and specialist support at the service provider level.
Taking the service provider level first, there is a clear trend among emerging managers to outsource back-office functions, and that positions jurisdictions like Jersey, that specialise in alternative investments, well. Managers will gravitate to fund centres with high-quality back-office administrators and service providers who have long and deep expertise in alternative investment strategies.
This gives managers the confidence to outsource and concentrate on their core business. At the jurisdictional level the market wants to know that the future implementation of tax and regulatory issues will not lead to significant or disproportionate regulation, reporting requirements or costs. The focus on whether a jurisdiction has the ability to meet substance requirements will also continue to intensify. Any weakness in political and fiscal stability, meanwhile, can be a red flag for investors. It is simply a risk an emerging manager does not need to take.
There are elements that fall within the remit of an emerging manager, like responding to economic trends and competition, and elements that fall outside of the manager’s remit, such as increased regulatory pressure, regulatory uncertainty and geopolitical uncertainty. The areas outside the remit of the manager can be mitigated by their
choice of jurisdiction. The message from Jersey to managers is you can focus on your job and what you can control, and we will do ours to offer political and fiscal stability and maintain a robust but proportional regulatory framework with a minimal change outlook.
What does this mean for the domiciliation of emerging managers targeting European investors? Are there distinctions between offshore private placement regimes and onshore AIFMD jurisdictions?
It is a question of horses for courses. To my mind the regimes are complementary. If a manager wants to market on a pan-European basis or to the retail market, the Alternative Investment Fund Managers Directive or the Undertaking for Collective Investment in Transferable Securities regime, known as UCITS, would be a good option. But that does mean that if a manager accesses Europe under the AIFMD then it is applicable wherever the manager markets, whether in Europe or not.
What differentiates a jurisdiction like Jersey is that it is independent from the EU and the UK, with an opt-in/ opt-out approach to the AIFMD. Jersey is out of scope of the directive when targeting investors from the rest of the world, but within the EU it has its own long-standing market access arrangements via the National Private Placement Regimes with EU member states, as well as an NPPR with the UK. It is important to point out that, according to EU statistics, only 3 percent of all alternative investment fund managers are registered to market in more than three European countries, and that is why NPPRs matter.
If a manager is among the 97 percent that do not market so widely within the EU, then NPPR agreements offer a more cost effective and faster solution that falls outside the full scope of AIFMD.
How has Jersey evolved its fund structures to offer up-and-coming managers cost-effective solutions that also provide speed to market?
In Jersey we have a regime called MoME – Manager of a Managed Entity. In essence it is a regulatory hosting framework where compliance, corporate governance, risk management and the provision of company secretarial or accounting services can be dialed up or down to support first time managers and their individual evolution. This has seen the Jersey Private Fund (JPF) evolve as the vehicle of choice, and more than 600 JPFs have been created since the vehicle’s launch. As it is designed for professional investors, with a minimum investment threshold of £250,000 ($313,000; €286,000), it offers lighter touch oversight, with two levels of regulation, for funds with up to 15 investors and funds with a maximum of 50 investors.
The appeal of the JPF is that it can be created within 48 hours, as the regulatory and compliance burden is placed on one of our local service providers, and it can be structured as a company, one or more limited partnerships, a Jersey unit trust or in certain cases a non-Jersey structure. It can be open-end or closed-end. This flexibility has seen the JPF used for everything from a single holding investment vehicle to the world’s largest fund and everything in between.
What other themes are you exploring to provide further support to managers in the years ahead?
Both the single biggest challenge and the key opportunity lies in the digitalisation of real assets. Jersey is a real assets jurisdiction, and the digitalisation of real assets is the future of the market. It is early days, but it is only going to go one way. It is a very real trend that we are seeing now.
One of the unique features of the ecosystem in Jersey is that our government, our regulator and our industry work together to innovate and address shifts in markets as they arise. This has worked exceptionally well over the years, and we will continue that cooperation to best respond to market trends and the changing dynamics faced by the private funds industry.