What role does stability play in domiciliation selection processes?
Elliot Refson: Stability has emerged as the number one consideration in domiciliation decision-making in recent years. First, managers want to be sure that there will be no significant or disproportionate increase in regulation, reporting requirements or cost. They also want to be sure that the implementation of tax and regulation changes can actually be achieved – in other words, does the jurisdiction have the resources and capabilities to provide substance? Second, investors and managers want political and fiscal stability. A weakness in either area is an immediate red flag. Financial services are the bedrock of the Jersey economy. Our default is stability. We have always been early adopters of new regulatory requirements and as a result offer a minimal change outlook from a regulatory, legal and economic perspective.
Philip Pirecki: After a prolonged period of very little change, we have seen a significant increase in regulation and transparency demands. Only those jurisdictions with the ability to absorb these changes will be able to provide a predictable platform for investment managers to operate in. The reason that stability has come to be so important in domiciliation decisions in recent years is that managers seek predictability.
Stability is clearly a key attribute, but what about resilience given the severity of disruption experienced over this past year?
ER: Resilience refers to the ability of people or things to recover quickly after something unpleasant. In Jersey, we have a unique collaborative approach between industry, government and the regulator. For many years that has led to innovation within a robust and globally respected framework. That triumvirate has also proved critical in responding to the challenges of the past year. For example, the regulator, the Jersey Financial Services Commission, adopted a caring and pragmatic approach, remaining on standby to help firms navigate the pandemic, while also being accommodating in extending reporting deadlines and helping relieve some of the pressure faced by businesses. This has led to the funds services industry being able to demonstrate real resilience.
PP: The ability to respond to change is integral to the concept of resilience. When you look at the direction of travel, which is clearly away from delegation and towards substance – towards more robustness offshore – there is no doubt that a jurisdiction needs infrastructure and talented people on the ground in order to be successful. That is what Jersey is able to offer.
ER: Managers need to know that substance requirements are achievable, particularly factoring in escalating demands around environmental, social and governance issues that have recently come to the fore. To put that in some context – there are more than 13,000 people working in the finance industry in Jersey, which is 22 percent of the working population. They have the deep and broad expertise required to support the managers that are coming here.
What does the future hold for fund domiciliation and the role of stability, resilience and innovation within that?
ER: The global themes that have dominated in recent years will continue to dominate in the years to come. We will continue to see strong allocations to alternatives. There is no sign of investor appetite diminishing and private equity will be the key beneficiary. Inevitably, that volume of capital will create challenges in finding quality investment opportunities and in delivering sustainable returns. Enhanced competition will undoubtedly lead to pressure on valuations.
I also believe that we will continue to see an increase in regulatory pressure and an increase in pressure from investors when it comes to building trust and transparency into all aspects of an alternative manager’s operations. One area that has evolved significantly in the past year is the requirements around ESG. Managers are responding to those changes quickly but, based on a survey that we recently carried out, The Future of International Fund Domiciliation 2021, this has not yet filtered down to a jurisdictional level. Given the current trajectory, however, it seems certain that will be the next step.
How can domiciles balance the need for stability and resilience with the demand for innovation and change?
ER: I think it comes back to a joined-up approach between government, regulators and industry. For example, I recently went to New York with the head of policy at our regulator. We met with a number of managers and lawyers, and it was clear they were shying away from the regulator for some reason. It soon became apparent that is because in the US, you generally only see the regulator when they are coming after you with a big stick. Jersey is a small island. Everyone knows each other. This means we really do have this unique joined-up approach, where challenges are dealt with upfront.
That applies to innovation as well. We regulated the world’s first bitcoin fund. We adopted an opt-in, opt-out approach to the Alternative Investment Fund Managers Directive, offering private placements. We are also in the first round to get the AIFMD marketing passport once it is granted to third-party countries, whenever that may be. Change is an iterative and joined-up process, based on a default of stability.
PP: It may seem counterintuitive, but innovation and regulation must go hand in hand. In order for these innovative ideas to come to market, there needs to be a partnership with the regulator, and that all links back to substance. In a world where regulation is proliferating at a remarkable rate, a jurisdiction has to be able to handle that volume, and importantly, that pace – and then, on top of that, to be able to work collaboratively with industry to deliver those products to the market-place. That is a question of substance – real substance, not paper substance – the ability to work with all parties, in including the courts, to bring something to market at speed.
“The reason that stability has come to be so important in domiciliation decisions in recent years is that managers seek predictability”
What role do the courts play in a successful jurisdiction?
PP: I think the courts are extremely important. It is one thing to have a law on their books, but that does not mean the judiciary have the necessary depth of experience and understanding. Jersey is steeped, not just in law, but in the commercial subject matter. That is vital if things go wrong – because they can go wrong – and when they do, you need a court system you can rely on.
How is Jersey preparing to respond to growing requirements around ESG?
ER: I believe there is an opportunity for a single jurisdiction to come to the fore in the ESG space, and I believe that jurisdiction will be Jersey. I do not think a single conduit will achieve this. Rather, a combination of strategies is required, not least the work that Jersey Finance has carried out alongside Equilibrium Finance to set out an ESG roadmap. However, it will take more than that. We need to have a trigger to start the conversation, in order for the Jersey funds industry to lead from the front and for this to be credible.
This article was originally published in Private Equity International’s ‘The Future of Private Equity’ report.