Jersey’s ability to innovate, its potential role as a post-Brexit bridge between the UK and the EU, and a significant increase in alternative assets were among the topics discussed by our panel. Chaired by Romil Patel in St Helier.
Mike Byrne (chairman, Jersey Funds Association)
Pippa Davidson (managing director, Praxis)
Oliver Morris (director – private equity, Sanne)
Dilmun Leach (group partner, Collas Crill)
Mark Grenyer (head of funds, JTC)
Erique Mvalo (director – private equity, Aztec)
Elliot Refson (director of funds, Jersey Finance)
Funds Europe – The past 12 months have seen turbulence in terms of protectionism and global geopolitics. Do you think this has affected global fund structuring and what role can Jersey play in offering stability to the world?
Elliot Refson, Jersey Finance – Jersey sits outside of the UK and the EU and has very strong links to both. The strength of Jersey is its stability. Because it is outside the UK and the EU, Jersey can bridge the gap between both parties, both pre-Brexit and post-Brexit.
Mike Byrne, Jersey Funds Association – The choice of Jersey by some of the big managers is because they are looking for somewhere that is stable as they try and embrace the trends of globalisation. Some of the biggest funds, such as Triton, launched their Fund V, Nordic Fund IX in the last year or so, and they expect to play globally, but they also want to de-risk the jurisdiction. That is why Jersey works very well to an international investor base, rather than one just focusing on European investors which might be onshore. To an international investor base, Jersey works perfectly in that it leverages both our stability, but also our expertise and our long tradition of alternative asset management.
Oliver Morris, Sanne – Global asset managers have capital to deploy, they want to raise capital, and people will continually look for those returns, so the option of doing nothing for large periods of time does not really exist for many asset managers. To manage that risk, they need to find stability. It is currently not in the UK with everything that is going on and it is probably not in Europe either, so actually the next best alternative perhaps is what we have to offer here, looking at the stable tax policy, stable population policy and a stable government for the last 20 to 30 years.
Dilmun Leach, Collas Crill – A good example of this is a project I worked on with a PE manager with significant operations in the UK and investments in Europe, who was looking at launching their next fund in one of Jersey, Luxembourg or Dublin, among others. They chose Jersey for their next fund largely because of the economic and political stability and the arrangements in place between Jersey and the UK where there should not be a change because of Brexit. There is also the fact that Jersey has agreements in place with the EU.
Erique Mvalo, Aztec – I think Jersey’s appeal has heightened in the face of global uncertainty because of the economic, regulatory and fiscal stability it offers managers and their investors. As the island’s economy is largely dependent on sectors such as funds, managers can be confident that the government will take the necessary steps and measures to ensure Jersey remains an attractive destination for fund structuring and administration.
Pippa Davidson, Praxis – The big manager names, the government and Jersey firms work together, and we always remain open for business, whatever happens. During my career I have seen lots of tax changes in Jersey and now there is Brexit, but we are quick to respond and everybody, both the industry and government, work together to make sure Jersey remains open and a good option for many.
Jersey is getting better at selling that message and doing more to make other markets aware of how robust we are, and what we offer.
Mark Grenyer, JTC – The numbers and the performance of the island over the last 12 months gives us confidence for 2019, but we are cognisant that we must not be complacent.
Funds Europe – With continued questions around the UK’s future relationship with the EU, where does this leave Jersey? Are you more concerned about the impact on funds or, on the contrary, are there greater opportunities for managers?
Refson – The opportunity set before us provides significant opportunity for Jersey and for managers who use Jersey. The agreement that Jersey has with the UK will continue post-Brexit. Jersey’s relationship with the EU will also remain, so again we bridge the gap between the UK and the EU, which is critical. It comes back to stability.
Davidson – We are in the best place we probably can be given the unknown outcome of Brexit. From my perspective as an administrator, I have not seen managers change their mind in terms of coming to Jersey, but maybe delay deploying capital a little bit, or changing their minds on certain investments, or just holding off until there is more certainty available.
Mvalo – Jersey has obviously benefited from its connection to the UK in terms of having an ally in the EU who is representing our interests, so it is disappointing for us that the UK may no longer have a seat at the table. That said, we have never been a jurisdiction to stand still and the recent memorandum of understanding signed between Jersey and the UK secures continued access for the island to the UK’s funds market, which has helped remove a lot of uncertainty. There is no question that Jersey will innovate and evolve to remain the jurisdiction of choice for the world’s leading managers.
Grenyer – What we have seen is a level of Brexit fatigue, and as this uncertainty continues, managers have decided to crack on and deploy capital through Jersey structures due to the certainty which we can offer.
Morris – If you use the history as a gauge to go by, you had the Eurozone crisis around ten years ago, with people questioning if European funds work and what will happen if the euro fails. There was a lot of legal wrangling and coverage in LPAs about creating a mechanism. An alternative solution then was to use a Jersey structure and redomiciling in future if need be. Where are we today? It is broadly another Eurozone-esque crisis. Jersey is still here today, it still offers the same option, so we have seen a number of managers saying: “We need to carry on. Is Jersey the absolute future for us? We do not know, but the regulatory regime is practical enough and works well that if things change in the future, then things could be redomiciled.” That is a huge positive to a manager, to be able to say they have a solution that works in uncertain times.
Funds Europe – As alternatives move more into the mainstream, how do you see the drive towards private equity, real estate and infrastructure funds manifesting itself in Jersey?
Byrne – We have seen record levels of assets under administration in Jersey, which I think reflects the significant continued global demand from investors for alternatives. We continue to see a significant increase in our private equity assets, but also in real estate, infrastructure and private debt. Given the conditions of public markets and the need for uncorrelated returns to those public markets, the alternate industry offers that brilliantly. The figures as of December 31, 2018 show over £320 billion (€370 billion) of assets here. That has got a long way to go, there is a lot of unsatisfied investor demand and we are seeing no let-up in that, so these assets can continue to perform.
Morris – We are well placed to service the increasing demand from alternatives, because you are seeing those lower returns generated from public markets, but you are also seeing an ageing population in the Western world. This is driving demand for greater pension returns, and alternatives asset classes are, by and large, delivering them.
Leach – Jersey will continue to benefit from the continued interest in private equity, infrastructure debt and real estate. One reason for that is the regulatory regime in Jersey, which differentiates on a sliding scale between retail fund products and products for professional investors who do not need the same degree of regulatory oversight. Generally, for alternatives you have a relatively small number of sophisticated investors, so you do not need as long and rigorous a regulatory process where you apply to the regulator and they examine the promoter and product in detail like you might have in onshore jurisdictions. Rather, regulation is achieved by oversight of the Jersey fund administrator.
In Jersey you can set up a club deal or private fund within 48 hours, and a few days for more widely marketed and regulated funds. It is a light-touch regulatory regime commensurate with how professional and sophisticated the investors are.
Grenyer – It is quite exciting to see the emergence of new alternatives in this space, outside of the more ‘traditional’ alternatives, particularly in areas of digital assets. We have seen an increasing number of new entrants, as well as traditional managers becoming active in this space. Clearly, there remain significant challenges in a maturing asset class, but with institutional-grade solutions coming to market in key risk areas such as custody, AML [anti-money laundering], reporting and monitoring, we can expect to see further growth in this niche sector during the next 12 months.
Funds Europe – Private equity fund values crossed the £100 billion mark last year. What does this say about the island’s regulatory standards and global market access?
Byrne – It says that our standards and our regulatory framework are exactly where global managers and global investors need them to be. We have always aimed to have an appropriate and agile framework, and our focus here on alternatives is what really allows us to do that better than many other jurisdictions. We do not have a competition for regulatory capacity, so we are not trying to regulate for all types of funds for retail and for alternates, ours are focused very much in the alternate space.
What we are seeing more and more is funds being raised with a Luxembourg vehicle alongside a Jersey vehicle, so that we can attract both European investors who wish to come through an Alternative Investment Fund Managers Directive (AIFMD)-regulated product and international investors who wish to come through a Jersey structure. So, there are options it is not just one-size-fits-all. As the market evolves and we respond to the demand that is out there, Jersey forms part of a multi-part solution as well.
Mvalo – It helps to dispel the myth that Jersey is only a viable option under certain circumstances, particularly when you scratch the surface and see the managers that are using Jersey and the investments and investor bases concerned.
Five years on from the introduction of AIFMD and we are continuing to see Europe’s leading players use Jersey for their structuring requirements despite initial concerns.
We have seen trends where some funds are being launched with more focus in Jersey, pretty much domiciled in Jersey for the whole structure but maybe just have one parallel vehicle or co-investment vehicle based in another jurisdiction like Luxembourg as a cushion.
Davidson – We are in the best place we probably can be given the unknown outcome of Brexit. From my perspective as an administrator, I have not seen managers change their mind in terms of coming to Jersey, but maybe delay deploying capital a little bit, or changing their minds on certain investments, or just holding off until there is more certainty available.
Funds Europe – To what extent are Jersey’s tax neutrality and transparency core considerations for managers?
Leach – They are vitally important. Jersey works very well from a tax perspective because it is simply tax-neutral and Jersey companies are taxed at 0%, limited partnerships are tax-transparent, it just works very easily and simply for managers and investors to understand. If you look at other jurisdictions, you need quite complex hybrid instruments and the tax rulings and complicated tax structuring to achieve similar results, whereas a Jersey fund structure is just very simple.
Byrne – It is tax-neutral, so in other words, the investors pay tax in their own jurisdiction at the rate applicable to them. We do that in a very clear and transparent way and that suits a lot of our large institutional investors’ tax appetite as they want clarity and to pay the tax that falls due to them in their home jurisdiction rather than it being taxed anywhere else. You can get tax neutrality elsewhere and it is one factor we offer. But then we add our expertise, the focus, a skilled workforce and some of the soft factors around the English language, common law jurisdiction, proximity to key markets and so on.
Morris – From a tax basis, the resounding point is it is simple and efficient, so if you are looking to deploy capital wherever on a global basis, Jersey is not looking to complicate those tax relationships that may happen in the jurisdiction where the capital is ultimately being deployed, or where the capital is being returned to. It is simple and efficient, and it has done that for a long time.
Around the tax substance assessments that have recently come out and the introduction of the substance law – that has not essentially changed the way Jersey has done its business. It is a codification of the existing rules and how the existing business has been run, so again it is providing further clarity. It is not an approach that says you must have X amount of cost here to claim you are meeting substance requirements, it is very much a simplistic qualitative basis of approach that looks at the facts of what is happening and looks to follow those on a consistent basis. That will appeal to well-regulated managers and investors that are on top of these matters.
Refson – The private placement regime that we have allows us to bridge the gap between the UK and the EU. We have around 170 managers marketing 320 funds using private placement – that statistic has grown on every release since 2011 and continues to grow.
Funds Europe – Do you see alternatives playing a growing role in helping to meet global societal challenges?
Byrne – We see alternates playing a role on two sides of that equation. In terms of funding the future, there is no doubt that the capital raised through alternate funds will be key for real estate and infrastructure investment and public/private partnerships. There is no doubt that across both the developed and the developing world, governments are struggling to finance their infrastructure needs, and the ability for large-cap projects to be partnered with funds is vital. We see some of the largest managers in the infrastructure space based in Jersey, and we would expect that to continue, so there is no doubt we will be there funding hospitals, roads, buildings now and into the future.
At the pension-holder’s level, alternates are forming an ever-increasing greater allocation of pension capital amid the uncertainty of global public markets. As you build out that allocation, there is a big play into public markets. A report PwC produced looks at the expectation over time, and while traditional strategies remain core, we see a decrease in allocation to that, we see an increase in allocation to passives, but we also see a very significant increase in the allocation to alternatives.
Refson – A further reason for that is the funding pension gap deficit – they have to look towards alternatives for greater returns in order to meet that need.
Davidson – If you are looking at climate change and diversity, those topics are much more in the media and have become much more prominent in recent times. Investors and managers are asking: “What is in our portfolios? What kind of firms are we working with? What kind of firms are we investing in?” Both we as service providers, and the managers, are having to think about that, and how their portfolios are broken down. In Jersey we have been very open to things not only in the crypto space, but also with clean funds, nature capital funds, anything looking at sustainable energy, Ecotech and so on. We all have to be open-minded and aware of these trends and the growing desire from investors to invest responsibly. We also have to look at our own businesses for sustainability and diversity, to ensure we are presenting balanced and diverse teams to our clients. It is not something that happens quickly, but over the next ten years or so, managers will have to look at more of those areas as their investors drive them to do so.
Mvalo – Absolutely. Impact investing is very topical at the moment. There is a growing number of investors who want to generate a return and make a positive impact on society at the same time.
A fantastic example of this is the Dementia Discovery Fund that Aztec recently supported. The fund provides finance for companies developing new medicines for dementia and has seen big names like Microsoft co-founder Bill Gates invest $50 million of his personal wealth into the fund.
In the real estate space, we are also seeing managers, such as L&G, use innovative funds to help tackle the chronic shortfall in affordable housing in the UK. There are plenty of great stories out there.
Byrne – There has also been acceptance that pensions are long-term strategies and having an over-allocation into liquid products just does not make sense because there is a cost to liquidity. The ability for pensions to take out some of that liquidity cost and invest long-term through alternative funds is key. That is a real awareness that is increasing. As alternates evolve and become more institutional, they are more investable by pensions. We have seen some of the very big global funds, many of which are based here, making sure that they are ready to accept pension capital. The industry is evolving as well to make sure it is fit for purpose going forward.
Morris – According to the recent financials coming out of the Nordics, their allocations on their sovereign wealth funds are moving from 5% up to a 40% allocation limit. That is a huge shift in additional capital looking to go into the alternatives market, and that is to meet their diversification requirements and the need to drive that return that they are possibly not seeing in liquid markets.
Leach – I have also seen a few managers looking at investing in venture capital. People have been looking at setting up funds to invest in technology businesses across Africa, for example insuretech to allow insurance to be accessed by people across Africa with mobile phones and other technology businesses which will help people’s lives across Africa.
Funds Europe – The Jersey Private Fund (JPF) has proven to be an attractive structure for co-investment through Jersey. How important is product and service innovation when it comes to meeting the evolving needs of alternative managers?
Refson – Innovation in Jersey is a continuous process and is vital to meet the evolving needs of alternative managers. The JPF is a case in point, with over 205 having been created in the past 18 months.
Davidson – Four out of five enquiries that I see, whether that is from first-time managers or bigger-name managers, tend to be about the JPF model, so it has clearly proven to be a more innovative, flexible and cost-efficient way to establish a fund in Jersey. It is very quick to set up and it has been a very attractive product. We have had competitor jurisdictions that we work with across our practice recommend the JPF to clients and therefore more business has flowed through to Jersey.
Morris – One of the keys for the jurisdiction has been its ability to have a wide range of products. On day one, a structure or an enquiry that might look as if it is falling into one category can look very different to what it originally started out as time goes by. As a jurisdiction, there are a number of different options that play into that sweet spot. You may start with a JPF and end up with an expert fund, or you may not, so the landscape of having everything we need to be able to change that product mix to the investor’s needs is key. The JPF was a welcome addition, the numbers speak for themselves – it is definitely an important part of the marketing armoury.
Leach – The reason it works so well is that there is a robust regulator in the Jersey Financial Services Commission (JFSC), who in the case of a JPF, regulates the Jersey fund administrator and we have 13,000 financial services professionals in Jersey who have very high-quality AML standards and fund administration tools and systems and so on. They are regulated to a very high standard, there is no need to regulate the fund product itself where there are less than 50 sophisticated professional investors. That is why we can have JPFs set up so quickly and easily – because there are such high-quality service providers in Jersey robustly regulated by the JFSC.
Grenyer – For multi-faceted businesses, it has been a useful bridge between the private client world and corporate funds, where there are private clients who are tipping into the private fund regime and developing their expertise. The JPF regime provides the opportunity for new promoters to develop a track record and then potentially springboard into more regulated products further down the line, if need be.
Funds Europe – Looking ahead to the next 12 months, are you optimistic or pessimistic for your business?
Refson – Assets under administration on the island is at an all-time high, the number of managers marketing into Europe via Jersey is at an all-time high, the number of JPFs and other products continues to grow with each economic statistic.
The uncertainty in the world around us would suggest that those increases in the use of Jersey both as a domicile and a jurisdiction for managers will continue, so I am optimistic.
Byrne – Looking at the investor demand, for instance sentiment reported by Preqin, there is strong investor demand, increasing allocations of private equity to infrastructure, real estate, private debt, to the asset classes we are very well established in looking after, so there are lots of reasons to be confident.
There is a clear ability to respond to any change or challenge that comes along, so whether that is Esma’s approval of our framework for AIFMD compliance or the OECD’s economic substance tests, whatever challenge is there, we have demonstrated the ability to respond, so that ability plus investor demand says we should have every reason to be confident.
Morris – We continue to see the strong pipeline of enquiries – and not just enquiries, but those converting into new business opportunities both from existing and new managers across the globe. We have seen double-digit growth, we continue to see it, and we forecast that to continue for some time into the future.
Grenyer – Agreed, across all of the alternative asset classes. On fintech, we are continuing to see an increasing number of institutional-grade clients looking to enter the market, so we expect to see continued growth in this space over the next 12 months.
Davidson – Whatever happens with Brexit, or the wider market, Jersey is very robust, stable and innovative. We are good at getting around the table and finding solutions for clients – and we will continue to do that and be open for business.
Mvalo – Unequivocally positive. Jersey has a fantastic proposition and we are seeing no signs of growth stalling. And this applies across the board. So not just private equity, but the other major asset classes too, including private debt, real estate and infrastructure.
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