In July this year, just as we thought we had a moment of summer calm in the craziness 2020 has brought us, Funds Europe published a report in association with Jersey Finance looking at the state of play in the alternative funds space.
Overall, the survey confirmed that appetite to allocate to alternatives, including private equity, infrastructure, real estate, and hedge, continues to grow as those asset classes move increasingly centre-stage with investors seeking to balance their appetites for risk and return and achieve diversification in their portfolios.
It also found that ESG, unsurprisingly, is considered by more and more investors and managers as playing a critical role in investment strategies, and that private capital – in particular from family offices – is central to driving investment across the alternatives spectrum.
Significantly from a domicile perspective, against a backdrop of a growing raft of regulatory initiatives – AIFMD, BEPS and substance – increasingly complex reporting requirements – CRS and FATCA – and the impact of digital disruption, a domicile’s ability to demonstrate high regulatory standards and specific expertise were considered essential factors in decision-making processes.
That assessment midway through the year provided something of a pulse check for how the industry was reacting and responding to the early stages of Covid-19.
As we near the end of the year and look forward to 2021, it’s clear that further change is afoot, as the pandemic continues to reshape approaches in really all areas of investor behaviour. At the same time, of course, investors and managers also continue to grapple with the fallout of Brexit.
Innovation and change is happening at an incredible rate, and all those in the alternatives supply chain – including domiciles – will need to be ready to continue to support investors in what will ultimately be a very different world.
But rather than it being a question of a major deviation in the direction of travel, the change domiciles will need to manage is more about pace. According to McKinsey, for instance, in the space of around two months this year, the world has ‘vaulted’ forward around five years in terms of digital adoption, and domiciles need to be ready to maintain that sort of trajectory into next year.
The macro trends we had already identified will continue – investors will be the driving forces behind domicile selection; regulatory frameworks will be fundamental to investor decisions; specific expertise and client service will be highly prized; sustainable finance will become core to investment strategies.
However, the pace of change will be relentless and, for some, a challenge. Those centres that have been on the front foot in their approach and that can provide stability and certainty in their proposition will be the ones that will succeed.
In terms of digital adoption, for instance, domiciles will need to have the right infrastructure in place to support managers moving increasingly to a remote working, remote fundraising environment. Investors will also be looking more closely at how managers, and the domiciles that support them, can demonstrate robust continuity in the face of disruption to maintain LP and GP relationships seamlessly.
In a rapidly evolving, agile environment, investors will also be paying closer attention to cost and domiciles will need to respond accordingly, focused on ease of doing business. Jersey, for instance, introduced a new limited partnership regime this year with a view to making migrating structures to Jersey from other jurisdictions much easier.
Meanwhile, in a very uncertain world, robust regulatory frameworks, backed up by good governance, will become increasingly attractive. In particular, an investor’s familiarity with a fund domicile and its compliance with international standards will remain vital in earning the respect of investors – something that in turn will give managers confidence.
Investors will also be looking increasingly at sustainable supply chains and an ability for domiciles to support global distribution requirements. In this context, Jersey is in a strong place. Whatever happens in terms of Brexit, for example, Jersey is able to support investor access to the EU as a third country through tried and tested private placement, and the UK thanks to its existing close ties.
At the same time, Jersey’s global distribution capabilities, outside of the AIFMD, will resonate strongly with an increasingly global investor base. A recent study by Preqin, for instance, found that over the next five years allocations to alternatives from Asia and emerging economies will outpace North America and Europe.
Whilst the global alternatives landscape looks set for ongoing evolution in the coming months, for Jersey, where alternatives make up around 85% of total funds business, the picture is a positive one – assets under administration in Jersey rose to new record levels in 2020 to more than £360 billion, whilst over the last five years, the community of fund managers operating in Jersey has more than doubled.
Whilst the pace of change looks set to significantly alter the alternatives space, the fundamentals remain the same. Critically, investors – and it will continue to be the case that investors primarily determine domiciliation selection – will want a stable jurisdiction with no regulatory, legal or economic surprises. But they also want a jurisdiction that is agile, resilient, innovative and forward-thinking. Balancing these qualities will be vital for domiciles specialising in alternative fund servicing heading into 2021.
By Elliot Refson, Director of Funds, Jersey Finance
Read the Funds Europe-Jersey Finance Alternatives report here.
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