Changes in international regulation and market volatility are posing serious questions for alternative fund managers, but fund domiciles that can provide reassurance around key issues such as substance, distribution and transparency will be well placed to respond to the needs of managers.
Those were the key messages to emerge from the first in a series of Funds Europe jurisdictional webinars, entitled “Seeking Certainty in the Alternatives Landscape”, held in conjunction with Jersey Finance last month (May 21).
The webinar brought together a number of experts in the private equity, real estate and wider alternatives fund space, including Elliot Refson, director of funds at Jersey Finance, Mike Byrne, partner at PwC, Tim Morgan, partner at Mourant, and Emily Haithwaite, partner at Ogier, who discussed the evolution of the alternatives landscape and how domiciles are needing to adapt to meet manager and investor needs.
Overall, panelists were unanimous in their assessment that stability will be an invaluable commodity over the coming years, particularly given the uncertainty stemming from the coronavirus pandemic. Managers and investors alike, they agreed, will look for certainty and familiarity from their domicile partners.
Commenting on how the regulatory environment has changed over recent years, Haithwaite commented that compliance and reporting requirements were placing additional burdens on private equity and real estate managers but at the same time giving opportunities to domiciles that excel in those areas:
“AIFMD was a game changer in terms of compliance requirements and has added much more complexity for managers, alongside various other drivers,” she said. “The challenge now for managers is finding structures that suit investment requirements but that also meet the highest international standards of regulation. Fund domiciles need to rise to that challenge and provide managers with access to best in class propositions.”
Meanwhile, certainty around governance and substance was cited by Byrne as a priority for alternative managers.
“The governance model we’ve seen in Jersey for some time, together with the commitment the jurisdiction has long had to substance, has really come into its own in recent times, given the disruption we’ve seen globally,” he said. “The availability of on-island expert directors, for instance, has meant that there has been little to no disruption to boards whilst travel restrictions have been in place. We fully expect excellence in governance to be front of mind in the coming months.”
Commenting on base erosion and profit shifting (BEPS) and substance more specifically, he added that the substance legislation introduced last year was seen as a key development for managers and that BEPS continues to be an issue.
“In both cases Jersey is in a strong position,” Byrne said. “In terms of BEPS, the examples the OECD provided were all very compatible with Jersey’s tax transparent model – Jersey has never tended to rely on tax treaties like other jurisdictions, for instance, so there is no complexity there. On substance, meanwhile, the new legislation has served to underline the approach Jersey has taken for some time, so it didn’t throw up any surprises.”
The importance of tax transparency was echoed by Morgan, who highlighted that the value of assets administered in Jersey rose to a new record £346 billion in 2019.
“Investors and managers both like simplicity and the principle of tax neutrality, which underpins Jersey’s model, really resonates with that,” said Morgan. “It means that a Jersey structure can be used to pool investor contributions from across the world, with no additional layers of tax being created.”
Jersey’s specific ability to meet the requirements of changes introduced in April last year to non-resident Capital Gains Tax in the UK was a case in point, he said: “The introduction of the two elective regimes which allow offshore entities – often Jersey SPV companies or Jersey Property Unit Trusts – to either be treated as transparent under the new rules, or exempt from them but subject to on-going reporting requirements, was a real validation from onshore authorities of the best practice Jersey offers. It was also an indication of the certainty Jersey can offer, to continue to enable international investment into the UK real estate sector.”
In terms of market access, meanwhile, being able to deliver a straightforward and transparent route to market is also vital, according to Refson. “We’ve seen the number of managers using Jersey’s private placement regime to market to the EU rise consistently year-on-year, and the reason for that is because it works, it’s tried and tested and it’s cost-effective,” he said. “At the same time, the tax transparent approach works globally too, meaning that Jersey structures have the flexibility to also market to other geographies. It all comes down to certainty again – investors like that.”
Looking to the future, the speakers acknowledged that domiciles would need to carefully balance stability with innovation.
“Having in place the right structures to suit investor needs is critical,” explained Haithwaite. “It’s something we had front and centre of our minds when we introduced the Jersey Private Fund in 2017 – it was a new structure, geared towards meeting a specific need for limited numbers of sophisticated investors.
“Just a few years later and it has become the go-to vehicle for alternatives structuring – more than 350 have been established so far. That’s because investors like the speed with which they can be set up, the regulatory framework they sit in, and the flexibility they offer in terms of market access. Having the foresight to meet investor needs like this is so important in the alternatives space.”
In relation to the impact of Covid-19, meanwhile, Byrne highlighted that private equity and real estate are not immune. “We’re seeing big changes in behaviours and that will have a short-term impact on the asset classes,” he said.
“In the longer-term, though, the view remains optimistic – alternatives are still a massive focus for institutional investors. The question will be how quality managers perform over time, and that’s where having a solid base will really come into play,” added Byrne.
Adding a Jersey perspective, Morgan commented: “Lockdown has been a challenge but those domiciles that have shown an ability to adapt have actually fared well. In Jersey, for example, the authorities adopted fully electronic filing, implemented flexibility to comply with substance requirements and amended legislation in areas like electronic powers of attorney. As a result, we’ve actually seen some significant funds launched through Jersey over the lockdown period.”
“The environment is becoming more complex,” concluded Refson. “Managers will all be looking for straightforward and high-quality solutions to give them the confidence and certainty they need and help them navigate the road ahead. Domiciles need to respond to that.”
The webinar can be viewed again here.
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