Elliot Refson, head of funds at Jersey Finance, explains the importance of choosing the right domicile for emerging fund managers to ensure long-term success.
In the fast-paced and unpredictable world of emerging fund managers, uncertainty is the only constant.
First-time managers, often equipped with significant experience, particularly if they are spin-outs from larger GP houses, encounter specific hurdles in launching their operations and funds.
Established managers have the advantage of existing networks and processes while their emerging counterparts start from scratch. Getting off to a strong start provides the foundation for the ongoing success of the fund.
Not least of these decisions will be domicile choice, with the ramifications of establishing in a jurisdiction having significant consequences for emerging managers and investors alike, providing the platform to get off to that good start.
Investor-driven trends
In the past, herd instinct compelled managers towards particular jurisdictions. However, these trends proved misguided as some international finance centres (IFCs) failed to keep pace with rapidly evolving regulatory environments.
For instance, Bermuda – once the favoured IFC for hedge funds – was usurped by Cayman evolving its product offering. A more recent example can be seen in the securitisation market, where over 300 funds moved from the Caribbean to Jersey after regulatory shifts created barriers to European investors.
Such investor-driven trends are now seeping into other asset classes, with first-time managers particularly cognisant of balancing cost efficiency with investor needs, notably around stability.
This perspective was borne out in a survey undertaken by Funds Europe and supported by Jersey Finance last year. Canvassing the views of more than 100 emerging managers from across the world, the study shone a light on their perceived barriers and needs.
Of the challenges, marketing and brand awareness, fundraising, regulation, access to expert professional support and cost were all highlighted as concerns.
Cost, of course, is likely to be a far more sensitive issue for emerging managers than for more established managers, and something that has been exacerbated as we have moved through 2023 in a sticky, high-interest rate, inflation-driven market.
The lesson here for domiciles is that if they are to effectively support emerging managers, they need to not only stay ahead of the curve by offering innovative, flexible solutions but need to do so in an easy-to-access, cost-effective environment.
Indeed, while accessibility to expert support was deemed paramount in Funds Europe’s study, with close to 50% of managers ranking service quality as the most important factor when choosing a domicile, such specialist services are needed at both the jurisdictional – particularly with an eye on balancing tax and regulatory certainty with cost – and service provider level.
Infrastructure
For its part, Jersey has a long track record in supporting the needs of a broad range of alternative investment managers, from start-up to well-established, and across asset classes such as private equity, real estate, hedge, venture capital and credit.
It is a position arrived at following a specific strategy adopted 20 years ago. Back then, the Island’s government and regulator made a concerted decision to become early adopters of regulatory standards, which at the time created the perception that the Island was over-regulated and costly.
Fast forward to the current environment, however, and the internationalisation of regulatory standards has created a much different picture, with Jersey now deemed proportionate while other jurisdictions play catch up.
Today with a world-class infrastructure and 14,000 financial professionals on Island, Jersey’s IFC has the capabilities to support alternative investment fund managers’ needs – from increasing requirements around the outsourcing of back-office functions to having the boots on the ground to meet substance requirements, backed up by a strategic jurisdiction-wide commitment to fintech innovation.
It is a position that means the Island has seen record inflows of AUM, up 142% in a decade and 72% in the past five years, which are figures that outperform comparable jurisdictions.
In addition, by having a tried and tested platform in place, Jersey can help with navigating complex regulations such as AIFMD II; meeting reporting and substance requirements such as SFDR and BEPS; accessing investor capital; distributing across borders, such as EU pre-marketing rules; and, ultimately, generating target returns.
It is a proposition that a growing number of emerging managers have explored as part of their strategic planning over the course of 2023, particularly when set against wider geopolitical and financial market flux that is largely out of their control.
Opportunity
The fundraising environment in 2023, of course, has been challenging for managers of all types. Emerging managers do not, of course, have the luxury of scale enjoyed by larger players, who are more able to absorb the impact of market shocks.
However, it has provided them with an opportunity to plan and prepare – to get their platform, processes and people in order for the long term. One study, for instance, found that more than half of emerging managers expect their tech budgets to increase over the next year (Dynamo, 2023).
What’s clear, however, is that emerging managers are ambitious and highly focused on growth and generating returns as soon as they can and when market opportunities improve.
Domicile choice is critical as part of that planning mix, providing emerging managers with an agile, robust platform that is aligned with their vision and that can give them the stability and certainty they need – reducing the regulatory and operational headache and empowering them to focus on what they do best: fundraising and generating returns.
As we look into 2024 and target an improved fundraising environment, there’s no doubt that choosing an experienced, stable, flexible and digitally-driven domicile like Jersey has the potential to offset the challenges faced by emerging managers in 2023 and set them on a path to a brighter future and long-term success.
© 2023 funds europe
