Experts in Jersey’s funds industry discuss managing expectations with respect to alternatives, the demand for sustainable investments and the importance of pricing in domiciliation decisions.
RICHARD HANSFORD, DIRECTOR – ALTERNATIVE INVESTMENTS, OCORIAN
Do you see the appetite for alternatives continuing its upward trajectory?
There is no doubt that the appetitive for alternatives continues to gather momentum. Staggeringly; Preqin, who is one of the leading data sources for alternatives, predicts that the alternative investment industry is expected to grow by 59% by 2023, reaching a total of $14 trillion (€12.5 trillion) in assets.
However, for this predicted growth to be realised, investors may need to manage expectations in comparison to previous years. In the hunt for better returns, investors have continued to allocate increased commitments into property, infrastructure, private equity and venture capital. With this increased capital flow into the industry, this has facilitated in driving up valuations across these asset classes and as a result, there are concerns that investors may be disappointed by future returns that are generally expected to be lower than those achieved historically. This is supported with a wide number of GPs struggling to find value in the market due to, in some sectors, record high operating multiples being used to value a particular investment.
Fundraising has also been boosted by investors recycling their returns into follow-on alternative investment funds. As a result, we expect the appetite for alternatives to continue its upward trajectory as investors hunt for better returns, with a large proportion of this allocation expected to come from institutional investors and in particular, sovereign wealth funds.
FIONA LE POIDEVIN, CHIEF EXECUTIVE, THE INTERNATIONAL STOCK EXCHANGE GROUP
Will sustainable and impact investing become increasingly prominent in the markets this year?
Sustainable and impact investing has already become more prominent. There has been a surge of investor interest in sustainable investments to the extent that sometimes there has been too much capital chasing too few suitable opportunities.
Governmental bodies, like the EU, are looking to use regulation as a way to define sustainable activities and thereby drive greater investment, while legislating on disclosure in a bid to boost transparency and thereby tackle ‘greenwashing’.
At the end of last year, The International Stock Exchange (TISE), which has an office in Jersey, introduced a green market segment, TISE Green, to facilitate greater capital flows into environmentally sustainable investments. TISE Green is open to all types of investments – bonds, funds and Reits, and trading companies – from any jurisdiction. A security must be admitted to TISE’s official list, but there is no extra charge for entering TISE Green, although there needs to be third-party verification of the investment’s green credentials against a globally recognised standard.
I expect that the scope of the segment will widen in the future to cater for broader social and impact investing where there is less industry standardisation at the moment, but which seems likely to occur as the market develops through this year and beyond.
MARTIN PAUL, HEAD OF INVESTMENT FUNDS & PRIVATE EQUITY, BEDELL CRISTIN
To what extent is price sensitivity a factor for managers when it comes to domiciliation decisions?
Price is definitely a factor when assessing where to domicile a fund or other investment structure, and within the subset of ‘business factors’, it is probably one of the more important.
However, other fundamental factors probably take priority.
A starting point is the reputation of the jurisdiction. A jurisdiction such as Jersey, which has been a leading international finance centre (IFC) for 50 years and is a ‘tried and tested’ jurisdiction for funds, provides comfort and continuity for both managers and investors.
The simplicity and stability of the legal and tax environment is another basic criteria that also must be met before other factors come into play.
The regulatory conditions in the jurisdiction are also important. Here, Jersey’s reputation for regulatory sophistication, accessibility and responsiveness, and track record of evolving to meet developing international standards, whilst maintaining business flexibility and speed to market, stand it in good stead.
After that, cost is very important. However, it sits alongside other business factors such as substance, ease of doing business, service culture, and local expertise. We see these factors combining – with the outsourcing of activity to well-known and trusted service providers bringing reassurance, expertise in specialist areas, as well as operational efficiencies – whilst also allowing mangers to focus on their core competencies.
Jersey has recognised and responded to the needs of managers, and in providing a seamless and sophisticated platform, at a reasonable cost, Jersey definitely hits the mark in terms of the main shopping list of factors.
WENDY MARTIN, PARTNER AND HEAD OF TAX – CHANNEL ISLANDS, EY
Is jurisdictional transparency and compliance important to managers?
The offshore world is at another crossroads. The direction each jurisdiction takes in the coming months and years will influence their ability to remain attractive to fund managers. We know that certainty is crucial to fund managers – in tax rules, in regulation and in a stable political environment – as this enables them to manage risk. But what about jurisdictional transparency and compliance? Whilst managers may not be directly concerned about transparency and compliance per se, understanding governments’ policies in these areas is important in creating that certainty.
The Jersey government has openly stated for many years that it is committed to complying with international standards. Take the recent challenge by the EU on economic substance, which has extended to the Organisation for Economic Co-operation and Development (OECD) resulting in an international standard. The Jersey government responded decisively, committing to comply with the requirements. It engaged with the fund industry from the beginning, ensuring that any proposal was proportionate and sustainable.
Being located in a jurisdiction that resists international standards and risks retaliatory action, such as blacklisting, is not good for attracting investors. The current crossroad will not be the last but knowing that a jurisdiction has a clear policy of complying with international standards, as Jersey has, gives managers the certainty they need to mitigate risk.
DAVID WALTERS, ASSOCIATE, COLLAS CRILL
Will jurisdictional collaboration become increasingly important in the years ahead?
Brexit has thrown the importance of collaboration between nations into stark relief. On leaving the EU, the UK will be required to forge new relationships with its former European partners and indeed with the rest of the world.
In some respects, the offshore world, and in particular the Channel Islands, are a step ahead. Both Guernsey and Jersey have built relationships with regulators in most of Europe’s major financial centres and for a number of years, funds domiciled in the Channel Islands have successfully been marketed using the national private placement regimes.
Following initiatives such as BEPS [base erosion and profit shifting] and the new drive on economic substance, these relationships will become increasingly important in allowing the funds industry, both onshore and offshore, to evolve in a collaborative manner to meet these challenges.
Both will need to work together to ensure that industry maintains the trust not just of investors, but also of governments and regulators, whilst ensuring that as diverse a range of jurisdictions, along with the vast array of skills and expertise they bring with them, continue to thrive and offer genuine choice to sponsors structuring their funds.
MIKE NEWTON, GROUP HEAD OF FUND SERVICES, CRESTBRIDGE
In March, the Jersey Financial Services Commission signed a memorandum of understanding (MoU) with the UK Financial Conduct Authority. Does this give fund managers assurances around accessing investor capital through Jersey?
The new October Brexit deadline means ongoing uncertainty around what the final deal, if any, will comprise. This presents fund managers with a continued period of ambiguity around how they may or may not be able to function post-Brexit. If the UK becomes a ‘third country’, UK fund managers will lose the automatic ability to manage cross-border European funds from the UK in the short term. However, the MoU will provide managers with greater clarity and a seamless pathway to continue to access capital through Jersey via a third-party management company model.
Whilst there will no doubt be a period of transition where finer details are confirmed, the potential opportunities are significant. This development is evidence of just how seriously Jersey takes its responsibilities as a facilitator of global capital and should send a message of real certainty, as well as provide fund managers with much-needed confidence in Jersey.
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