While the events of 2020/21 threw up a host of considerations for alternative funds professionals, the reality is not so much that Covid-19 has changed the trajectory for fund domiciles, but rather that it has accelerated certain trends.
One of the fundamental trends that looks set to define the fund domiciliation landscape over the coming years is the rise of governance. In a column I penned towards the end of last year for this publication, I suggested that one of the key themes to emerge from the pandemic was just how much investors are calling the shots and putting managers under greater scrutiny. A few months on, and we are continuing to see that - with governance proving to be central to how managers are responding. In every single Funds Masterclass event Jersey Finance and the JFA have held over the past six months, for example, ‘good governance’ has been a recurring theme – at manager, fund and jurisdictional level.
Driven in part by the remote fundraising environment of the past year, LPs are asking more questions of managers, while lawyers and service providers are spending increasing amounts of time on due diligence questionnaires and operational governance assessments. The message is clear – investors want to know more about the managers and funds they are putting their capital into, and the locations where their managers and funds are based.
The rise of ESG is accentuating this trend – while the E and S elements remain important, the G strand is increasingly so. Not only are investors interested in funds that can show good governance, but they need to see that the whole ecosystem that supports that fund champions good governance too.
Indeed, in a study supported by Jersey Finance earlier this year looking at the future of domiciliation, 69% of interviewees (global managers, investors and advisers) said that ESG considerations would play a growing role in their decision-making, including domiciliation.
It’s a trend that was equally voiced in a survey the JFA undertook amongst its members recently. In that survey, economic substance – a concept that has become synonymous with governance – was highlighted as a major decision-making factor. Respondents pointed to how Jersey’s own long-term approach to substance, but also its flexible and increasingly digital response to upholding substance in light of travel restrictions, was having a positive impact on its competitiveness.
We are in an environment where investors are sat on significant amounts of dry powder; with more than 80% of investors indicating their intention to allocate more to alternatives this year (Preqin), the big question is around how to put that to work effectively, with an appreciation that headline performance is no longer enough on its own – investors are purpose-driven, conscious of their role in economic and social recovery, needing, in a world of ever greater transparency, to be beyond reproach in everything they do.
In this light, a focus on governance is critical for fund domiciles in 2021 and beyond, with good governance, reinforced by technology and expertise, underpinning every stage of the fund supply chain. This is not just a knee-jerk response to the environment we have experienced over the past 18 months. This is a lasting – and a positive – development.
By Tim Morgan, chair, Jersey Funds Association
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