Regulation impact

Next, we asked to what extent the introduction of international regulation has prompted, or is prompting, the alternatives industry to restructure (fig 9).

The responses were notable in two respects: the narrow margins between responses and the fact that 24% professed that they were unsure.

A quarter of respondents agree that the key driver behind restructuring is new fund vehicles creating more demand. Others include company structures being redefined (15%), the use of old vehicles with new ones where appropriate (13%), domiciles being reviewed (13%) and the restructuring of old fund vehicles (5%).

Commenting on the findings, Martin Paul, a partner and head of the investment funds and private equity group at Bedell Cristin, said: “The alternative fund industry, like financial services generally, is constantly evolving.

“Part of that evolution is adapting to the changing business landscape, which in the alternatives sector involves thinking about how best to make investments and how to structure to meet the demands of investors. 

“In both cases, applicable regulation is relevant. The market looks to deliver the best returns in the way desired by investors, in the most effective and efficient manner possible.”

The survey results reflect that new vehicles are created to connect investors and assets in the best way possible – and that the industry works to create new and better vehicles, which can then unlock demand, added Paul. 

“Tried-and-tested models will continue to be used, but there is constant adaptation in terms of vehicle and domicile,” he said. 

To understand the core drivers in better detail, the survey asked respondents to pinpoint which factors are driving fund restructuring, other than international regulation. They noted the following:

  • Investor requirements;
  • Innovation and disruption;
  • ESG;
  • Climate change;
  • Poor performance for hedge funds – US regulations force a move towards family offices;
  • Global distribution and competitive pricing;
  • Transparency;
  • Public perception;
  • Cost efficiencies;
  • Tax;
  • Investor appetite for stronger governance models such as the EU’s Alternative Investment Fund Managers Directive (AIFMD); and 
  • Fund lifecycles.

In terms of the key restructuring trends that are being observed, responses included:

  • Diversification and risk mitigation;
  • Regulatory reporting;
  • Legal structures;
  • Pre-global financial crisis funds are being restructured;
  • Transparency;
  • Lower costs;
  • Adjustments required in a post-Brexit world;
  • The need for substance;
  • More opportunities in the listed space;
  • Onshoring; and
  • A shift to local regulated products.

Regulation response
According to respondents, the key challenges in responding to greater regulation as an alternative funds domicile (fig 10) were expertise (50%), costs (46%), capacity (38%), reporting (37%) and uncertainty (19%).

Increasing regulation has been a core theme in recent years and this comes with complexity.

“The survey results reflect reality,” said Paul of Bedell Cristin. “The changes require a greater level of expertise in order to ensure compliance with the myriad of rules; ensuring compliance incurs initial and ongoing cost in terms of people and systems; the increased requirement can stretch capacity; and the ongoing reporting burden is now significant.

“The key is responding to all of that, and the challenge is to streamline and automate as much as possible, to take advantage of outsourcing to pools of excellence when possible, whilst at the same time being able to demonstrate compliance with international best practice – both to regulators and clients.”

As if to emphasise the importance of certainty, panellists in Funds Europe’s jurisdiction webinar series, in partnership with Jersey Finance, were unanimous in marking stability out as an invaluable commodity over the coming years. This will be even more pronounced after the pandemic, with both managers and investors likely to seek certainty and familiarity from their domicile partners.

Continue reading the report: Cost pressures »

© 2020 funds europe



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