Elliot Refson, head of funds at Jersey Finance, considers the results of Funds Europe’s emerging managers survey and explores the biggest challenges facing the next generation of fund managers.
After a long period of relatively few major upheavals in markets, the last two years have presented a real challenge for all asset managers. The conditions that fuelled the long bull market in the decade after the Global Financial Crisis have gone, replaced by higher inflation, negative growth and greater geopolitical uncertainty.
For established fund managers, the evolving fund landscape is difficult to navigate. It is even more challenging for emerging managers, which face a wide range of issues that could prevent them from hitting their fund launch targets and becoming viable over the long term.
That is why the Funds Europe emerging manager survey – carried out in collaboration with Jersey Finance – set out to discover the challenges facing the next generation of alternative funds.
More than 100 respondents from around the world – specialising in alternative investments and with less than £300 million in assets – took part in the survey, providing detailed insight into what emerging managers seek from a fund domicile.
Challenging times
Emerging managers face considerable operational challenges in the current environment, so they must choose their domicile carefully, says Elliot Refson, head of funds at Jersey Finance.
“The survey suggests the biggest challenges facing emerging managers are, unsurprisingly, marketing/brand awareness, fundraising, regulation and, as always, cost,” says Refson. “The marketing, regulatory requirement costs and the time to market can all be mitigated by choosing the right domicile.”
An offshore fund domicile can offer emerging managers significant benefits that will help keep costs and the regulatory burden low at a time when every penny counts, Refson adds.
“For example, managers looking to market their funds into the EU must comply with AIFMD. But there are different ways of doing this.
“A manager can establish a fully compliant AIFMD structure in a jurisdiction like Luxembourg or Dublin. Alternatively, an offshore jurisdiction like Jersey benefits from an opt-in/opt-out approach to AIFMD. Being outside the EU means Jersey is not subject to AIFMD, and funds domiciled here can target investment from the rest of the world outside of scope of the AIFMD and within the EU through the national private placement regime (NPPR).”
The NPPR offers an alternative to a full AIFMD passport and is a more cost-effective and efficient way for managers to access EU-domiciled investors, says Refson, and it is a product of the longstanding bilateral relationships between Jersey and the EU member states. This is one of the reasons why Jersey is home to more than 200 fund managers distributing over 370 funds into Europe and why it continues to attract many new and emerging managers.
Further, time to market can be cut through the Jersey Private Fund structure, which Refson says can launch within 48 hours of making an application.
“The reality is that, according to the EU’s own statistics, only 3% of alternative investment fund managers are registered to market their funds in more than three European jurisdictions,” says Refson. “So, if a manager is one of the 97% that doesn’t plan on marketing so widely, Jersey and the NPPR can offer a far more streamlined, cost-effective and efficient solution outside the full scope of AIFMD.”
“…only 3% of alternative investment fund managers are registered to market their funds in more than three European jurisdiction.”
Which fund domicile?
There is a wide range of domiciles, so picking the right one can be challenging for emerging managers. Increasingly, to narrow down the options, emerging managers prioritise the features most important to them.
Survey respondents highlighted service quality, regulatory standards and costs as their top-three considerations when choosing a fund domicile.
It is difficult to overstate the importance of regulatory standards and a stable funds jurisdiction for emerging managers, says Jersey Finance’s Refson, particularly those looking to attract new investors.
“The last thing an emerging manager needs is to establish in a jurisdiction where there are red flags – or the potential for red flags – for investors,” he says. “But to see how jurisdictions will evolve, it is vital to [reflect on] how they have evolved in the past.
“If you were to go back 20 years, Jersey was considered over-regulated, inflexible and expensive. This was because our government strove to adopt the highest standards and to embrace, and be early adopters of, new regulation and legislation. Fast-forward to today, Jersey is seen as proportionately regulated, innovative and competitive.”
What changed? “Everything and nothing,” says Refson.
“On the everything side of the equation, other jurisdictions with lower regulatory barriers have been forced to catch up with Jersey’s position around international standards. At the same time, geopolitical events have uncovered instability in other jurisdictions.
“On the nothing side, Jersey has maintained its course of the highest standards and is acknowledged by some of the world’s leading bodies such as the IMF and the World Bank,” he adds.
Further, Jersey’s tax neutrality and stability – both political and fiscal – mean a minimal change outlook from a regulatory, legal and economic perspective. And this is underpinned by the world-class infrastructure and the broad expertise of the island’s 14,000 people in the finance industry.
And all of these points are directly relevant to emerging managers because choosing the right domicile take all of the uncertainty and jurisdictional risk of alienating investors off the table.
A jurisdiction that evolves with you
Environment, social and governance (ESG) investing has gained popularity in recent years as awareness of environmental and social issues has grown. Fund managers with strategies that have adopted ESG practices have been among some of the biggest recipients of inflows. Access to a range of ESG services and solutions is, therefore, crucial in today’s markets. However, it was one of the biggest difficulties highlighted by emerging managers in the survey.
“ESG is hugely important, not least because the market for it is growing exponentially,” says Refson. “Deutsche Bank expects ESG assets to exceed $100 trillion by 2028, and both Bloomberg and PwC have made similar forecasts. What these forecasts imply is that ESG will permeate all areas of alternatives and will also become a key aspect of mainstream investments.
“ESG, simply put, is making a difference for good as a by-product of investment; it is a mindset, what that mindset is is the remit of each and every investor” Refson adds. “Therefore, the role of an international financial centre such as Jersey must be more than regulatory; it has to respect that mindset.
“In Jersey, we provide an environment where ESG is embedded across all sectors of society and not simply treated as a product or service line.”
Refson says “And this is exactly what we are doing in Jersey through a culmination of stratagem based on the work our government and our regulator, the Jersey Financial Services Commission have carried out, as well as the Jersey for Good project led by Jersey Finance, which sets out a two year plan to accelerate our journey to a sustainable future leading up to 2030. These allow us to start the conversation and make a positive impact.”
But to go back to our proportional but pragmatic regulatory regime: Jersey allows for ESG reporting to be done in any format that is made to other regulatory regimes. What this means is that if one standard dominates amongst the many competing standards around the world then this will ultimately become default in Jersey without the need to keep reinventing the regulatory framework.
And this is an illustration of how Jersey will keep reinventing itself and building on its base of stability and remain the default jurisdiction for alternatives that it has become over recent years.
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