The Channel Islands are proving to be fertile ground for start-up fund managers looking to get one foot on the ladder
Even the big guns have to start somewhere. In Formula One racing, for example, a car costs millions to run, success comes down to split-second decisions, and the slightest mistake can lead to catastrophe, perhaps even death.
So it’s no surprise current world champ Lewis Hamilton cut his teeth first in karting, a junior version of the sport that’s all about driver skill. It was only after he moved through the ranks of Formula Renault, Formula 3 and GP2 that he finally graduated to Formula One, where cars go at 240mph, the rules are suitably tight, and success requires everything from managing your tyre degradation to the group mind of the pit-stop team.
And what’s good for the elite of motorsport works just as well in the funds space too. Boutique funds – those operating with a relatively modest £10 million to £100 million – are like the karting or Formula Renault of the funds world. They’re the perfect vehicle for a new manager who understands an asset class or investment strategy but has only ever made investments privately and is now let loose with other investors’ money for the first time. Or for a manager who’s left a much larger operation to go it alone.
Boutique benefits
The benefits of starting out this way are manifold. “Sub-threshold managers targeting professional investors can build up their investor base and assets under management without the extra cost of added regulations,” says David Porter, Head of the Jersey Financial Services Commission’s Policy Unit. “Then, as they grow, those additional requirements apply – focused on what is proportionate and appropriate. It’s a lifecycle.”
Indeed, if a new manager went straight to a regular fund, they’d suddenly be up against the highest risk and the strictest regulation, and the vast extra cost that comes with it. Under the EU’s AIFMD regime, for example, regulation becomes more detailed and restrictive when the levels of funds under management pass its two thresholds – €100 million and €500 million – bringing extra remuneration rules, compliance and risk control, restrictions on assets and far more complex reporting.
These boutique funds, driven by seasoned professionals but freed of the burden of extra costs, usually start by collecting and working with relatively conservative levels of investment, in order to build trust and a reputation among investors. This at a time when larger structures have found the fundraising environment testing.
Small but effective
Freedom Asset Management, set up in Guernsey in 2014, is a perfect example of those who used to work for large firms branching out on their own. “We’d worked at the likes of BlackRock and Schroders, and saw an opportunity to provide an alternative to the large asset managers,” says Sandrine Reynaud, Freedom’s CEO.
“Lots of them have been suffering from heavy-handed regulation and they have lots of cost to product – they need a scalability of billions or it’s not interesting to them. We wanted to provide niche products – we can start a fund at £10 million and are still very cost-effective.”
It’s easy to see the appeal of boutique funds for investors. They get a lot of value for their money, and a service that’s relatively bespoke to them. They may even get a shot at niche assets that a larger fund wouldn’t touch.
“Investors are now thinking harder about who they’re giving money to and why,” says Paul Wilkes, Group Partner at Collas Crill. “Many of them got spooked by the structures they’d invested in, seeing their money not performing or even stuck in zombie funds, where the fund managers couldn’t find assets. So there’s that caution around nowadays. If the people behind a boutique fund are truly experts in alternative assets that are a little different, investors will feel they’re backing these skilled individuals, not a brand.”
Islands options
There are ample reasons why these start-up funds would wish to set up in the Channel Islands – beyond their stable regimes and strong economies. “There’s also an optionality,” says Porter. “They can set up different funds – to target EU investors under AIFMD and non-EU investors under Jersey’s own fund regime.”
In terms of alternative investment funds (AIFs), Jersey had 115 alternative investment funds managers running 251 AIFs at the end of June 2016, of which around 25 per cent operated below the AIFMD threshold and so could be classed as boutique. Guernsey has similar numbers.
Then there’s the issue of future-proofing. “With onshore structures, you may be below the threshold on day one, but later you could be caught by that extra regulation and cost that investors don’t find palatable,” says Wilkes.
“Going via a Channel Islands structure puts you out of scope of that regulation – using the private placement regime it’s more future-proofed and keeps costs acceptable for the investors. A fund may start at £20 million to £40 million on day one, but that growth may come as soon as three to five years, so you need to future-proof into the medium term as well as the long term.”
The Channel Islands are also in good stead to receive the EU’s third-country passport for marketing alternative investment funds – something Wilkes thinks is “particularly important”.
The bigger picture
Beyond the regulations there are, of course, plenty of other factors that draw boutique funds to the islands. Successful fund managers will have a network of investors through which to raise the funds, and be good at managing people’s money when they get it, but they wouldn’t get far without a network of advisers to guide them.
The islands’ many top-quality service providers can assist their growth by helping them comply with the islands’ regulations, for example. Channel Island structures are recognised, and you’re only 45 minutes from London, while operating in the same familiar legal system.
“Guernsey is a well-known jurisdiction, it’s well regulated and cost-efficient,” says Reynaud, explaining Freedom’s decision to set up there. “The investors we have tend to be family offices or high-net-worth individuals, so they don’t need the large institutional products of the UK or Luxembourg.
"In Guernsey, you get all the benefits but you can do something much quicker and more bespoke. You get a product that provides the same comforts as others, and a regulator who’s very flexible and works very quickly. Within three days you can set up a new fund.”
And the picture may be about to get even better for boutiques here. Both islands have introduced, or are introducing, manager-led funds, designed for the AIFMD world, which make funds easier to regulate and therefore quicker to set up, as well as saving costs.
Streamlined offerings
The islands are also streamlining their offerings, giving greater clarity around products and authorising them more quickly, thus making it easier to set up and run funds – something a first-time manager looking to establish themselves will clearly find attractive.
“We know the speed to market is important for smaller funds, and with that in mind the government of Jersey and the JFSC launched a joint consultation this summer aimed at enhancing, simplifying and rationalising Jersey’s funds environment,” says Geoff Cook, CEO of Jersey Finance. “This included revised guidelines around Jersey’s Very Private Fund regime, which is a perfect and well-used platform for smaller boutique funds.
“We feel that, while appropriate levels of oversight and governance are still expected, the regime can offer a fast and straightforward solution for boutique fund structuring, as well as other fund types.”
Wilkes, Reynaud and Cook all believe that the Channel Islands will now see the arrival of more boutique funds. And that has to be a good thing – it means there will be an injection of entrepreneurialism, the enthusiasm that comes with helping people build businesses, and the potential for them to become significant employers in their own right.