Private equity: keeping its powder dry

With a massive amount of money in private equity waiting to be invested, the road ahead looks like a fascinating one for the Channel Islands

From a global perspective, it appears that private equity (PE) has reached an interesting juncture. From record deal activity in 2015 (US$599bn), acquisitions slowed in 2016 ($507bn) and continued to do so in 2017 ($329bn to September), according to data from Preqin. Lucrative PE exits have followed a similar trajectory, peaking in 2014 at $618bn, before steadily falling to $212bn in 2017. 

Given that there’s been continued strong fundraising, this has left the PE space with a huge amount of capital, known as ‘dry powder’, available for investment. 

Preqin data shows that private equity dry powder reached a record $918bn as of June 2017. Christopher Elvin, Head of Private Equity Products at Preqin, believes that this war chest for investments may even reach $1trn by the year-end.

Ben Honeywood, Audit Director at KPMG, agrees that 2017 has been another bumper year for PE fundraising. He cites the record $100bn Softbank Vision tech fund and the €17bn CVC Fund VII – the biggest European buyout fund – both of which were established in Jersey. 

“Fundraising is at levels not seen since before the global financial crisis, and brings the current level of capital invested into PE to around $3trn, with no immediate signs of reducing,” he says.

“However, high valuations continue to make it difficult for funds to put capital to work as quickly as they can secure it,” warns Elvin. This will inevitably put pressure on the deal market, as fund managers seek to find attractively priced assets in which to invest.

Closer to home, in terms of PE assets under management, Niamh Lalor, a Partner at offshore law firm Ogier, says: “Guernsey passed the £100bn milestone for the first time, while Jersey Finance stats show PE fund values rising by almost a third year-on-year to £59.7bn at the end of 2016.”

The sentiment is echoed by Darren Bacon, Partner at Mourant Ozannes. “Channel Islands private equity has fared very positively in the past 12 months,” he says. “According to the Guernsey Financial Services Commission’s latest statistics, the value of Guernsey investment funds has risen £28.6bn – 12 per cent – over the past year.”

The market also appears relatively healthy in terms of deal flow and exits. “Funds that have performed well are raising new money and looking to make new investments. For those investors seeking liquidity, the secondary market remains active and provides an exit from previous deals,” says Bacon.

Local rivalry

Guernsey has traditionally been stronger in PE than Jersey, with the likes of Terra Firma, BC Partners, Apax and Pantheon all using Guernsey for their funds. KPMG’s Ben Honeywood believes the reason for this is because its regulatory and legal environment has long been very welcoming to PE firms wishing to set up funds offshore. 

Still, Jersey has caught up of late, most notably because of the Softbank fund mentioned earlier – also known as ‘The Whale’ – and CVC Capital Partners’ CVC Fund VII. That said, there were also a number of high-profile large buyout funds raised in Guernsey over the past year, including Apax Fund IX ($9bn), Permira VI (€7.5bn) and Cinven VI (€7bn).

Honeywood believes Jersey is gaining momentum. “The recent high-profile large fund raises indicate the attractiveness that Jersey has enjoyed in recent years. This has been supported by the consolidation of the Jersey fund administration market, as well as investment in business property infrastructure, which has modernised and added a new energy to the market and made Jersey very attractive to entrants and start-ups.”

Traditionally, big deals have been structured through the Channel Islands for tax benefits, but this is changing, says Paul Wilkes, Group Partner at Collas Crill. “With the increasing competition among all fund domiciles – both onshore and offshore – the tax benefits are becoming less obvious and the real drive for structuring choice is access to markets at a reasonable cost, credible yet flexible regulation, and expertise of the services providers in the particular asset classes. 

“Given these factors, there’s been a particular trend in our practice of funds investing in UK real estate, or real estate-linked, assets and traditional private equity funds targeting management buyout transactions. The latter tends to be across a wide spectrum of markets – from complex fintech and algorithmic innovations to shaving companies.”

Wilkes also believes the PE expertise available in the Channel Islands leaves them well placed to take advantage of investor appetite for investment into US tech companies via PE funds. “This has led to an increased effort from the islands to be in key US cities to promote their funds regimes, which meet the current demands of the discerning investor,” he confirms.

“Separately, South Africa remains a large funds market that actively acknowledges the benefits of offshore investment by its citizens. This has historically been a great source of business for the Channel Islands – a number of South Africa investment firms have a presence here. Now is the right time to reinvigorate that sector and educate the next generation of fund managers as to the perfect partnership the islands can provide as they grow their businesses.”

Future prospects 

Adam Moorshead, Managing Director - Guernsey for JTC Group, which provides fund, corporate and private wealth services to institutional and private clients, is confident about the Channel Islands’ prospects. “Based on the growth both islands have seen through the past 18 months, the prospect for next year remains strong, particularly with large technology investments now taking place. We anticipate deal volumes are on a path of continued growth.”

He also believes that with geo-political uncertainty likely to create significant volatility in traditional markets, private equity will become even more attractive to investors.

Ben Honeywood concurs. “In a recent Preqin survey of managers across the PE market, among existing investors, 61 per cent indicated that they would invest more in 2018 than 2017, with only six per cent indicating they would invest less. What’s more, the rise of secondaries funds in recent years has added further liquidity to the market.”

Further ahead, he is aware of risks but believes the Channel Islands can safely navigate them. “As long as the Channel Islands stay off any EU blacklist, I don’t expect any fundamental changes. 

“Clearly, there will be areas of uncertainty from Brexit, but the Channel Islands are well placed to navigate through the uncertainties that exist – the islands will be better placed, with well-thought-out collaboration when fending off onshore entrants to the PE market.”

Ogier’s Niamh Lalor is confident the Channel Islands, along with Luxembourg, will continue to benefit from Brexit uncertainty. “The Channel Islands have also benefited from effective market access in Europe, particularly following the European Security and Markets Authority’s view that there are no significant obstacles to granting the passport to the Channel Islands once it’s opened up to third countries.”

All of this points to the Channel Islands looking set to maintain their position as a leading base for private equity.