The changing face of private capital

Written by: Dominic Dudley Posted: 20/12/2019

PrivateCapital illoJersey’s and Guernsey’s capacity for innovation and flexibility – as demonstrated through their private fund regimes – is proving attractive to private investors searching for new ways to put their capital to work

Last year, the world’s millionaires and billionaires suffered a rare setback. After seven consecutive years of growth, the assets of the world’s high-net-worth individuals (HNWIs) – those with at least $1m in investible assets – fell by around $2trn, according to consultancy Cap Gemini.

The culprits were poorly performing equity markets and slower growth in places such as China – two areas that, in more buoyant times, had been responsible for driving up wealth.

It may prove to be a blip rather than the start of a trend, though. Boston Consulting Group, while acknowledging last year’s poor performance, nonetheless says wealth worldwide is likely to grow by around 5.7% a year between 2018 and 2023.

Changes in behaviour

While they wait for the recovery to kick in, the tricky market conditions are prompting changes in behaviour from the world’s wealthy. Professional services firms say clients have been edging away from volatile equities and developing a greater appetite for assets offering more reliable returns. 

“There has been a notable move away from equity markets to a range of other asset classes, including private equity, real estate and debt,” says Kate Storey, a Partner in the Guernsey office of law firm Walkers.

It is a trend that may be gaining momentum, particularly among those concerned about the long-term outlook for their family, where preserving capital may be more important than trying to grow it.

Investors are also moving beyond standard funds. Emily Haithwaite, a Partner at Ogier, says there is a growing trend towards investing directly rather than via pooled vehicles managed by third-party managers. “We have established numerous proprietary investment structures for wealthy families, as well as joint ventures and co-investment structures,” she says.

Such trends are global in nature and in the Channel Islands they are leading to a growing number of family offices being set up. In part, this is down to the political stability the islands offer, but it is also linked to the innovative fund structures that are available. 

Gareth Morgan, a Senior Associate in the Guernsey office of Collas Crill, says money is being drawn in from around the world, with “a noted increase in interest from private HNWIs and family offices in South Africa, the Middle East and Asia”.

Private fund regimes

One particular attraction is the light-touch private fund regimes developed by Jersey and Guernsey over the past few years. Although there are some technical differences between the Jersey Private Fund (JPF) and its Guernsey equivalent, the Private Investment Fund (PIF), they are broadly similar and both have proved appealing to private investors and wealth managers. 

Among other things, they are quick to set up and relatively cheap to maintain. It takes just 24 hours to gain authorisation in Guernsey for a PIF and 48 hours in Jersey for a JPF. It costs less than £6,000 to apply for a PIF and just over £5,000 in annual fees (which include annual fees for the manager), while a JPF application will set you back around £1,000, with £500 in annual fees.

“The PIF and JPF regimes were introduced to simplify each jurisdiction’s funds landscape and provide a single, lightly regulated, vehicle,” explains David Walters, an Associate in Collas Crill’s Jersey office. “The speed and ease of set-up have also helped make the PIF and JPF extremely popular with fund managers due to a short time to market, light-touch regulation and significant flexibility.”

Guernsey was the first to move, setting up its regime in 2016. The following year, in its first full year of operation, it received 13 applications. That more than doubled to 27 in 2018, according to the Guernsey Financial Services Commission, accounting for 50% of new registered funds that year.

In Jersey, the JPF has proved even more popular since it was launched in 2017. By the end of 2018, some 202 JPFs had been formed, according to the Jersey Financial Services Commission. Of those, 128 were registered in 2018, or 59% of all funds approved that year. By June this year, the number had increased to 257.

“JPFs are very popular vehicles for the deployment of private capital because they are quick and cost-effective to establish and authorise, no formal offer document is required and there are clear parameters regarding family and employee investment vehicles,” says Haithwaite. “It is also possible to create bespoke structures for professional and sophisticated investors.”

Gap in the market

The popularity of the new fund regimes suggests the islands have identified a gap in the market. “The introduction of these two regimes is a classic example of the ability of the Channel Islands, as self-governing bodies, to react to the interests of the market and develop products to suit,” says Walters.

Tim Morgan, Chairman of the Jersey Funds Association, adds that the development of the JPF builds on the Channel Islands’ long experience – the accessibility of the fund has been a critical element in its success. 

“It’s a very clear regime, but it’s also flexible enough to cater for different types of uses,” he says. “It can apply to closed or open-ended structures. It can apply to different legal forms, whether they’re corporates, partnerships or unit trusts, and it can even apply to structures domiciled in other jurisdictions, provided there is a Jersey manager or other nexus. 

“It’s certainly bringing in new money and clients. Getting the balance between a strong regulatory and governance regime on the one hand and providing the most competitive product on the other is something we’re good at getting right.”

All this has been happening alongside other trends in private capital, driven in part by greater interest in environmental, social and governance (ESG) issues among investors. According to UBS, more than a third of family offices around the world are now engaged in sustainable investments, while a quarter are involved in impact investments, according to its latest Global Family Office Report.

That is part of a broader pattern in which wealthy individuals are starting to think about more than just the scale of their financial returns. “Areas that matter increasingly to new generations are philanthropy, sustainable investing and impact funds,” says Haithwaite.

Morgan agrees. “We’re seeing shifts in investment attitudes as to how private wealth is deployed. As ESG becomes more mainstream, many service providers we work with are focusing on delivering investment returns in a demonstrably sustainable and socially responsible way.”

Other new areas of investor interest cropping up include cryptocurrencies and fintech. Such changing demands offer further opportunities for the financial sector in the Channel Islands to develop in the years ahead, although it does also require adaptation by firms serving the HNWI sector (see boxout).

The future

“We see private wealth forming a greater part of the Guernsey and Jersey markets in the next few years,” says Walters. “Political and financial instability in certain other countries has led to a migration of private wealth to jurisdictions like Guernsey and Jersey, and we expect this to continue. As global trends shape investment moods, we expect to see an increase both in ESG investment and more structured wealth management offerings.”

In the meantime, the new funds regimes should also continue to prove popular. As Carey Olsen Partner Chris Griffin says: “The approval time and the ongoing regulatory costs of the PIF and JPF are minimal. I think we’ll continue to see them being used widely. They have been hugely popular and I see no reason why that should change in the short to medium term.” 

SKILLING UP

The changing demands of wealthy investors is having a clear impact on professional services firms, which are having to expand the range of services they offer. In the Channel Islands, that is leading to the creation of new ways of working and the development of a broader base of skills.
   Firms now find it makes sense to bring together people from different areas of their business who perhaps weren’t used to working so closely together in the past, such as the private client, investment funds, insurance and dispute resolution teams. 
   “The amount of capital in private hands has grown significantly and, with it, the demands and sophistication of investors deploying that capital,” says Kate Storey, a Partner at Walkers. “Service providers need to have expertise to meet those expectations. There’s more need than ever for us to work across traditional legal disciplines to deliver the services that clients demand.”
   As well as adapting the in-house structures, firms are collaborating more closely with third-party partners to provide clients with what they need in as seamless a way as possible. 
   “Traditional decision-makers in the private wealth space don’t necessarily have the specialist expertise to conduct proper analysis on potential investments in tech, fine art and other esoteric asset classes,” says Alexa Saunders, a Partner at Carey Olsen. 
   “One of the things we have seen spring up in the private wealth space is lots of asset-specific consultants and advisers who are able to give very bespoke advice to trustees and private wealth managers thinking of investing in these asset classes.”
   In some cases, companies are also having to rethink what sort of business opportunities they want to target, particularly given the fact that some of the new private investment structures can involve relatively low levels of capital at first. 
  “More administrators and custodians are reviewing their business and fee models to accommodate this burgeoning business source,” says Collas Crill’s Gareth Morgan. “Administrators who previously would not consider a fund starting with less than £100m in investment are looking at proposed structures of £20m to £50m to ensure they capture that part of the market.”

 


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