The future of fund financing

Written by: David Burrows Posted: 16/11/2017

BL53_WordArtAs the funds industries in the Channel Islands look to build on their strengths, will they explore new avenues when it comes to fundraising?

The Channel Islands have long been associated with successful funds industries. Both Guernsey and Jersey have considerable strength in alternative asset funds such as private equity, real estate and infrastructure.

Historically, the cash to invest in the funds created in the islands has been stumped up from a wide group of sources. This includes pension funds; funds of funds; sovereign wealth funds; government agencies; supra-national bodies and high-net-worth individuals largely based in the UK, Europe and US.

However, it’s claimed in some quarters that these traditional sources of investment into alternative funds have run dry, and that financing for funds is increasingly coming from other investors. If that’s the case, then who are these investors and what role do the Channel Islands play in meeting their needs?

Andrew Weaver, Partner at Appleby in Jersey, has certainly witnessed a shift in investor interest. “We’ve seen an increase in the more private investment structures, particularly private wealth and family office investment structures, and ‘club deals’ investing in a single asset, primarily real estate. We’re also seeing a rise in co-investment structures, investing alongside fund vehicles, and feeder or pooling structures for investors who don’t want to invest directly in overseas funds.”

Frances Watson, Partner at law firm Mourant Ozannes, agrees that greater activity has come from a new generation of private wealth and family office investors. Yet while interest from these quarters has increased, some institutional investors are scaling back. 

She cites regulation such as Solvency II – which relates to the amount of capital EU insurance companies must hold to reduce the risk of insolvency – as playing a part in this subtle shift. “If an insurer is investing in alternative asset classes such as private equity, it needs to focus on what it sets aside for the greater margin of risk,” she explains. “Institutions have had to think about how they allocate their assets.” 

The new versus the old

It’s worth examining whether the more traditional sources of investment actually are drying up, or if that cash is simply just tied up. Or is this new cash in addition to old money? Kate Storey, Partner at Appleby in Guernsey, suggests it’s largely the latter.

“Old money, however, isn’t perhaps being spread quite as widely as it was,” she says. “Professional investors and pension funds are reducing the number of fund sponsors they’re exposed to, and increasing their exposure to those sponsors, so new sponsors must cast their net widely.”

Mike Capraro, Head of Business Development Fund Services at Zedra in Jersey, disputes claims that sovereign wealth funds are a significant new source of capital. “Apart from a few isolated reports of investment, this doesn’t appear to be a major trend for new money. These funds are sufficiently substantial and well-resourced to pursue their own direct investments rather than deploy money through third parties, unless they offer unique expertise.” 

So if there is a subtle change in who’s investing, where are they investing from? Is there more interest in the Channel Islands from investors in different geographies? Weaver believes the answer is yes. 

“We have seen an increase in Nordic promoters choosing the Channel Islands for their fund vehicle, as well as interest from India and China. There’s been an increase in investors from North America, and Middle Eastern sponsors using Channel Islands funds structures have broadened the geographies from which they raise money.”

This geographic shift has been spotted by other practitioners. “The Channel Islands are seeing a lot of wealth coming from outside Europe. Sophisticated investors worldwide are getting to know about them,” says Watson. 

Building relationships

She goes on to argue that this shift hasn’t happened before because, until recently, interest from the Far East and Middle East was minimal and it’s taken time to build these relationships. “The Channel Islands are much more sophisticated in marketing now. And I think greater interest in these jurisdictions from foreign investors is the fruition of an awful lot of hard work.” 

While countries like South Africa have long since had good links with the Channel Islands, for other foreign countries it’s been a slower burn. 

The next question is: do these ‘new’ investors have interests in specific asset classes? Kate Storey has noticed more of a focus on real estate and private equity. 

“In Guernsey, there’s also a focus on investment in insurance-linked securities. Growth areas also include financial services, fintech and Islamic finance.”

It could be argued that private clients want to invest in things they understand, which would explain the increased interest in real estate and private equity. PE into automotive, airlines, biomedical and tech, for instance, is something that investors feel they have some knowledge about. 

With property, Brexit has certainly helped, in the short-term at least – as sterling declined, so interest in the London property market increased. 

Watson highlights a desire for income-generating assets – property being one. “The weakening of sterling has certainly been good for property investors. We continue to see opportunities for investors outside of Europe,” she says.

Andrew Weaver notes that investor demand is noticeably driving a shift in the type of fundraising the islands are seeing. “Undoubtedly private wealth and family offices are driving a shift to more private structures compared with plain vanilla private equity/real estate funds. Fund structures have definitely stepped into the non-bank lending space.”  

However, he adds: “Some elements of this are restricted due to the limited availability of preferential tax treaties, although there are structuring options available to lessen the impact here.”

Impact of Brexit

This brings us to Brexit and whether the Channel Islands are well placed, irrespective of how the UK leaves the EU, or whether it poses the risk that investors will look for funds elsewhere. 

Storey is optimistic. “This new market is right in the centre of the Channel Islands’ expertise, with their decades of pedigree in servicing the private wealth sector,” she says. “The major advantages of establishing investment structures in the Channel Islands include the speed of set-up, and the physical proximity of the Channel Islands to the UK and Europe whilst being outside of the EU. Also, the stability and certainty their regulatory regimes offer whilst the UK goes through Brexit.

“Optionality and flexibility are a significant feature of the more recent regulatory developments in the Channel Islands – a highly sophisticated approach to the development of regulation is aimed at ‘future-proofing’.”

This positive view of the islands is largely echoed by Frances Watson. “The Channel Islands are regarded as a highly respected jurisdiction globally. As for Brexit, there will be advantages and disadvantages – things ebb and flow. The weakening of sterling linked to it has evidently thrown up good short-term opportunities for some investors.”  

Mike Capraro believes that fund promoters have responded to Brexit either by adopting a ‘wait-and-see’ approach or by selecting the path of least resistance and setting up their funds in Luxembourg or Dublin. 

“Luxembourg has apparently been a huge beneficiary of Brexit. EU managers with a history in Jersey have continued to use the jurisdiction for follow-on funds, but others with no history in Jersey have defaulted to EU jurisdictions. Tax and legal advisers to those managers also appear to favour Luxembourg or Dublin.”

Despite the migration towards other jurisdictions, Capraro is optimistic that the Channel Islands will remain attractive to investors. He predicts that Jersey will continue to develop links with markets further afield, such as the growth economies of Africa, the Middle and Far East, and South America – which bring their own challenges, mainly in compliance and due diligence.

He concludes: “Jersey has in the past always found a way to reinvent and reposition itself in changing circumstances through its strong and capable political leadership and through industry innovation. There’s no reason to believe that it will not continue to prevail.” 

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