The power of private investment

Demand for private investment funds is expected to double over the next two years as more investors are attracted to their flexibility, cost-effectiveness and the chance to chase greater returns in volatile times

Guernsey and Jersey private funds are flying. According to figures from Jersey Finance, the number of registered Jersey Private Funds (JPFs) – marketed to no more than 50 qualified professional investors and covering the whole range of asset classes (see panel) – jumped 70% between March 2020 and March 2022. 

Mark Cleary, Director at fund services provider Zedra, believes this is only the tip of the iceberg, forecasting a 100% jump in the number of JPFs by 2024. 

“Private funds have been a real success story to date, and they will continue to be,” he says. “They are at the 500 mark now in Jersey, but in a couple of years that number could feasibly double.”

Guernsey, which established a Private Investment Fund (PIF) regime in 2016 and restructured it last year to attract more investors, has also seen a rise in interest. 

According to Guernsey Finance, PIFs have “increased in popularity each year and at the end of last year [2021] more than £14bn was invested in Guernsey PIFs”. 

While both islands are demonstrating impressive numbers, Cleary says the “velocity off the launchpad” has been starker in Jersey than Guernsey. 

That, he suggests, could be the result of quirks such as slightly more complex regulation for PIFs in Guernsey – there’s a hard requirement to audit private investment funds annually, which is not a requirement in Jersey.

Regardless, it is clear that both islands, benefiting from being well regulated jurisdictions with broad management and administration experience, have tapped into burgeoning demand for their private funds products. 

The need for speed

So, what other factors are driving the success? Dylan Latimer, Partner at Bedell Cristin in Guernsey, highlights cost, flexibility and one-day registration as strong PIF advantages, as well as the relatively lighter regulatory touch applied to them.

Guernsey PIFs can be open- or closed-ended and established as a company, partnership or unit trust. 

“The launch of PIFs in 2016 was a response to investors seeking more flexibility than a typical open-ended or closed-ended fund,” he says. “Not having to prepare a prospectus means you can get the fund to market even more quickly. 

“Now, with the new PIF rules introduced in 2021, the PIF product has become even more flexible and given PIFs universal appeal.

"For Route Two and Route Three PIFs, no longer having the requirement of a Guernsey-based fund manager reduces cost and further increases their attractiveness. The manager can be based anywhere, such as Zurich or London.”

Indeed, the one-day registration process in Guernsey compares favourably with the several weeks for authorised funds and three-day approval process for Guernsey-registered funds.

Cleary also highlights the benefits of speed and flexibility. “In more traditional collective investment funds, to become authorised and regulated through either the Jersey or Guernsey regulators, the manager and sponsor typically need to undergo an application process with the regulator. That can be a long process,” he says. 

“With private funds, the application process has been considerably shortened. That is a real incentive for those wanting to come to the islands and launch a fund.”

The general rise in the cost of complying with the ever-increasing regulatory burden for funds may also have focused fund managers’ minds, argues Sam Sturrock, Group Partner and Head of Funds in Collas Crill’s corporate, finance and funds team in Jersey.

“If a fund manager doesn’t actually need a wide spread of investors geographically or a high volume of investors, then JPFs can be far more cost-effective than a public, more regulated fund. 

“The current environment has really made managers reflect on whether they need to pay a higher cost for their funds to be all things to all people, or if they can be quite surgical about the complexity of their funds, the location of investors and where they are marketed,” he says.

Seeking outperformance

Cleary believes that private investors who are seeking alternative sources of returns in difficult markets have also helped the surge in demand. 

“There has been a general reduction in private assets going public through an IPO, and that means the universe of investible assets is smaller than it has been historically. Investors also have more dry powder, which has continued to build up during the pandemic,” he states. 

“Investors from all over the globe are looking for newer sources of returns in private markets. Private funds can provide the structure and appropriate regulation to facilitate this.”

PIFs have traditionally proved popular with venture capital and private equity fund managers, according to Guernsey Finance, because they frequently have smaller numbers of large, sophisticated and specialist investors. 

They can also be attractive to first-time fund managers who are moving from an asset management or corporate finance career and are eager to set up a new fund of their own.  

“Perhaps someone outside the fund space has a good idea and is keen to monetise it. Maybe they have an informational advantage on some type of asset that they believe could attract other investors,” Cleary says. “These could be friends, family or through institutions.”

“We’ve seen many different uses of private funds and their strategies are not at all homogenous,” Cleary adds. 

“For example, we’ve worked with managers who raise money from institutional investors and invest in companies with a view to transforming their business and operations through genuine ESG strategies and services. 

“The core belief again is that investors can earn real outperformance through innovative and more focused strategies.”

Latimer is also seeing first-timer interest. “Before PIFs, first-time managers who didn’t have sufficient scale were at risk of being squeezed out of the market.

Now, they are building up track records with investors using PIFs, which often lend themselves to investing in niche or innovative trends including ESG, technology or even cannabis. 

“They can take better advantage of these opportunities by getting to market quickly,” says Latimer. “But we are also seeing established managers who are running traditional funds now looking at PIF options.”

Latimer also has high hopes for family office demand via the new Route Three scheme. “As family offices become increasingly sophisticated, they are observing that PIFs via Route Three can be run in parallel with, or as an alternative to, family trusts. They are an effective means of deploying capital,” he says. 

Bedell Cristin recently advised the Stonewood Wealth Management group on converting an existing PIF from Route One to Route Three by simultaneous deregistration and registration.

The PIF is still managed by Stonewood, with the conversion allowing the management role to be transferred to its UK-based manager, Stonewood Wealth Management.

In addition, according to Guernsey fiduciary firm HFL, PIFs can enhance corporate governance and wealth management. The business recently set up a PIF as a long-term succession planning vehicle.

According to the firm: “Where family trusts are investing in a PIF, estate planning using a centralised regulated vehicle that will drive growth is a smart approach.”

European bridge

Private funds can also be marketed in an easy and cost-effective way to eligible investors in the UK and the European Economic Area through national private placement regimes.

“We are well placed to be a bridge between the UK and the key European financial hubs post-Brexit for alternative investment funds – particularly given the ongoing uncertainty in relation to financial services between the UK and EU,” says Sturrock. 

“We can also expect to see more interest in the relative stability of Jersey and Guernsey compared with other jurisdictions impacted by geopolitics or dramatic regulatory change. That may mean more non-EU-facing private funds being established here with a nexus to US and developing markets.”

Such growth, however, could prove challenging to the islands, warns Cleary. “Jersey and Guernsey are attractive because we are best in class. But the availability of fund management and administration talent on the islands could limit our ability to meet demand,” he says. “We need to be mindful of this as they develop.”

Nevertheless, Latimer is confident that any hurdles can be overcome, given the boost that private funds can continue to give the islands.
 
“The Route Two PIF is not aimed at retail investors but rather qualifying private investors who are either professional investors, experienced investors or knowledgeable employees,” he says. “They will need to understand the risks involved and be able to bear the consequences of investment in the PIF. 

“The continued success of the PIF will be helped by the fact that the Guernsey Financial Services Commission has listened to industry bodies and professionals about how PIFs can evolve and improve.” 

Latimer concludes: “The three routes emerged from collaboration between the regulator and the funds industry. Private funds will go from strength to strength. It is where the growth lies.”