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Service Providers
By Michael Johnson, Chair, Jersey Funds Association
As the global disruption of a pandemic continues to fade in the rear view mirror, new challenges – and opportunities - have come to the fore for Jersey’s funds industry.
Regulatory, economic and geopolitical change are now staples of the environment we operate in, but the good news is that Jersey's funds industry has been able to adapt to such a fast-evolving environment.
Jersey's forward-looking approach, commitment to first class service and focus on creating an ideal ecosystem for alternative investments have enabled its funds sector to thrive over recent years – but increasingly it is the jurisdiction’s ability to be agile and innovate in the face of change that is shaping our future course.
Buoyant
The past year has been another successful and buoyant one for our funds industry.
Figures in early 2023 indicate that the total net asset value of funds under administration in Jersey stood at a record high of more than half a trillion pounds (£523bn), with Jersey private funds continuing to increase year-on-year.
In addition, we are seeing an ever-increasing community of managers fully resident in the island across private equity, hedge fund, venture capital, debt and real estate. These managers provide depth and diversity to Jersey's industry, at a time when substance remains high on the agenda.
Jersey’s expanding and enhanced product range is being warmly received by global managers and investors too.
The Jersey Private Fund regime (JPF) continues to assert its appeal as a fast, cost effective fund vehicle which is ideally suited to a small number of sophisticated institutional investors. More than 600 JPFs have now been established in total – meaning that their number has now overtaken Collective Investment Funds (CIFs) in Jersey for the first time.
Amendments to Jersey’s Limited Partnership law and the long-awaited introduction of the Limited Liability Company (LLC) structure in early 2023 have also bolstered Jersey's options for overseas managers, particularly those in the US.
Jersey’s platform as a gateway to EU investor capital through private placement remains strong too.
With this year marking ten years since AIFMD was implemented across Europe, more than 400 funds and 200 non-EU managers are using the tried and tested National Private Placement Regime (NPPR) through Jersey to access Europe– a figure that has grown by around 60% in five years.
It’s clear that global managers continue to respond positively to Jersey’s private placement option, which holds particular appeal for those who do not require a full onshore EU presence – which is around 97% of managers, according to the EU’s own figures.
As investors continue to navigate a challenging landscape, Jersey’s funds sector is, overall, in a good place, with global trends supporting the future outlook of our industry as investors continue to focus on the opportunities presented through alternatives– private equity, venture capital and real assets - areas where Jersey has particular expertise and experience.
Challenge
It is, however, prudent that Jersey remains on the front foot, alert to changes in the landscape and ready to respond with agility to market shifts.
At a macro level, for instance, Jersey’s weighting towards alternatives could turn out to be our greatest challenge should the industry adopt a cautious outlook as we cross the rubicon to a higher interest rate environment.
In early 2023, for instance, two-year UK Gilts stood at 5.5% and are expected to surpass 6% in the next year. That’s the benchmark for the risk-free rate – the key hurdle for allocators when determining allocations to portfolios.
Not only that but allocators are also contending with the denominator effect, further impeding their sentiment and ability to continue to allocate so freely to closed-ended alternatives. We cannot ignore some significant sectors that are likely to be impacted – real estate, a key area for Jersey, being one.
In this new era, embracing innovation, being agile and looking at our product range to see how we can introduce a wider choice of products and services will be vital. It’s why this year the JFA has established an innovation sub-committee to look at a range of ideas – such as developing the foundations for holding assets using digital ledgers.
The tokenisation of real assets looks set to have a transformational impact on the cross-border funds industry in the coming years. We are already well engaged on that topic, but it is vital we maintain momentum in an area that is witnessing real acceleration.
We are also well positioned in the rapidly growing arena of ESG investing. Jersey has a clear sustainable finance vision and is making good headway in implementing on that strategy – but as international regulation evolves, it’s vital we keep up with the pace of change.
The MONEYVAL assessment in 2023, meanwhile, has also underlined the importance of asserting our industry’s strength in combatting financial crime and working collectively as an industry and with the government to ensure our national approach is fully aligned with our industry approach.
Jersey's reputational advantage has long been at the heart of our success and as an industry we continue to be alive to the importance of being able to demonstrate the highest standards of anti-money laundering, compliance and governance.
In addition, if we are to maintain our growth trajectory, we need to be able to draw on a sustainable workforce. Experience and expertise have long been Jersey’s hallmarks, and a commitment to sourcing the best talent to boost productivity – in tandem with digital adoption - will be critical in the years ahead.
With that in mind, the JFA remains proactive in attracting both young and diverse talent to the industry and enabling ‘career switchers’ an opportunity to enter the sector.
As we look forward, the ability of our industry to be agile and embrace innovation, balanced against a commitment to remaining a stable and certain domicile, will continue to be at the core of Jersey’s proposition. If we can achieve that balance, then our funds industry can approach the future with confidence.
You can read the full Jersey: First for Finance publication as an e-reader here.
JFA Chair Michael Johnson provides an analysis of the evolution and current state of Jersey's funds sector for the 2023 edition of annual coffee table publication First for Finance...
Jersey Finance launches latest white paper in a series undertaken by IFI Global
Stability, expertise and flexibility have been highlighted as key components of the international fund domicile of the future in a new report published this month by IFI Global and supported by Jersey Finance.
‘The Evolution of the International Fund Jurisdictions’ report forms the latest in a series undertaken by IFI Global with Jersey Finance, with previous reports published over the past two years having focused on fund domiciliation, structuring, and fund governance.
This new report explores the origins of the fund domiciliation industry and how a number of locations around the world with no previous connection to funds, have ended up playing fundamental roles at the heart of the global funds landscape, servicing more than US$16 trillion of fund assets.
The report also explores how those centres, including Jersey, BVI, Bermuda, Cayman, Guernsey, Ireland and Luxembourg, have since evolved and what their past experiences tell us about their future direction. Among the report’s key areas of focus are:
· Key dates, from the establishment of the first expatriate banking operation in Jersey in the 1960s to EU alternative fund regulation in 2018
· The origins of the international funds industry in the 1980s, including the first investment funds offered to expats and the largely Anglo-Saxon asset management industry of the 1990s
· The dawn of alternatives, including the introduction of regulatory measures, the shift towards institutional investors, the heightened focus on governance and substance in the wake of the global financial crisis, and the impact of Brexit
· The future, including the growth of sustainable finance and crypto funds and the importance of first mover advantage when it comes to new investment categories
Commenting on the findings, Elliot Refson, Head of Funds at Jersey Finance, said:
“Given the trends over the last decade or more highlighted in this paper, there’s no doubt that the fund jurisdictions that will be most successful in the future will be those that are stable with strong expertise and infrastructure, and robust but flexible regulatory frameworks. This has really been Jersey’s mantra for the past twenty years, and we’ve seen the fruits of that in the growth of Jersey in recent years as a trusted funds domicile.
“There will undoubtedly be more changes over the coming decades and our focus will remain on staying true to our values and on retaining our position as an integral part of the global fund landscape.”
Simon Osborn, CEO of IFI Global and author of the report, added:
“Fund domiciliation patterns have always been subject to change and there is no reason to believe this will not continue to be the case in future. To understand how the asset management business might develop in the future, it is a good idea to know something about how the international fund jurisdictions, on which this industry depends, are evolving.
“This White Paper touches upon how a few unlikely locations, dotted around the world, got into this business, focuses on what is happening in international fund domiciliation today and explores what may well happen to international fund jurisdictions over the next few years.”
The new research can be viewed and downloaded here.
In our latest blog, JFA Committee Member and PwC’s Asset Management Leader, Mike Byrne, looks at how Jersey’s alternatives sector can be an engine of growth and a force for good in a rapidly changing world…
Over the past 40 years, the private markets (or alternatives) sector has grown to become a bedrock of high value employment and prosperity in Jersey – the sector now accounts for nearly 90% of funds under administration in the jurisdiction.
As assets under management (AuM) in the private markets sector continue their rapid expansion worldwide, they’re set to play a key role in driving recovery and creating more sustainable and socially inclusive economies both here and across the globe.
Mainstream
The private markets designation brings together private capital (private equity and credit) and real assets (infrastructure and real estate), and this has real relevance for Jersey which has a formidable reputation in private equity and real estate in particular.
As investors go in search of returns that other asset classes may struggle to deliver, private markets are one of the fastest growing areas of asset management globally. It’s a sector that is now by no means niche – it’s fast becoming mainstream.
Reflecting that, earlier this year, PwC published Prime time for private markets: The new value creation playbook, an in-depth exploration of how the sector is evolving and how to capitalise on the potential. According to that report, it is anticipated that private markets AuM will increase by $4.9 trillion to reach $14.4 trillion by 2025 - around 10% of overall AuM worldwide.
Further, in the JFA’s own survey of its members at the end of last year, respondents painted a clear picture of an industry that is looking to grow and diversify, driven by the private markets. In an industry with alternatives at its core, 69% of respondents said they were confident that their business would grow over the next five years, whilst both short and medium term strategic priorities for Jersey’s funds industry remained focused on private equity, real estate, venture capital and debt funds, according to respondents.
Increasingly challenging
As the PwC report highlights, however, this is an increasingly challenging market in which the prizes will be hard won.
· In search of return: with entry multiples so high and economies still fragile, traditional value levers such as financial engineering and cost reduction may no longer be enough to deliver target returns. Forward-looking private markets managers are therefore broadening their value creation lens in areas ranging from strategic repositioning and top-line growth to longer hold and ‘permanent capital’ models.
· Competing in a concentrated market: Institutional investors’ growing demand for multi-asset mandates is making it difficult for smaller, single-asset-focused managers to compete with big, diversified rivals. There’s still room for specialised players with the right capabilities. The firms that are most vulnerable are those that have neither scale nor specialisation. They risk being squeezed out of the picture.
· Keeping pace with changing stakeholder expectations: the other, and in many ways most far-reaching, challenge is the shift in stakeholder attitudes. As environmental, social and governance(ESG) priorities in areas such as health, sustainability and social inclusion come to the fore, ESG performance has become as important as financial returns.
This isn’t just altruism. As pension and sovereign wealth funds’ private markets allocations increase, reflecting the ‘people’s priorities’ will be ever more important in securing large mandates and sustaining scale and growth. Embracing ESG would help private markets managers to reframe public perceptions, cultivate closer affinity with investors and generate new forms of value. Investment opportunities include helping portfolio companies to move towards net zero production. Private markets managers could also help to bridge the funding gap for small and innovative growth businesses and boost infrastructure investment in areas ranging from healthcare to digital communications.
With government coffers drained by the COVID-19 pandemic, the record levels of dry powder at private markets managers’ disposal could make them a vital contributor to recovery and regeneration – a Marshall Plan for the 21st Century. This would need to be weighed against the increased public scrutiny that would come from a more prominent role in socially-critical areas such as small business finance and infrastructure development.
Opportunity
Jersey’s specialist expertise, record of innovation and supportive regulatory environment puts it in a strong position to take advantage of private markets expansion. But just as the sector as a whole must adjust to a changing world, firms in Jersey are working hard on sustaining relevance and where they can take the lead:
· Picking their spot: the most crucial decision is whether to be a scale or niche specialist player. Firms in Jersey are carefully considering what it is exactly that might make business want to come here, and how they can build on their standout capabilities.
· Challenging assumptions: Further questions centre on how to address changing investor demands. The ever-increasing risk of being called out for ‘greenwashing’ is a clear case in point. As a result, governance – the G in ESG – is rightly at the centre of the agenda. Firms in Jersey are deeply aware of the principal areas needing to be addressed, including gauging what investors really want and how to stay ahead of the game – the goalposts are moving all the time.
· Nurturing talent: Firms are committed to addressing the need to deepen skills and talent, including creating more diverse boards and stepping up the recruitment and upskilling of women.
The evolution and expansion of private markets offer the win-win of high value economic growth locally, and an opportunity to help address pressing social and environmental priorities globally.
With so much at stake, Jersey’s funds sector is focused on tracking how investor demands are changing, ensuring it can keep pace, and articulating what it can offer that other financial centres can’t.
Jersey Finance’s chief executive explains how offshore jurisdictions are evolving to meet private equity’s needs, why Jersey’s relationship with the EU is important for its future and what measures the island has in place to address tax concerns.
This Q&A was first published in Real Deals on 3 November 2016.
Jersey Finance’s chief executive explains how offshore jurisdictions are evolving to meet private equity’s needs, why Jersey’s relationship with the EU is important for its future and what measures the island has in place to address tax concerns.
The private equity industry has grown up a huge amount over the last ten years. How has that changed what managers expect, and how has Jersey evolved to meet these needs?
GC: The industry is more sophisticated and more international. Managers want to domicile their funds in jurisdictions that can service their needs effectively and serve as a global platform for raising and investing capital around the world.
We have taken a number steps in response to these shifts. We are building more substance in Jersey and the ecosystem of advisers and services has grown strongly. We have the infrastructure and wherewithal in the Island to guide managers through things like base erosion and profit shifting (BEPS) and ESMA (European Securities and Markets Authority) regulations. This is underscored by the growth in employment in financial services in Jersey, which is nearing an all-time high. The industry added more than 800 new jobs in 2015 and 2014, net of any reduction. This helps fund managers because they can demonstrate that there is genuine substance to their activities in Jersey.
Since 2008 we have also grown internationally and pushed out into Hong Kong, Dubai and Mumbai. We are visiting these cities regularly and there has been an increase in the number of private equity groups using Jersey as a base to raise money from, and invest in, emerging markets.
Following on from that, what does the future hold for offshore financial centres following the release of the Panama Papers and the focus that governments and the OECD are placing on cracking down on tax evasion and avoidance?
GC: The Panama Papers added to the global public pressure for all jurisdictions to improve their regulatory systems, but it was a process that was already underway, and which Jersey had been engaged in for a long time.
A seminal point in this debate was 1998, when the sanctions for tax evasion changed from civil to criminal. The consequences for evasion are serious and can see a result in a prison sentence of up to 15 years. The deterrents have become significantly stronger.
Jersey took a big step in 2002 when it reached an agreement with the OECD to exchange information on tax matters. Jersey is also compliant with the Foreign Account Tax Compliance Act (FATCA) in the US, has signed up an Inter-Governmental Agreement (IGA) with the UK and was an early adopter of the OECD’s Common Reporting Standard (CRS).
What this means is that Jersey financial institutions have to send information held on their clients to Jersey authorities, who share this with the relevant revenue authorities around the world. Transparency is automatic.
A related issue is the question of beneficial ownership of companies registered offshore. How has Jersey addressed this issue?
GC: The Panama Papers have certainly magnified these issues and questioned whether offshore centers know who they are doing business with. Jersey has a longstanding central register of beneficial ownership information and is experienced in collecting, verifying and holding beneficial ownership information on all Jersey companies.
Some jurisdictions have been slower than others to make progress in this regard, but it is becoming increasingly important to demonstrate that your center is not a harbour for bad business.
Why is a robust regulatory and information sharing framework so important for Jersey’s relationship with key markets like the European Union?
GC: A good relationship with the EU is crucial for Jersey, and in order to do business the island has to show that it meets the very highest transparency and regulatory standards.
An example of illustrating how seriously Jersey takes these obligations is a report by the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism, which reviewed Jersey’s institutional, legislative and regulatory framework and found that, of the 49 areas they assessed, Jersey was rated compliant or largely compliant in 48, placing us in the top tier of jurisdictions assessed under those criteria.
Meeting regulatory requirements puts Jersey on a very strong footing when it comes to doing business with the EU. When governance is strong and a strong regulatory and legal regime is in place, managers can base themselves in a jurisdiction and raise money with confidence.
