Ashley Le Feuvre, Director of VG Fund Services Limited considers, the key trends currently driving growth and development within Jersey’s funds industry.
As the financial services industry and the world at large continue to navigate the unprecedented impact of the Covid-19 pandemic, Jersey and Jersey-based service providers remain ready and able to support the funds industry and its changing needs.
While undoubtedly a significant event, Covid-19 has only added to the series of challenges the funds industry has faced in recent years. These include ever-changing tax legislation, increased international regulation and reporting obligations (including the introduction of economic substance requirements), geopolitical turbulence (not least of all the Brexit saga), as well as the overall impact of the global security situation and continuing cybersecurity threats, including the high profile leaking of sensitive information.
A thriving environment
Jersey remains robust, undeterred by all of these pressures, and its alternative funds industry continues to thrive. To complement an already flexible range of regulatory options, the Jersey Private Fund (JPF) product was introduced in April 2017. This has proved hugely popular with VG’s clients across differing asset classes and over 300 JPFs have now been established across the industry. The JPF is light-touch regulatory option and can be structured as a company, limited partnership or unit trust. It is usually licensed within two days of an application being submitted, which makes this an efficient and cost-effective option.
Alongside the JPF, the fully regulated Certified/Expert Fund structure remains well utilised and, with mechanisms for structuring single asset and co-investment structures outside of regulation, there is a range of options to meet all requirements. The Jersey regulatory framework has been recognised by the European Securities and Markets Authority. This means there are structuring opportunities using Jersey for fund promoters looking to raise funds in Europe, in particular utilising National Private Placement Regimes, which would generally provide a much more cost-effective solution when compared to a hosted Alternative Investment Fund Manager (AIFM) arrangement located in an EU member country.
A solid foundation
The global focus on regulation and good governance is welcome and highly positive, as Jersey is well placed to benefit from this. For fund structures, Jersey can assist promoters in marketing their offering by providing a domicile of real substance in which to locate their funds. Jersey offers tax neutrality, has over fifty years’ experience with fund establishment and administration and benefits from political, fiscal and economic stability; given the continuing global turmoil, this should be a source of comfort to promoters and investors alike. Jersey has robust economic substance legislation to ensure that companies performing the various prescribed activities, including fund management, generate the appropriate level of economic activity and demonstrate effective governance and oversight in the Island. The European Union Finance Ministers have also confirmed Jersey's status as “cooperative”, supporting and reaffirming the Island’s reputation as a well-regulated jurisdiction.
There is a robust, technical infrastructure available in Jersey, with access to a wide choice of high-quality functionaries and service providers and a growing pool of experienced and independent professional directors. VG provides a full range of administration and fiduciary services to all types of Jersey investment vehicles. This infrastructure, combined with the island’s highly developed legislative and regulatory framework, which has been subject to positive scrutiny by the OECD, the IMF and Moneyval among others, serves to demonstrate to investors that there exists in Jersey a framework of exceptional corporate governance to safeguard their interests. This puts the jurisdiction in a strong position when compared to others and there is strong potential to plug skills gaps which may appear in other markets.
A growing demand
The asset classes driving much of Jersey’s recent success are private equity and real estate.
Covid-19 has hampered the real estate market; travel restrictions have made it challenging for promoters looking to deploy funds to assess targets and there has been a necessary focus on managing tenants and relationships with lenders. Despite this, deals are happening - albeit they are generally taking longer to complete. Covid-19 has borne opportunities within the real estate market. We have seen a shift in the attractiveness of different commercial real estate sectors, most notably logistics being favourable with a continued move away from retail. What the future real estate market will look like continues to evolve, however Jersey remains a jurisdiction of choice for real estate structures, with flexible options like the Jersey Property Unit Trust contributing to this attractiveness.
Private equity also prevails as a strength for Jersey, with some impressive fund raisings recently announced by Jersey domiciled funds. There is a growing demand among investors for impact and socially responsible investment and Jersey has recognised this. This was underpinned by the Jersey Financial Services Commission issuing a consultation paper on sustainable investments. The goal of this is to enhance the processes and procedures around investments marketed as environmental and socially responsible and address the risk of investment products being mislabelled as such, known as “greenwashing”. While the M&A market has slowed, there is growing interest in technology, with private equity and venture capital funds looking to invest in technology businesses, in particular cybersecurity and fintech, health and med-tech and also online retail and educational technology. The enduring Covid-19 situation may also present opportunities for distressed asset investments and for debt funds, with the lending market facing its own challenges.
These trends all play to the strengths of Jersey and also VG, where we have a focus on the closed-ended funds market.
Clearly, Covid-19 has caused disruption to the funds industry resulting in various challenges, in particular for smaller promoters. These include securing firm investor commitments, capital deployment, liquidity management and not to underestimate certain simple logistical issues, such as requirements for wet-ink document signing, which remains necessary in some instances. The Jersey industry has responded well to these difficulties, with clients able to leverage the expertise of their service providers and their relationships with international counterparts.
A flexible approach to the evolving “new normal”
Looking ahead, the growing importance of SRI will remain a key investment theme for clients. From a geo-political perspective, the potential fallout from a no-deal Brexit is likely to be significant for the UK, with the possibility of a weakened pound perhaps presenting buying opportunities for non-sterling investors, particularly in the real estate asset class. From a global perspective it is impossible to look at the next twelve months without continuing to consider the ongoing impact of Covid-19 and the associated restrictions on travel restrictions, remote working and similar and Jersey has shown it is capable of adapting to meet these challenges while continuing to provide a high-level service to clients.
It was recently announced that Jersey has maintained its position as the top ranking offshore jurisdiction in the latest Global Financial Centres Index (GFCI) and remains the only offshore location included in the top 30 International Finance Centres. The primary objectives for Jersey over the coming year therefore, are to maintain this well-earned reputation and continue to demonstrate stability, experience, quality and adherence to global standards. This will be done while continuing to have an innovative and responsive industry in the face of global competition. Likewise, Jersey service providers will need to maintain a deep understanding of clients’ individual needs and take a flexible and innovative approach to addressing them. This is something which VG, an independent and owner-managed business, is ready and able to do as our clients continue to adapt to the evolving “new normal”.