Tuesday, February 27, 2018
Blog: Jersey, boosting global prosperity by maximising pension fund returns
By Ben Robins, JFA committee member
It is uncontroversial that tax-exempt investors (pension funds, endowment funds, sovereign wealth funds), are spared local taxes to maximise the return for their tax-paying beneficiaries.
Those local exemptions are lost, however, where tax-exempts invest cross-border, which could discourage international investment, prejudicing returns from high-growth regions and risk diversification. The solution presents itself in tax-exempts investing internationally through a tax neutral investment platform in a specialist domicile like Jersey.
The debate around the use of lower tax centres raises the question "why do people invest in offshore funds?". The answer is simple: for alternatives, they're best in class. Expert domiciles like Jersey provide the optimum (regulatory, capital efficiency, cost, tax and service) environment for alternative investment structuring, offering mature expertise and higher returns.
This attracts "best in class" managers who produce the best returns for their tax-exempt investors. Monterey Insight statistics for 2017 showed a healthy 14.7% annual increase in AuMs in Jersey funds, with private equity and venture capital strategies (53%) and real estate strategies (20%) representing a significant share.
The need for tax-exempt exposure to alternatives has been driven by two recessions, budget challenges, the demographic shift and a long period of low interest rates: traditional pension investments in government securities, investment-grade bonds, blue-chip stocks and fixed-income strategies have been bolstered by allocations to alternatives to provide better overall returns, diversify portfolios, add inflation protection and keep return assumptions relatively constant, as returns on "less risky" investments have declined.
On recent averages, public and private sector pension funds have allocated just over 4% of their investable pool to private equity, which has delivered an 8.3% median net IRR over the past decade for public pension funds vs. 5.3% for their total portfolio.
Such is private equity's appeal, investors are struggling to reach their target allocations to private equity as 94% of LPs want to maintain or increase their allocations (Sources: Preqin and Bain Global Private Equity Report 2017). Private equity also offers tax-exempts long-term strategies which mitigate volatility risk and provide in-built diversification across portfolio companies and an ever-increasing range of geographical and sector strategies. 2017 saw the launch from Jersey of Softbank's (largest ever) Vision Fund and CVC Fund VII - funds of real global consequence.
Similarly, private sector pension funds constitute 19% and public sector pension funds 15% of the institutional investors in private real estate funds - more than any other investor type. Higher risk, value-added, real estate strategies are used by 49% of private and 60% of public sector pension funds.
Recent real estate fund performance has been strong, with annualised returns of 14.9% over last three years and 93% of investors happy with their returns. (Source: Preqin). Private real estate funds provide tax-exempts with portfolios combining capital appreciation and a rising stream of inflation-adjusted income, to balance out the ups and downs of the securities markets, and they provide marginally increased liquidity versus real assets, whilst allowing passive investment.
Jersey has long hosted real estate structures channelling tax-exempt investment into UK property and infrastructure, whether industrial parks, office blocks, apartments, retail complexes or student accommodation (eg the Malaysia Employees’ Provident Fund co-investment in Battersea Power Station project).
This all demonstrates how Jersey boosts global growth and prosperity by facilitating secure and efficient cross-border investment and maximising pension fund returns.
For more, see ‘Jersey for Institutional Investors’.
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