Enhancing the Framework
This article was first published in the PERE Fund Services Guide 2016.
As more capital moves across borders the structuring of funds and investments is becoming more complex. Fortunately, real estate's fund services industry is meeting managers' ever-increasing demands, says Geoff Cook, chief executive of Jersey Finance.
In the alternative investments world, global trends such as the shift in wealth towards Asia Pacific and the increase in cross-border investment flows are driving the demand for sophisticated investment support, with estimates from PwC indicating that the global asset management industry will grow to more than $100 trillion within the next five years.
With this comes a greater interest in property investment. Institutional and private investors in markets now stretching from the US to the Middle East and Africa to Asia are seeking efficient means of deploying investment capital into real estate funds, and fund managers in those markets are also looking to diversify their portfolios into non-domestic assets.
The Knight Frank Wealth Report 2016 notes that the general trend over the past decade has been for significant growth in cross-border investment, led by outflows from China (+1,471 percent), and certainly it is Jersey’s experience that Asian investors continue to be attracted to London property.
As such, international finance centers (IFCs) located in close proximity to the UK, such as Jersey, remain essential among Chinese, Malaysian and Singaporean private, institutional and sovereign wealth funds. There is a strong rationale for the appeal of IFCs. For instance, Jersey is independent yet has close connections with the UK and is a jurisdiction of substance, with the expertise of more than 13,000 professionals working in its finance industry and has a strong focus on high-end real estate and private equity funds business.
Yet the work of these real estate service providers is becoming more challenging as this increasingly global real estate investment continues apace. More than ever these cross-border investment flows require precise alternative fund structuring and servicing expertise, particularly against the backdrop of international regulatory change and the drive towards international standards. Fortunately, IFCs can provide the framework for the increased complexity caused by shifting capital across borders.
This is made possible by offering a comprehensive range of fund structuring options, including limited partnerships and separate limited partnerships which are commonly used for private equity deals. This is backed up by a range of regulatory regimes catering to a full spectrum of investor types, including the well-used expert and private fund regimes, tailored for the needs of professional and institutional investors.
This regulatory environment, however, needs to be underpinned by an infrastructure of high quality, experienced service providers, including major offshore law firms, accountancy firms, administrators, depositaries and custodians, as well as an impressive pool of non-executive directors to bolster corporate governance credentials.
For Jersey this infrastructure has formed the bedrock of a growing fund management community, underlining Jersey’s commitment to demonstrating fund management substance – a vital concept under the OECD's Base Erosion and Profit Shifting (BEPS) initiative.
Looking at continental Europe the same theme applies, with more global capital wanting to get into the region's property markets. Yet since the advent of the pan-European fund management regulation, the Alternative Investment Fund Managers Directive (AIFMD), this has become more difficult.
This is because until non-EU fund managers can opt into the AIFMD they must navigate a patchwork regulatory environment requiring a country-by-country analysis of the new marketing rules in each EU jurisdiction. Additionally, some nations have gone above and beyond what the AIFMD requires when updating their local marketing rules, creating even more burdensome regimes for non-EU managers.
As such the world's largest and most sophisticated fund managers require expertise and regulatory frameworks to efficiently structure both pan-European funds, through an ‘opt-in’ regime that is fully compliant with the AIFMD, and non-European funds through a ‘rest-of-the-world’ regime.
Jersey can offer this dual approach and provide globally-focused fund managers with the stability and flexibility they need to successfully market to investors both inside and outside the EU.
Within Europe, the AIFMD-compliant National Private Placement Regime (NPPR) option is giving non-EU private equity and real estate fund managers, including, increasingly, those based in the US or Asia, added flexibility in accessing the European investor market without the headache and costs of full onshore AIFMD ‘passporting’ compliance. This solid AIFMD structuring is a key driver behind Jersey’s funds growth, providing the right frameworks to offer Jersey funds to EU and non-EU investors.
Figures from the Jersey Financial Service Commission show that there are currently 115 Jersey fund managers and 251 Jersey funds with authorisation to actively market into the EU through the NPPR.
In July 2016, Jersey’s appeal as an IFC was further enhanced when the European Securities and Markets Authority (ESMA) reconfirmed Jersey as one of only five non-EU jurisdictions to have no obstacles at all in being able to apply for the full-EU wide AIFMD passport in due course. Whilst the authority’s announcement showed that satisfying ESMA’s criteria was not straightforward for all jurisdictions, it also emphasised that Jersey’s foresight in creating an AIFMD-equivalent regime some time ago had put it in a very strong place.
At the same time, an ability to offer a ‘rest–of-the-world’ regime completely outside the scope of the AIFMD but in a European time zone is proving popular for managers, meaning that Jersey is well set-up to cater to managers targeting, for instance, the rapidly growing Asian private equity and real estate fund market, or the African infrastructure sector.
This flexibility offered by IFCs is giving managers genuine confidence for the long-term. They appreciate the flexibility of accessing Europe through private placement or, in due course, the passport, as well as a regime for funds targeting non-EU based investors.
In a complex world where wealth patterns are driving demand for private equity and real estate investment expertise in all corners of the world, Jersey is well placed to provide robust cross-border investment platforms and demonstrate a mature response to regulatory change.
This is backed up by the numbers. The rate of fund formation in Jersey remains healthy, with more than 1,300 fund entities being serviced in the jurisdiction. Figures for the first quarter of 2016, collated by the Jersey Financial Services Commission, also show that the value of regulated funds being administered in Jersey has grown to $300.9 billion, the second highest figure since 2008. In particular, the real estate and private equity fund sectors reported strong numbers, with assets being serviced in Jersey growing by 20 percent and 10 percent year-on-year respectively.
The familiarity, flexibility and expertise that Jersey offers are proving highly attractive to both the manager and investor communities across not just the UK and Europe but also, increasingly, Asia, the US and Africa.