Focus on quality in a complex landscape
Globalisation and population growth are undoubtedly having a transformational effect on wealth patterns around the world and, consequently, the demand for cross-border investment structuring.
By 2030, for instance, these trends are expected to increase global demand for infrastructure investment by over $50trn, whilst estimates indicate the global asset management industry will grow from $65trn to in excess of $100trn within the next five years.
Emerging markets in particular are witnessing growth in wealth and wealth creators, driving the demand for sophisticated investment support even further across the globe. This rise in cross-border trade flows requires precisely the kind of alternative fund structuring and servicing expertise that specialist international finance centres (IFCs) like Jersey can provide.
Meanwhile, IFCs are having to contend with a growing raft of regulation, which has had and continues to have a profound impact on fund structuring. As well as a number of tax information reporting initiatives coming on stream via the OECD and the US, fund managers have also had to assess the detail of the EU Alternative Investment Fund Managers Directive (AIFMD), which has been in play for just over a year now.
Against the backdrop of all of this, Jersey’s funds industry has continued to perform extremely well, and particularly since the AIFMD was introduced. In fact, figures for the end of 2014 show that the net asset value (NAV) of regulated funds being administered in Jersey grew by around a fifth year-on-year to reach just over £228.9bn, the highest figure in seven years, whilst the fund formation rate is also at its highest level since 2008.
In particular, real estate business grew by 32% annually to reach its highest ever level, whilst private equity maintained a steady increase of 5% in 2014. Fundraising through Jersey, by both established and new promoters, looks to be very active again in 2015 with lots of new funds coming close to launch.
Reflecting the genuine confidence there is in the jurisdiction at the moment, the number of Jersey-based fund promoters has almost doubled over the past five years. As of June 2014 there were 123 Jersey-based managers, up from 70 five years ago.
It’s clear that Jersey has earned a strong reputation as a European centre for private equity and real estate fund structuring, particularly as the go-to destination for property investment into London.
The jurisdiction’s strong links with the UK gives it unrivalled market access to London, and real estate investment projects in the city involving Jersey are on the rise. A number of major property structures have been routed through Jersey recently, stretching from Battersea Power Station to The Shard, to Shoreditch and chunks of Canary Wharf.
Jersey’s pivotal role as a conduit for investor capital into the UK was first highlighted in the 2013 ‘Jersey’s Value to Britain’ report, which found £1 in every £20 of money invested by foreign individuals and companies in assets located in Britain reached the UK via Jersey.
This link was crystalised further in the ‘Jersey’s Contribution to Foreign Direct Investment (FDI)’ report (2015), which showed that Jersey distributed in excess of US$75 billion of FDI in 2012, with the UK being the biggest target (44.8%) of outbound FDI distributed from Jersey.
There are a number of reasons for this success. Jersey has certainly, for instance, benefitted from being subject to less uncertain economic, political and regulatory conditions than other fund domiciles specialising in alternative fund servicing.
Moreover, although a proven supporting domicile to some of the world's best known asset managers, Jersey is not, and does not hold itself out as, a ‘volume player’. Its success is not built on aggressive leveraging of economies of scale, but is rooted in its focus on high-end quality real estate and private equity funds business reliant on stability, reliability, flexibility and user-friendliness.
In addition, the jurisdiction is well placed to meet the challenge of demonstrating substance around fund management activity in light of AIFMD and the OECD's Base Erosion and Profit Shifting initiative. With managers needing to demonstrate that they maintain genuine responsibility for their portfolio or risk management functions in Jersey, there will be greater scope for fund administrators to help organise and evidence managers' enhanced governance arrangements.
Jersey can also boast a very healthy corporate governance ratio set against its 1,300 or so regulated funds, whilst other jurisdictions may well find themselves needing to re-configure their operating model.
Beyond the UK, it is also notable that there has been an uptick in business being structured through Jersey targeting Europe more widely since the AIFMD was introduced. Far from the European regulation causing a movement away, the trend evidenced in Jersey is one of building significant future management substance.
As at June 2015, according to figures from Jersey’s regulator the Jersey Financial Services Commission (JFSC), 84 Jersey fund managers had received private placement authorisation from the JFSC, and 205 Jersey funds were being marketed into Europe through the private placement regimes.
As well as providing certainty of European market access, the private placement option into Europe offered through Jersey is giving private equity and real estate fund managers a welcome element of added flexibility, without the headache and costs of reporting under full AIFMD ‘passporting’ compliance.
Further, with ESMA recommending in July that Jersey should in due course be able to take up the full EU-wide passporting option under AIFMD, managers using Jersey can be confident that the optionality Jersey offers stands them in good stead for the long-term.
Whilst the UK and European investor market remains important, the global shift in wealth around the world to emerging markets is proving increasingly significant. Investors in markets stretching from the US to the Middle East to Asia are seeking efficient means of deploying investment capital into real estate funds, often in the UK and Europe, and this is absolutely a trend Jersey is witnessing.
Asian money continues to favour the London property market with second and third wave money, cash rich developers and Asian insurance companies being increasingly attracted to London property. With a Double Taxation Agreement between Jersey and Hong Kong having come into force in 2013 stimulating the market, the Far East in particular remains a key property investor market for Jersey funds.
In addition, investors in the Middle East are now allocating over a quarter of their investments to property (World Wealth Report 2014), meaning there is real potential for IFCs like Jersey with Islamic Finance experience and expertise in real estate fund structuring. Recent commercial transactions of note through Jersey include high profile London property investments on behalf of Gulf investors such as the Shard building and Chelsea Barracks.
Meanwhile beyond Europe and outside the scope of the AIFMD, Jersey also continues to provide an attractive platform for servicing globally-focused private equity and real estate funds, something that will become increasingly important as emerging markets come to the fore.
For this reason, Jersey’s ability to offer a ‘rest of the world’ regime outside the scope of the AIFMD has positioned it strongly and uniquely as a European time-zone jurisdiction that can cater for funds targeting both assets and investors in growth markets.
Africa is a case in point. The recently published ‘Jersey’s Value to Africa’ report (2014) found that, whilst Africa has the potential to grow 5% each year to 2040, to do so it will need to invest US$85 trillion in its infrastructure. Around US$6 trillion of that will need to come from FDI and, given its strong cross-border private equity and infrastructure fund capabilities, Jersey can play a part in meeting that investment need.
In an increasingly complex landscape shaped by globalisation, population growth and regulation, Jersey has positioned itself strongly as a gateway to the UK. At the same time, its flexible approach to the AIFMD has made it a preferred fund servicing centre in Europe, and its global capabilities make it an ideal centre for meeting the requirements of a fast-paced industry.
Jersey is a well-trodden path for global private equity and real estate structuring, and it is that familiarity that continues to give confidence to fund managers and investors.
This article was first published in PERE Fund Service Guide, September 2015