Funds have become an increasingly important element of Jersey"s and Guernsey"s financial services industries, enabling the islands to play a key role in providing a range of organisations with access to global capital markets. In this post-credit crunch era, Kirsten Morel takes a look at the current state of play in the islands" funds sectors
Crunching the numbers
There are many ways to look at the health of the funds industry in the Channel Islands, and the most tempting is to look at the net value of funds under management and administration. The reality, however, is these figures can be affected by a number of external factors, including currency movements.
Assets held within the funds industry are intrinsically linked to the wider global financial markets, and affected by other events around the world, meaning that while the scale of funds figures make for good headlines, they don"t tell us much about the state of the funds sector.
The figures in the Channel Islands at the moment paint a rather grey picture. Total funds under management and administration in Guernsey fell from £286bn at the end of June 2013 to £261.3bn at the end of June 1014. In Jersey, where the funds sector is a bit smaller in relation to the whole of the finance sector, the net asset value of funds under administration slipped slightly by £0.9bn from £201.3bn at the end of Q2 2013 to £200.4bn at the end of June 2014. Admittedly, the silver lining here is that this is a rise from the £192.1bn figure that Jersey had fallen to at the end of 2013.
A more comprehensive understanding of the overall health of the funds industry can be found by looking at the figures that give a snapshot of the activity in the sector and the popularity of the jurisdiction when it comes to new funds. These paint a different picture for each island. Guernsey saw a small rise in the 12 months to the end of June 2014 with the number of funds approved for domiciling or servicing rising by 15 from 1,093 at the end of June 2013 to 1,108 at the same point in 2014. In Jersey, the picture isn"t quite as rosy. While the number of unregulated funds rose by 13 to 202 in the 12 months to the end of June 2014, the number of regulated funds fell to 1,283 from 1,337 - a fall of four per cent over the same period.
With the figures showing a mixed 2014 for the islands" funds sector, Ben Robins, Chairman of the Jersey Funds Association, believes other indicators tell a different story. “I have to say the number of funds we have and the assets under management figures are interesting benchmarks, but not the only benchmarks. One is how busy people are, and over the last 18 months, we"ve seen a lot of activity in Jersey.”
Backing this up, he explains, is the arrival of formerly UK-based hedge fund Brevan Howard to the island, as well as the presence of private equity fund managers CVC, Nordic and other “very large European funds”.
Trends in funds
Growth may be roughly neutral, but that doesn"t mean the funds industry in the islands isn"t moving forward. “We"re renowned for our listed funds,” says Fiona Le Poidevin, Chief Executive of Guernsey Finance. “We"re listings leaders in London, and at the end of July, we had 125 listed entities on the stock exchange.”
Leading the rest of the world when it comes to LSE listings is no mean feat, and lends credibility to the claim that Guernsey is the listings jurisdiction of choice. Jersey isn"t too far below on the leader board, with 88 entities registered on the LSE at the end of 2013, confirming the trend to use the Channel Islands as a gateway to the London markets.
Funds listed include energy and infrastructure funds, which mirrors an industry-wide trend. “The trend for infrastructure funds has been prompted by governments investing in infrastructure during the recession,” says Tom Amy, Director at Elian Fund Services. “And real estate and private equity funds, over the last three years, have become more popular. A classic example is real estate debt which is debt investment as opposed to holding real estate itself.”
It"s a sentiment that Ben Robins echoes for Jersey, saying: “Private Equity was a strong story in 2013 - and 2014, I think, will be about real estate.”
Large scale investment in infrastructure and energy as well as growth in sectors such as fintech and mining funds brings with it large scale investment vehicles - and the Channel Islands are benefitting.
William Simpson, Partner at Ogier in Guernsey, on the other hand, isn"t entirely sure about trends. He says: “Investment companies have been established, some listed, to acquire one or more businesses, ranging from banks, mining and related assets to food and chemicals. There have also been a number of feeder structures to facilitate US and generally non-EU investors. It"s therefore difficult to identify any particular trend save to say, as always, Guernsey remains broadly based and continues to attract a wide range of interesting and sometimes challenging funds.”
So why are the islands being chosen for funds business? Robins sees “the tax base and also European regulation, such as AIFMD,” as drivers of business to Jersey. This growing trend for business originating from non-UK markets is also seen in Guernsey, says Amy. “We"re certainly seeing US fund managers looking at Europe, and as soon as they start looking at that, they start asking about Guernsey.”
Regulation, regulation, regulation…
“Guernsey did the right thing in having a dual regime,” says Fiona Le Poidevin, acknowledging that the Channel Islands" two-track approach has made the most of the potentially tight regulatory corner created by AIFMD.
The dual regime means funds can opt in or out of AIFMD as best suits their client base, so providing a route to Europe via the Channel Islands if needed and avoiding the extra administration and cost if not (see page 24).
Such a strategy plays to the many firms in Guernsey that have limited or no interest in Europe. “Thirty-four members sell into European countries from here,” says Mike de Haaf, Consultant to the Guernsey Investment Funds Association (GIFA). “Of the 27 jurisdictions we"ve signed a bilateral cooperation agreement with, we sell into 15. There"s a mix of members here, some for whom Europe doesn"t come into the equation.”
The Channel Islands have taken a serious and proactive approach to AIFMD, ensuring something that first looked as though it could lead to them becoming excluded from European markets has, in some respects, turned into a bit of an opportunity, particularly in the provision of depository services, which are required by AIFMD for funds holding non-financial assets.
“It creates an opportunity for individual companies, and a few have chosen to go down this route,” says de Haaf. “There are a couple of private equity managers here who have been issued depository licences for AIFMD purposes.”
Of course, the other major piece of regulation that has affected the islands" funds sector is the US - and subsequently the UK - FATCA regimes (see page 60). Again, the Channel Islands moved fast to get to grips with the legislation, and, according to Ben Robins, have given themselves an advantage.
“There was less scope for negotiation but the way the States of Jersey tax team got to grips with regulation was excellent. People looking to use your jurisdiction want to know you"re aware and ready for it, and I hope that we"ve shown that, for a small jurisdiction industry, the regulator and government can come together quickly, even when the issues are complex.”
Fiona Le Poidevin agrees that this collaborative approach should continue, as the islands are increasingly subjected to international regulations. “With any external regulation we need to approach it in the same ways we did with AIFMD - with the government, regulator and industry working together.”
This approach is already being applied to MIFID 2, the successor to the EU"s Markets in Financial Instrument Directive that seeks to make financial markets more transparent, resilient and efficient as well as offering investor protection. “MIFID 2 is one of the big regulations coming our way, and there"s already a working group set up,” says Le Poidevin.
It"s natural that the implementation of international regulations can cause the islands great concern, but one of the big stories over the coming months and years will be the reorganisation of domestic legislation to make the islands" funds regime easier to negotiate.
“A huge project is the need to simplify and streamline the funds regulatory regime in Jersey, and there"s a very important project already underway to deal with this,” says Robins.
The odds are that international regulation will only get tighter, at least for the foreseeable future. With the islands taking a heads-up and hands-on approach to dealing with both domestic and international regulations, there remains, says Robins, “a lot of optimism” in the industry.