Private equity"s recovery over the last year has resulted in larger funds being raised and bigger deals being done. But what does this mean for the Channel Islands? And is any of the capital raised making its way over here? Vicky Meek investigates
After a difficult few years, private equity activity and fundraising is picking up. That"s great news for the players themselves and to businesses looking for private equity funding. Yet so far the recovery is uneven, as deals are concentrated at the larger end of the fund-size spectrum.
Indeed, the first half of 2014 saw a total of $159.4bn invested globally by private equity across 1,476 deals, according to data provider Preqin - an average deal size of $108 million. Compare this to full-year averages of $95 million in 2013 and $79m in 2012. While these averages may not sound high, they include deals in emerging markets, which are typically smaller, as well as acquisitions made by private equity-backed companies, which also tend to be rather smaller than original buyouts.
Increased deal size is a trend that looks set to continue, with larger, more established firms having the most success at fundraising. According to Preqin, quarterly aggregate fund closes exceeded $100bn for four consecutive quarters by Q2 2014, with funds such as Ardian"s latest $9bn secondary fund, its sixth, boosting the overall figures.
“The larger funds continue to be successful at fundraising,” says Ben Morgan, Partner in the Corporate and Finance Group at Carey Olsen. “Yet for smaller managers that might have got away with a shorter track record pre-crisis, it"s much harder.” Indeed, first-time funds accounted for just seven per cent of the capital raised in Q2 2014.
And this may well have an impact on private equity-related business in the Channel Islands. “While fundraising figures have improved, the fact is that it"s mainly the established private equity players that are successfully raising funds,” says Andrew Whittaker, Managing Director at Ipes. “That means there are fewer new managers coming through and therefore less new business to attract.”
Figures for funds under management and administration in Guernsey have remained relatively stable over recent times, though the most recent numbers available - for the second quarter of 2014 - show a decline of 1.3 per cent, or £1.8bn, in closed-ended funds over the year since 30 June 2013, and a decline of 4.4 per cent or, £1.9bn, in open-ended funds. In Jersey, the total under management has risen slightly over the year to just over £120bn for closed-ended funds from £119.4bn, and decreased for open-ended funds from £73.9bn to £72.9bn.
Moving out
These declines may well be the result of jurisdictional choice. “One of the issues the Channel Islands are facing is that some managers are choosing to go elsewhere, and that means work for administrators is being lost to other centres, such as Luxembourg,” explains Whittaker. “The push factor is largely political - Luxembourg"s tax advantages are on par - but some funds perceive an EU domicile as an easier sell to investors.”
Tom Amy, Managing Director at Elian Fund Services in Guernsey, also reports that some are opting for UK-based structures over the Channel Islands because they are seeking to be domiciled onshore and they"re largely based in London.
Yet despite a degree of competitive pressure from other locations, private equity activity in the Channel Islands suggests that investors believe in the potential of the financial services sector here, particularly in services related to private equity, other alternative investments and trusts. “We are seeing some deals here,” says Darren Bacon, Partner at Mourant Ozannes. “Many administration firms, for example, have gone to private equity, and the sector remains a target for investment.”
The summer"s £180 million management buyout of Ogier Fiduciary Services (now Elian Fund Services) by Electra Partners was, as with activity globally, towards the larger end of the deal spectrum for the islands. By comparison, 2013"s acquisition by Silverfleet Capital of Ipes was valued at around £50 million, and AnaCap"s deal to buy IFG Trust and Corporate Group (now First Names Group) was £70 million.
The attractions of this type of business to private equity are high. “Financial services businesses are on most private equity firms" wish lists now,” says Morgan. “Experience has shown that, with a little extra effort and know-how, it"s possible to make good, relatively quick returns in the Channel Islands.” In addition, business is sticky - administrators, for example, rarely lose existing fund work because the effort of switching providers is too great.
The gradual implementation of the Alternative Investment Fund Managers Directive (AIFMD) is another reason for investing. With private equity firms now required to hire depositary services, the administrators have a new line of business to grow into. In addition, private equity sees the opportunity for consolidation of players in the market. Part of this is to do with regulatory change requiring scale and global reach among financial services businesses in the Channel Islands, but also the increasingly global nature of fund registration, administration and related services.
Since receiving private equity backing in 2012, First Names Group has acquired Moore Group, Basel Group, Citadel (based in Luxembourg), Temmes Management Services, Mercator, and, most recently, Seymour Trust Company. Meanwhile, JTC Group, which received investment from CBPE Capital in 2012, acquired Guernsey"s Anson Group in late 2013.
“Many private equity-backed groups in the Channel Islands have grown through acquisition,” says Amy. “There"s been a real consolidation story in part because of the range of services financial services businesses here now need to offer. There will be more scope for consolidation in the future as more new entrants are coming into the market. However, firms are being increasingly selective. The list of company names and the clients they service is very visible - for the strategy to work, you have to make sure you"re buying compatible businesses.”
Most believe Channel Islands" investment activity will therefore remain at a steady rather than a brisk pace, and, for many, private equity"s investment, in addition to the business it brings to the islands, is welcomed with open arms. “The beauty of private equity investment is that the firm is there to support management and help implement strategy,” says Amy. “Not only is private equity providing finance for growth, it works in partnership so firms can achieve it.”
Jerey vs Guernsey: a draw?
Guernsey may historically have been considered the Channel Island of choice for private equity fund registrations, and Jersey for real estate and funds of funds, yet there are signs this may be changing.
Those in Guernsey point to expertise built up over years. “Guernsey has specialist teams based on the island,” says Darren Bacon, Partner at Mourant Ozannes. “The private equity fund administration teams, for example, are here, and so the work is not outsourced to teams in Luxembourg or Ireland.” He also points to Better Capital and Terra Firma putting people on the ground in Guernsey.
“Guernsey is more mature and has a deeper talent pool than Jersey,” says Ben Morgan, Partner at Carey Olsen. “We are the go-to jurisdiction for private equity fund formation.”
Yet there is a move towards unregulated structures among some private equity funds, and it"s driving a portion of business to Jersey. “There"s more activity in so-called unregulated funds and, because Guernsey doesn"t currently have an unregulated fund regime, we"ve seen several new funds consider both islands and ultimately choose Jersey,” says Andrew Whittaker, Managing Director at Ipes.
And some believe the lines between the two are blurring in terms of perception. “While Guernsey may have a reputation for private equity and Jersey for real estate, this distinction is weakening,” says Tom Amy, Managing Director at Elian Fund Services in Guernsey. “The fact is that both islands can do both and that is starting to be recognised. I"m seeing more interest here in Guernsey for real estate corporate and fund structures, for example.”