Funds comprise a major part of the Channel Islands" finance industries, but other jurisdictions are constantly striving to steal their own piece of the action. Dave Waller scans the competitive landscape
Islands are often used as a metaphor for isolation. "No man is an island", as one famous saying goes. “I am a rock, I am an island,” sang Simon and Garfunkel, woefully. Yet even islands aren"t alone, and the Channel Islands should remember that being surrounded by water is hardly the same as existing in a vacuum. When it comes to funds work, Jersey and Guernsey may have staked out their space, but they"d be wise to beware the other landmasses and the threat they pose.
But who exactly are these rival jurisdictions, and which is the greatest threat? Is it, for example, Luxembourg? Net assets under management in Luxembourg investment funds hit almost €3 trillion at the end of July, according to the Association of the Luxembourg Fund Industry - easily dwarfing the total in the Channel Islands combined. “Probably half of international funds in Europe are set up in Luxembourg,” says Francois Pfister, Practice Partner at Ogier"s Luxembourg office.
Pfister points out that Luxembourg hardly counts the Channel Islands as a significant rival - it"s too busy keeping a very keen eye on Dublin, as both jurisdictions traditionally move at a similarly grand scale in the EU-based UCITs space. According to the Irish Funds Industry Association, Ireland UCITs account for over 75 per cent of assets of Irish-domiciled funds. It"s also the largest hedge fund administration centre on the planet, servicing a massive 40 per cent of the world"s hedge funds, while exchange-traded funds domiciled in Ireland manage assets in excess of €140bn - that"s over 30 percent of the European market.
But while Europe"s big boys aren"t obsessively checking their rear-view mirrors for any moves by the Channel Islands, the threat is being felt another way. With the introduction of AIFMD, the EU"s new regulation of alternative investments, Luxembourg is expanding further into an area the Channel Islands likes to call home. “We"ve found that AIFMD is enabling Luxembourg to diversify asset classes while providing the same level of service,” says Pfister.
Indeed, many private equity funds are now domiciling in Luxembourg while using lawyers based in places like Paris, thanks to Luxembourg"s EU status. Similarly, it can be easier to persuade the board of, say, a French pension fund to use Luxembourg rather than the Channel Islands.
“A lot of investment managers going out to market in the EU will be concerned that the Channel Islands" non-EU status will be an issue, even though that rarely turns out to be the case,” says Andrew Whittaker, a member of the Guernsey Investment Funds Association"s executive committee. “It"s a perception problem, but it"s enough for Luxembourg to benefit.”
Island threats
Then there are the EU"s island jurisdictions. Malta has a young financial services industry, which may be able to boost its market share with the introduction of AIFMD, potentially offering fund managers a cheaper route into Europe than either Luxembourg or Dublin. The same goes for Gibraltar. Yet neither has the range of services or the proven track record offered by the Channel Islands - and they"re both after a slightly different type of business anyway.
“We don"t consider ourselves a threat to the Channel Islands, nor them to us,” says Philip Canessa, Senior Executive at Gibraltar Finance. “The big difference is that Gibraltar is part of the EU and the Channel Islands aren"t. We reckon we"ve got more mileage because of that. Though obviously if we weren"t in the EU we"d be competing directly with the Channel Islands.”
Indeed it seems the one jurisdiction that poses the greatest threat to the Channel Islands lies outside the EU - the Cayman Islands. Cayman has a strong track record in hedge funds, where it"s traditionally made a bigger splash than Guernsey or Jersey - particularly for managers based in the US and Asia. Not only does it lie offshore and outside the EU like the Channel Islands - meaning it offers similar advantages - but its looser regulatory framework is likely to be cheaper and more malleable. “They"ll come out with a workaround to whatever"s happening at the time, reinventing their fund structures to make sure they comply with new rules,” says Whittaker.
Ben Robins, Chairman of the Jersey Funds Association, is only too aware of the potential Cayman threat. “Cayman is the only real challenge to the Channel Islands in professional investor funds,” he says. “If you go to the Asian market, to Singapore or Hong Kong, the Cayman product is already well known. The Channel Islands are looking to set up a slightly different school at a higher regulatory level there, but that comes at a higher cost.”
What about Singapore and Hong Kong themselves? Are there products domestic to those jurisdictions that will threaten those of the Channel Islands? “I"m not sure that"s happening yet,” Robins says. “But it"s something to watch.”
Happy coexistence?
While each jurisdiction is jostling for its share of funds work, it doesn"t follow that any one is necessarily struggling. Each jurisdiction will have those fund managers who favour it for a range of reasons - whether that"s the time zone, the regulatory environment or simple force of habit. For certain funds, with asset managers based in London and the US, offshore jurisdictions like Cayman have always been natural hubs. Some groups prefer to put fund managers in the Channel Islands, or to stay in London or Paris - others may see fit to have a fund vehicle offshore and a fund manager onshore. It seems there"s plenty of work - as long as your regulatory frameworks are up to scratch.
“There are various strategies and it"s possible for them to coexist, at least in the near future,” says Pfister. “It"s the "second string" jurisdictions that are losing out. Bermuda"s not as popular as it has been in the past, for example.”
Indeed, as befits robust jurisdictions with a strong reputation, current trends seem to suit the Channel Islands. While Cayman may have more experience of hedge funds, and Luxembourg and Ireland are processing vast amounts of European business, the Channel Islands take much of the work aimed at the UK. Jersey is building an enviable presence in real estate, tapping into a commercial real estate sector that"s been resurgent over the past 12 months - real estate funds were up nearly 20 per cent during the second quarter of 2014. It"s also seen the launch of several huge private equity funds recently, by the likes of Triton, Nordic Capital and Ardent. “The challenge for us is recruiting enough people to handle all the work,” says Robins. “Which is a good indicator of how buoyant things are here.”
Guernsey, meanwhile, continues to make strides with hedge funds and listed funds, and has seen a 45 per cent growth in the net asset value of investment funds under management and administration since 2008. “From a listed funds perspective, Guernsey is streets ahead of the competition,” says Whittaker. “It"s a well-trodden path, investors are very comfortable, and we have the right skills.”
Whittaker goes on to describe Luxembourg as being “way behind” in private equity, while Robins says that Luxembourg doesn"t have the pedigree of the Channel Islands, despite “aggressively touting for business in the private equity space”. And once AIFMD is fully in place, it will even have lost its political advantage. “By 2016, there may well be parity in the structures, meaning no political problems in investing money into Europe via the Channel Islands,” says Robins.
Then there are those funds sectors that are still emerging - everything from debt funds to renewables funds to South American funds requires knowledge that may not yet be available in some of these other jurisdictions. And thanks to the regulatory changes, even Cayman"s position is getting weaker, which may see the Channel Islands scooping up some of its business.
“Cayman is finding it difficult to market into the EU,” says Whittaker. “With Guernsey having such a good reputation with the likes of the OECD in terms of regulation, lots of Americans are looking to come through Guernsey structures to market into Europe. So it"s essentially a case of a changing the investor base - we"re losing French and German investors to Luxembourg and gaining Americans.”
Four years ago, the Channel Islands had one eye on their rivals and the other on AIFMD as it loomed over the horizon. But with AIFMD now here and clearly bringing some positives to the Channel Islands, and sovereign wealth and pension funds from the Far and Middle East also cottoning on to the islands" products, it seems Guernsey and Jersey look pretty robust for the time being.