Expert panel discussion | Credit facilities in private equity
20 May 2020
From a global viewpoint, a current of political and economic turmoil is creating considerable uncertainty, yet it seems Jersey is still able to provide a welcome and safe harbour. We have seen the ascendency of the Trump administration and its impact on the international arena, including unsettling US relations with North Korea, China, Russia, Israel, Mexico and Venezuela. Meanwhile on the domestic front, Trump’s administration highlighted divisions across the US.
In Europe, German Chancellor, Angela Merkel has publicly confirmed she will step down from her role as Chancellor in 2021 as a result of the 2018 election setbacks. She has been the German Chancellor since 2005. There has been the ascendancy of the ‘gilet jaunes’ movement in France seeking to highlight perceived economic injustice and the Claim for Catalan independence in Spain. Europe has also seen a general rise in electoral gains by nationalist parties in recent years, including in Italy where, during 2018 a coalition government combined an anti-establishment party and a right-wing party. All of these events have unsettled the perceived European political stability.
In the UK there has been the prolonged fallout from the Brexit referendum. The exit process has consumed British politics for the last two years and recent events have highlighted how complex and divisive this process is. The resulting splits within and between the traditional political parties, has resulted in the formation of a new political affiliation and raises significant concerns about the political and economic stability of the UK and its future role in Europe, as well as on the international stage.
With all the aforementioned uncertainty, it would be no surprise to see the fund management industry retrench and await calmer conditions , yet recent statistics released by the Jersey Financial Services Commission (JFSC) suggest the opposite for the Jersey funds industry. The value of regulated funds serviced in Jersey saw double digit growth to reach a new all-time high, while bank deposits also increased over the course of 2018.
Figures for the final quarter of 2018 (ending 31st December 2018) show that the net asset value of regulated funds under administration in Jersey grew 10% annually to stand at £319.9 billion, the highest recorded figure to date. Within the funds industry, the statistics show particularly strong performances in the alternative asset classes, recording a year-on-year increase of 23%.
Specifically, private equity fund values rose by 38% over the year to cross the £100 billion mark for the first time ever and finish the year standing at £114.5 billion. In addition, the combined total value of infrastructure, credit and debt funds also showed impressive growth, increasing by 28% to stand at £64.8 billion, while the value of real estate funds grew by 10% to £41.4 billion and hedge funds increased by 3% to £52 billion.
There is an element of irony in the fact that despite one of the most unstable periods in global politics in the last 30 years – and the recent turmoil from regulatory initiatives such as the AIFMD (Alternative Investment Fund Managers Directive) and Tax assessments – that Jersey is experiencing strong performance within its alternatives funds industry.
The AIFMD was one of the most convoluted and widely debated pieces of fund regulation to impact both EU and non-EU jurisdictions. There was a significant concern from all non-EU jurisdictions, Jersey included, that after the introduction of the AIFMD regulations, the industry would be faced with ‘Fortress Europe’. There was a valid concern that for all those jurisdictions outside the membership of the European Securities and Markets Authority (ESMA) Co-operation Agreement, that not having access to the European marketing passport would severely restrict fund raising and marketing opportunities across the EU. The reality has, thankfully, been somewhat different, as supported by the recent statistics issued by the JFSC. Whilst the status quo has changed, the market has continued to operate in a broadly efficient manner.
When selecting a jurisdiction and fund product, one consideration for fund managers is a flexible jurisdiction that can be utilised for multiple strategies targeting both EU and non-EU capital. The adaptation of the Jersey regulatory infrastructure provides fund managers with a compelling solution. Jersey can offer effective National Private Placement access, whilst remaining out of scope for AIFMD, which continues to prove popular.
The Regulatory landscape has been enhanced with the introduction of the Jersey Private Fund (JPF) which adopts a similar approach to some European jurisdictions, notably Luxembourg, focusing on the regulatory status of the fund service providers, rather than the fund itself. In under two years since establishment, there have been over 200 JPF entities formed for a variety of asset management strategies.
Earlier this year, recognition from EU Finance Ministers (ECOFIN) formally confirmed Jersey’s position as a cooperative jurisdiction. It is again evidence of Jersey’s proactivity to retain a stable and sound basis to engage with the EU and further afield. The overlap between the enhanced regulatory landscape created for funds and the updated tax substance law are a natural progression and have provided further clarity and stability to deal with increasing global concerns for tax and regulatory substance.
Jersey’s administrative model is built upon demonstrating management and control and good governance procedures. Because of this, Jersey-based fund managers and related companies conducting relevant activities under the new substance law are not expected to need to change how they operate when focusing upon the new substance rules. Not all jurisdictions will be able to draw similar conclusions.
Whilst we have seen recent seismic movements across the political, economic, taxation and regulatory landscape, Jersey has delivered significant growth across its alternative assets funds industry. This has largely been due to the proactive engagement between government, regulators and industry, to provide a stable platform that continues to deliver for a wide range of fund managers and capital bases on a global scale.