Small, newly established funds in search of a well-regulated home offer a growing business opportunity for Channel Islands corporate services firms. But they need to take it before competitor jurisdictions catch up
Traditionally, start-up funds have often been domiciled in Caribbean jurisdictions such as the British Virgin Islands and the Cayman Islands. This has been largely down to their light-touch regulatory regimes and low-cost structures. But this has changed over the past couple of years as market demand has shifted.
With scandals such as the Panama Papers shining a public spotlight firmly on the morals of the wealthy, private investors are looking to place their money in well-regulated jurisdictions.
‘Start-up funds’, which tend to cater for this market, are typically those that are established by new, first-time managers or promoters who have not established a fund before. Start-up managers have usually had a background with an established investment bank or fund manager and have now decided to go it alone or with former colleagues.
Christopher Reed, a Group Partner at law firm Walkers, notes that first-time promoters will typically have a cornerstone investor in mind, or at least a particular type of investor they will target. “Having this investor on board may be key to being able to attract other investors where the fund manager has no prior track record,” he says.
As new kids on the fund management block, start-up funds need support to establish themselves. This requires a highly tailored service, explains Robert Ayliffe, Executive Director of Jersey-based Fiduchi, an independent fund administrator that specialises in working with start-ups.
“The start-up fund does not typically have that much cash for working capital,” says Ayliffe. “They’ll be looking to do things as effectively and efficiently as possible. The price of the services they need has to be kept as low as possible and they probably need a bit more hand-holding. They may not be familiar with technicalities of regulation and what you need to do to get a fund launched.”
Herein lies the challenge, and the opportunity, for firms that supply fund administration services. Ayliffe notes that small start-up funds may fall below the cut-off size of funds preferred by larger administrators.
“A lot of big providers will struggle to provide a commercial proposition to some start-up managers,” says Ayliffe. “They may have de minimis levels in terms of the size of the funds they administer – maybe £100m plus – before it becomes commercially viable for them. Senior people will be busy on their existing books of business and less able to provide the hand-holding to start-up managers.”
Different focus
Tony Gardner-Hillman, founder of Gardner Hillman, a specialist provider of tailored solutions to the funds industry, agrees. “Established fund administrators in the Channel Islands have tended towards a commoditised product, delivered by a systems-driven focus on collating and reporting in the ‘pure admin’ style,” he says.
“Their investment in systems and the low margins on the work they chase necessitate volume and growth in headcount in the collating and reporting roles. If they offer governance, it tends to be an add-on to help them win the pure admin and to facilitate their own compliance obligations.
“There’s an opportunity for newcomers to fund administration, specifically private wealth management businesses, to focus on substance in governance as their bespoke core service – high-level management functions delivering tailored solutions – and farm out the pure admin to established providers or develop that as their add-on.”
The demand from private investors, family offices and private wealth in general is understandable. A low interest rate environment, a massively and restrictingly regulated mainstream fund and wealth management sector, as well as loss of reputation across swathes of the financial services sector over the past decade, all play their part.
There is a willingness and desire for one-off investment opportunities, especially in alternatives. Closer relations with wealth managers and funds may promise less risk and greater attention to investors’ needs. Smaller, energetic, ambitious start-up funds can meet such demands.
Yet at the same time, jurisdiction plays an important role, explains Chet Pohl, Counsel at law firm Appleby. Whereas the perceived low-cost, light-touch regulation offered by Caribbean jurisdictions has been attractive, investors are now looking for other things.
“Guernsey has numerous factors which make it successful in attracting new funds,” says Pohl. “It’s in the same time zone as the UK. It is in close proximity to London. It offers promoters and managers high-quality legal, accounting and administration services.
“The regulator is relatively pragmatic and is willing to meet with new promoters to guide them from the outset. There is a robust, but practical, regulatory and legal landscape. This provides investors with comfort that there is a level of protection afforded to them by virtue of the oversight of funds by the regulator.
“Yet, at the same time, there’s enough flexibility to enable fund promoters to get the funds set up easily.”
The same can be said of Jersey. And, as Walker’s Reed points out, it’s not that the islands are missing out on start-up fund business but that there is still plenty of room for growth.
“The 2017 introduction of the Jersey Private Fund (JPF) regime, which is targeted at groups of less than 50 professional and sophisticated investors, is persuasive,” he says.
“The JPF regime has proved to be attractive to not only first-time fund promoters but also to experienced institutional investors and sovereign wealth funds. The stats show that the JPF has had a positive impact and has been a popular addition to Jersey’s funds products.
“The most recent figures from Jersey Finance show a 25% increase in the number of JPFs over the last six months, with a current total of £43bn assets under management. That is an impressive increase and reflects the global standing of Jersey as an investment funds jurisdiction of choice and the JPF as an attractive investment fund product. The Guernsey Private Fund regime has been a similar success story.”
EY’s Mark Le Page, a former Deputy Director at the Guernsey Financial Services Commission, agrees. “Over the last five years, Guernsey and Jersey have both sought to attract sensible, good-quality start-ups through regulatory products that have a private feel to them, insofar as there are requirements limiting the number and type of investors,” he says.
“Whilst at the Guernsey Financial Services Commission, I created the Private Investment Fund, which redefined the concept of private investor to one who could bear the loss of this investment.”
The road ahead
In such an environment, start-up funds look set to prosper. A higher number of smaller, perhaps independent, service providers would probably increase the islands’ capacity to handle more start-ups and their reach can be global.
In the wake of the Panama Papers, the Caribbean jurisdictions may lose out. Meanwhile, although centres such as Dublin and Luxembourg may be obvious competitors, unless investors are European, fund managers have no need to be subject to EU regulation – which some argue is excessive. “That’s where Jersey has a lot to offer,” says Fiduchi’s Ayliffe.
“Longer term, Singapore may become a more competitive jurisdiction, especially to service Asian investors. They are starting to develop new fund products but it is an embryonic industry there.
“Africa is also a source of business. I see a lot of business coming out of Africa and the Middle East. It may be, years hence, that Jersey becomes the EMEA hub and Singapore becomes the Asian hub. Jersey is open for smaller funds and there is a growth opportunity there,” he concludes.
All in all, both Guernsey and Jersey look set to benefit from growth trends in wealth management and in the drive for entrepreneurial fund managers to strike out on their own. It is still early days in many respects and the islands have plenty of scope to develop their start-up fund services offerings before competing jurisdictions develop their capabilities.