15 minute read
private investment
Private power
Demand for private investment funds is expected to double over the next two years as more investors are attracted to their flexibility, cost-effectiveness and the chance to chase greater returns in volatile times
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Words:
David Stirling
GUERNSEY AND JERSEY private funds are flying. According to figures from Jersey Finance, the number of registered Jersey Private Funds (JPFs) – marketed to no more than 50 qualified professional investors and covering the whole range of asset classes (see panel overleaf) – jumped 70% between March 2020 and March 2022.
Mark Cleary, Director at fund services provider Zedra, believes this is only the tip of the iceberg, forecasting a 100% jump in the number of JPFs by 2024.
“Private funds have been a real success story to date, and they will continue to be,” he says. “They are at the 500 mark now in Jersey, but in a couple of years that number could feasibly double.”
Guernsey, which established a Private Investment Fund (PIF) regime in 2016 and restructured it last year to attract more investors, has also seen a rise in interest.
According to Guernsey Finance, PIFs have “increased in popularity each year and at the end of last year [2021] more than £14bn was invested in Guernsey PIFs”.
While both islands are demonstrating impressive numbers, Cleary says the “velocity off the launchpad” has been starker in Jersey than Guernsey.
That, he suggests, could be the result of quirks such as slightly more complex regulation for PIFs in Guernsey – there’s a hard requirement to audit private investment funds annually, which is not a requirement in Jersey.
Regardless, it is clear that both islands, benefiting from being well regulated jurisdictions with broad management and administration experience, have tapped into burgeoning demand for their private funds products.
THE NEED FOR SPEED
So, what other factors are driving the success? Dylan Latimer, Partner at Bedell Cristin in Guernsey, highlights cost, flexibility and one-day registration as strong PIF advantages, as well as the relatively lighter regulatory touch applied to them. Guernsey PIFs can be open- or closed-ended and established as a company, partnership or unit trust.
“The launch of PIFs in 2016 was a response to investors seeking more flexibility than a typical open-ended or closed-ended fund,” he says. “Not having to prepare a prospectus means you can get the fund to market even more quickly.
“Now, with the new PIF rules introduced in 2021, the PIF product has become even more flexible and given PIFs universal appeal. For Route Two and Route Three PIFs, no longer having the requirement of a Guernsey-based fund manager reduces cost and further increases their attractiveness. The manager can be based anywhere, such as Zurich or London.”
Indeed, the one-day registration process in Guernsey compares favourably with the several weeks for authorised funds and three-day approval process for Guernseyregistered funds.
Cleary also highlights the benefits of speed and flexibility.
“In more traditional collective investment funds, to become authorised and regulated through either the Jersey or Guernsey regulators, the manager and sponsor typically need to undergo an application process with the regulator. That can be a long process,” he says.
“With private funds, the application process has been considerably shortened. That is a real incentive for those wanting to come to the islands and launch a fund.”
The general rise in the cost of complying with the ever-increasing regulatory burden for funds may also have focused fund managers’ minds, argues Sam Sturrock, Group Partner and Head of Funds in Collas Crill’s corporate, finance and funds team in Jersey.
“If a fund manager doesn’t actually need a wide spread of investors geographically or a high volume of investors, then JPFs can be far more cost-effective than a public, more regulated fund.
“The current environment has really made managers reflect on whether they need to pay a higher cost for their funds to be all things to all people, or if they can be quite surgical about the complexity of their funds, the location of investors and where they are marketed,” he says.
SEEKING OUTPERFORMANCE
Cleary believes that private investors who are seeking alternative sources of returns in difficult markets have also helped the surge in demand.
“There has been a general reduction in private assets going public through an IPO, and that means the universe of investible assets is smaller than it has been historically. Investors also have more dry powder, which has continued to build up during the pandemic,” he states.
“Investors from all over the globe are looking for newer sources of returns in private markets. Private funds can provide the structure and appropriate regulation to facilitate this.”
PIFs have traditionally proved popular with venture capital and private equity fund managers, according to Guernsey Finance, because they frequently have smaller numbers of large, sophisticated and specialist investors.
They can also be attractive to first-time fund managers who are moving from an asset management or corporate finance ▼
career and are eager to set up a new fund of their own.
“Perhaps someone outside the fund space has a good idea and is keen to monetise it. Maybe they have an informational advantage on some type of asset that they believe could attract other investors,” Cleary says. “These could be friends, family or through institutions.”
“We’ve seen many different uses of private funds and their strategies are not at all homogenous,” Cleary adds.
“For example, we’ve worked with managers who raise money from institutional investors and invest in companies with a view to transforming their business and operations through genuine ESG strategies and services.
“The core belief again is that investors can earn real outperformance through innovative and more focused strategies.”
Latimer is also seeing first-timer interest. “Before PIFs, first-time managers who didn’t have sufficient scale were at risk of being squeezed out of the market. Now, they are building up track records with investors using PIFs, which often lend themselves to investing in niche or innovative trends including ESG, technology or even cannabis.
“They can take better advantage of these opportunities by getting to market quickly,” says Latimer. “But we are also seeing established managers who are running traditional funds now looking at PIF options.”
Latimer also has high hopes for family office demand via the new Route Three scheme. “As family offices become increasingly sophisticated, they are observing that PIFs via Route Three can be run in parallel with, or as an alternative to, family trusts. They are an effective means of deploying capital,” he says.
Bedell Cristin recently advised the Stonewood Wealth Management group on converting an existing PIF from Route One to Route Three by simultaneous deregistration and registration.
The PIF is still managed by Stonewood, with the conversion allowing the management role to be transferred to its UK-based manager, Stonewood Wealth Management.
In addition, according to Guernsey fiduciary firm HFL, PIFs can enhance corporate governance and wealth management. The business recently set up a PIF as a long-term succession planning vehicle. According to the firm: “Where family trusts are investing in a PIF, estate planning using a centralised regulated vehicle that will drive growth is a smart approach.”
EUROPEAN BRIDGE
Private funds can also be marketed in an easy and cost-effective way to eligible investors in the UK and the European Economic Area through national private placement regimes.
“We are well placed to be a bridge between the UK and the key European financial hubs post-Brexit for alternative investment funds – particularly given the ongoing uncertainty in relation to financial services between the UK and EU,” says Sturrock.
“We can also expect to see more interest in the relative stability of Jersey and Guernsey compared with other jurisdictions impacted by geopolitics or dramatic regulatory change. That may mean more non-EU-facing private funds being established here with a nexus to US and developing markets.”
Such growth, however, could prove challenging to the islands, warns Cleary.
“Jersey and Guernsey are attractive because we are best in class. But the availability of fund management and administration talent on the islands could limit our ability to meet demand,” he says. “We need to be mindful of this as they develop.”
Nevertheless, Latimer is confident that any hurdles can be overcome, given the boost that private funds can continue to give the islands.
“The Route Two PIF is not aimed at retail investors but rather qualifying private investors who are either professional investors, experienced investors or knowledgeable employees,” he says. “They will need to understand the risks involved and be able to bear the consequences of investment in the PIF.
“The continued success of the PIF will be helped by the fact that the Guernsey Financial Services Commission has listened to industry bodies and professionals about how PIFs can evolve and improve.”
Latimer concludes: “The three routes emerged from collaboration between the regulator and the funds industry. Private funds will go from strength to strength. It is where the growth lies.” n
Channel Islands Private Funds: a quick guide
Jersey
The Jersey Private Fund (JPF) regime began in March 2017 and incorporates funds with 50 or fewer offers or investors. They can be established as a number of different types of vehicle (companies, limited partnerships, unit trusts are most common), as Jersey or non-Jersey vehicles (for example, as an English limited partnership for which a Jersey company acts as general partner) and can be closed- or open-ended.
These funds can only be invested in by professional/ eligible investors who have acknowledged in writing the receipt and acceptance of an investment warning and disclosure statement.
A key feature is light regulation, with no requirement to appoint an auditor (unless a company is a public company) or have an offering document.
However, every JPF must appoint a regulated full-substance designated service provider in Jersey and carry out the appropriate due diligence.
Speed and ease of establishment are crucial, with a typical 48-hour regulatory turnaround.
Guernsey
The Guernsey Private Investment Fund (PIF) structure dates back to 2016 “as a simple and cost-efficient route to market for managers with close relationships to smaller numbers of sophisticated investors”.
Fundamental changes to the regime were made last April with the creation of a ‘three routes’ structure, all of which offer fasttrack registration of one business day: • Route One – PIFs can be open- or closed-ended collective investment schemes limited to 50 people and only 30 new investors in the preceding 12-month period. They must have a licensed Guernsey-based fund manager. • Route Two – This new route for qualified private investors does not require the appointment of a Guernsey Financial
Services Commission-licensed manager but does require a designated administrator. The initial investment must be no less than $100,000. • Route Three – Another new route, this opens up PIFs to family structures. Only the family office members and employees can invest.
The momentum of economic crime regulation shows no sign of slowing
Emma Bailey, Advisory Director, and Alexandra Reip, Associate Director, at KPMG in the Crown Dependencies, discuss the importance of data integrity and board oversight in light of the current focus of the Channel Islands’ AML/CFT regimes
IN BOTH OF the Channel Islands, preparation for the Moneyval evaluations is increasing at a great pace, with no chance of the Jersey or Guernsey Financial Services Commissions taking their foot off the gas until the evaluations have taken place in 2023 and 2024. What does this mean for entities operating in the fund sectors in both islands?
For many compliance officers and money-laundering reporting officers (MLROs), it must feel like they have wandered onto a Formula One track but are driving an affordable hatchback with their L plates still on.
So let’s take a look at the recent accelerators that are supercharging the pace of the change:
CIVIL FINANCIAL PENALTIES
There is a price to pay for non-compliance. Both regulators continue to flex their powers in fining entities for regulatory breaches. In a recent example, the JFSC imposed a heavy penalty (circa £803,000 reduced from circa £1.6m for early settlement) on a licensee.
The findings, which were outlined in a public statement, will interest many firms across the islands, especially those that have undergone a period of rapid acquisitions.
Of the 11 key findings, two are of particular note to all entities. The Commission found that the entity failed to: • Keep adequate and orderly customer due diligence (CDD) records (10.4.2.28 of the AML/CFT Code) • Have its business affairs adequately monitored and controlled at senior management and board level (Section 3.1.1.5 of the TCB Code)1 . These two points are evidence of the importance placed on data integrity and board oversight.
LOOK AFTER YOUR DATA
The maintenance of data is crucial in all aspects, not just CDD. Data that is ordered and easily accessible will: • Meet regulatory requirements • Deliver better customer service • Provide relevant and targeted management information • Ultimately drive revenue.
Management information is one of the ways for entities to avoid the failings of poor senior management and board oversight.
It’s important that this information is based on a single version of the truth. Inconsistencies in data submitted to regulators are sure to be a red flag.
Boards are reminded that simply receiving the information is never enough; they need to question it and act on it to ensure their entity does not hit the buffers. Just as in F1, the drivers and the mechanics will only ever be as good as those leading them.
In Guernsey, fines have also been high and the GFSC is equally focusing on data.
The approach of the GFSC towards inaccurate data was clearly outlined in its 2021 Annual Report and Accounts: “We have been disappointed at the accuracy of data received by the Commission from licensees. Errors are found in regular reporting and in responses to thematic reviews.
“Some errors appear to be as a consequence of ‘fat fingers’ (for example, extra zeros or miscalculation of currency
exchange), while other errors persist annually, making validation checks at the Commission difficult.
“Accuracy of data is going to be an ongoing area of focus for the Commission; put simply, if we need to question if the data provided to us is incorrect, what else is?”2
DATA INTEGRITY AND BOARD OVERSIGHT
Fund service provider boards will be more than aware of the time and money invested in complying with AML/CFT regulations.
When significant resources have been spent on reviewing and updating CDD data in both islands, it is galling for all involved for that tremendous effort to be wasted. Now is the time for entities to ensure that the clean data is maintained through a robust framework leveraging technology to implement measurable controls.
It is key that boards recognise the importance of the task. New approaches around data management can have the added benefit of releasing pressure on resources, which in an increasingly competitive market for compliance staff can only be a good thing.
IMPORTANCE OF TAKING A PIT-STOP
With the speed of requirements being introduced and the deluge of sanctions following the Russian invasion of Ukraine, it is not hard to see why compliance staff must feel a pit-stop is a luxury.
However, if entities do not take the time to evaluate the effectiveness of their processes and procedures, significant deficiencies may go unnoticed. In other words, if you don’t take the time to service the engine and check the suspension, then the wheels can fall off or you may be taken off the road.
Shutterstock/Hafiz Johari
TAKE ADVANTAGE OF FEEDBACK
In the run-up to Moneyval, both Commissions are increasing their feedback to industry. While the pit-stops may be time consuming, these opportunities should be given attention.
In addition to public statements, over recent months the JFSC has published its report on its 2021 financial crime examinations. A total of 146 findings were identified, including, again, the themes of corporate governance (board oversight) and customer due diligence measures (data integrity).
This led the JFSC to comment: “A number of key themes and detailed findings in this feedback paper are similar in nature to those contained within previous feedback papers issued by us. We expect the board and senior management of all supervised persons to: • Monitor for feedback papers and similar
guidance notes published by us from time to time • Consider their own arrangements against the matters set out in feedback papers • Take prompt action where appropriate to remedy any deficiencies identified.”3
The GFSC held a series of workshops to provide feedback on the findings from its thematic on sanctions screening.
Data integrity and board oversight featured heavily here, too, with boards urged to ask questions such as: “Are we confident that all relevant data is screened?”4
The authorities in both islands continue their engagement with industry. For example, the GFSC’s industry seminar scheduled for the autumn is titled Working together to combat financial crime.
On top of that, the JFSC jointly with the Government of Jersey recently held an event, Combatting Financial Crime Together – the road to Moneyval and beyond, followed by an event titled Regtech: A missed opportunity.
SPOTTING THE SIGNS OF CHANGE
Horizon-scanning offers the protection of the ‘telemetry’ in F1 cars. Knowing what’s coming, while potentially scary, is far better than being caught unawares.
Any consultation is worth a review, even if it does not look relevant to your firm or sector at first glance.
Horizon-scanning is a vital part of regulatory compliance and it should stretch beyond country-specific regulation and also consider near-shore and supranational trends.
STAY ON TRACK WITH KPMG
Through data integrity and board oversight, fund services businesses should aim for a place on the podium or at least keep on track and not steer off the course.
Our KPMG professionals can provide you with a concise step forward in guiding you to safeguard your business.
If you simply need a more precise understanding of data governance or you would like to optimise your CDD processes and existing technology, we are here to help you. n
FIND OUT MORE
If you wish to seek advice or would more like more information, please visit our website: home.kpmg/cds or contact Emma Bailey (Emmabailey1@kpmg.com) or Alexandra Reip (alexandrareip@Kpmg.com).
1 2022-07-01-enf-1410-iq-eq-public-statement-final.pdf (jerseyfsc.org) 2 1962 GFSC Annual Report & Accounts 2021 (web).pdf 3 Financial Crime Examinations Feedback from 2021 examinations — Jersey Financial Services Commission (jerseyfsc.org) 4 GFSC Sanctions Thematic presentation_1.pdf
