Mon, 24/12/2007 - 07:30
With a history of serving the private equity sector dating back at least 20 years, Jersey can boast a longer pedigree in the industry than most of its rivals. But one of its most important assets, say practitioners, is a pro-active approach to encouraging business that represents a major step forward from a few years ago.
'There's much more support for growing businesses here than in the past,' says Brendan McMahon, a financial services partner with PricewaterhouseCoopers. 'I came 20 years ago from Ireland, a country that was very ambitious to grow a financial services industry, to Jersey, where the attitude was that we could turn the tap on or off if we needed to.'
Today the island has moved a long way from that ambivalent stance, says McMahon, who is also a private equity leader in PwC's global investment management practice. 'It's very much a case of whatever the industry needs, we need to provide,' he says, citing the efforts made by Geoff Cook, chief executive of the industry promotional body Jersey Finance, to drum up business for the island. 'He's asking all the private equity houses for their view on what we're doing in Jersey and what if anything we still need to do. We're taking a very proactive role in engaging with our clients.'
McMahon says global industry confidence in offshore jurisdictions is a fragile construct, easily damaged and slow to rebuild, and he cautions that Guernsey's public debate about the merits or otherwise of population growth may prove an obstacle to attracting new business. 'We appear to have less constraints over employment growth than what we're hearing in Guernsey,' he says. 'When you talk about zero population growth, as Jersey did in 1990, it took 10 years to overcome. By contrast, the government now says it wants to grow the working population by 500 per year, which is a lot of people in an environment like this.'
That's not to say Jersey has a perfect record of seizing opportunities. McMahon notes that it was Guernsey that stole a march on its neighbour some two years by reaching agreement with the Dutch authorities on recognition of Guernsey's fund regulation as equivalent to that in the Netherlands. This allowed Guernsey vehicles to be listed on the Euronext Amsterdam exchange without undergoing further regulation, a status achieved by Jersey a year later.
In the meantime, however, the domiciling in Guernsey of KKR Private Equity Investors, Europe's largest publicly-listed private equity vehicle, had grabbed the attention of the largest US buyout houses. 'The listing of permanent capital vehicles is the main differentiating factor between the islands after KKR used a Guernsey structure to establish a vehicle listed on Euronext,' McMahon says.
'KKR went out to raise USD1.5bn and they ended up with USD5bn. It was a bit of a faux pas on the part of the Jersey authorities that they never got around to responding to the Dutch. Because of the herd factor, after KKR did it, Carlyle, Apollo and a number of other large groups went to Guernsey on the back of that.'
While Euronext and to a lesser extent the London Stock Exchange have garnered the headlines, there is a listing solution much closer to home for private equity funds domiciled in Jersey and Guernsey, according to Tammy Menteshvili, chief executive of the Channel Islands Stock Exchange, which was established in 1998 and now has a total of more than 2,400 listings. At least half of the securities listed over the past two years have been funds, a large proportion of them investing in alternative assets.
Menteshvili believes the benefits of listing in Amsterdam or London have been exaggerated.
'There was one very large deal on the private equity side that went to Euronext, KKR, and everyone assumed that this must be the way forward, but that doesn't mean that what we have to offer isn't as attractive,' she says. 'We can raise that kind of interest from investors through our exchange just as well as any other.
'Not only can we raise capital here but we have secondary-market liquidity on a number of our funds. We have market-makers, an order book and most importantly an electronic settlement system, which at the moment is just a vague idea in people's minds at some of these other exchanges like Euronext - which isn't even a stock exchange, by the way, but an inter-dealer market like AIM.'
Menteshvili also notes that secondary market liquidity, one of the main arguments cited for listing on markets such as Euronext, can be very thin for listed private equity vehicles. Kohlberg Kravis Roberts has just announced plans to use its funds to buy shares in KKR Private Equity Investors to support its sagging share price. While its net asset value per share amounted to USD25.77 at the end of September, the vehicle's share price had fallen to less than USD18 at the beginning of December.
Nevertheless, the trend toward listing of private equity vehicles and other alternative funds domiciled in the Channel Islands is likely to continue, and it has been boosted by the introduction in January this year of the Listed Fund Guide by the Jersey Financial Services Commission. Like the Expert Funds regime introduced in 2004, Listed Funds benefit from a streamlined approval procedure, with authorisation promised within three days, thanks to the fund's administrator taking over the burden of due diligence from the regulator.
'The Listed Fund Guide has taken off very well, because we are seeing a significant interest in getting funds listed, more so than at any time since the 1980s, when listing was part of the process of establishing funds for the retail market,' says Richard Thomas, a partner with law firm Ogier and chairman of the Jersey Funds Association. 'Now we're looking at it more for the institutional market. In addition, there are cases where fund promoters targeting the UK independent financial adviser market for investment through self-invested personal pensions require a listed product.'
While the KKR deal sparked a surge of interest from the US, most private equity business continues to flow to Jersey from the UK and other parts of Europe. 'There was an influx of US groups, but there won't be a flood of business,' says Horace Camp, managing director for fund administration for Kleinwort Benson in the Channel Islands. 'In Europe, Scandinavia has always been a very attractive area for business and the UK remains a big source of promoters, but many fund administrators in Jersey or Guernsey have business from all over the world.'
Gary Clark, head of hedge fund services at Mourant International Finance Administration, the island's largest administrator of alternative funds and one of the largest providers of services to private equity both in Europe and internationally, believes that the introduction by Jersey next year of unregulated funds will provide further impetus for the industry. This new type of fund, aimed at highly sophisticated investors and with a USD1m minimum investment, is not subject to ongoing supervision and does not require a Jersey-based administrator or even an audit sign-off.
Clark believes there will prove to be considerable appetite for this type of vehicle in the European time zones and that it will help Jersey to compete more effectively with the Cayman Islands, which are not only the world's leading hedge fund domicile but home to a large if hard to quantify share of the world's private equity structures. 'If we'd had an equivalent product to Cayman 10 years ago, we'd have had a lot of these funds domiciled in the Channel Islands, for no other reason than it's more convenient,' he says. 'But that regime wasn't there - Expert Funds were the first step.'
Even with completely unregulated products, he argues, Jersey's reputation for being at the top end of the offshore jurisdiction quality spectrum will serve it well. 'The island wants to lead international standards and maintain its reputation, but equally it needs to respond to the requirements of the market,' Clark says. 'With a product that's very open as to how it's serviced, managers have a greater choice of service providers. Greater competition to provide services leads to better corporate governance and greater investor protection.'
Camp argues that both Channel Islands are likely to benefit from a blurring of the lines between alternative asset classes. 'Private equity is changing,' he says. 'We're seeing convergence between what is a private equity fund, a property fund or a hedge fund as managers seek to do something different to deliver a return to their clients.' He believes that while in the past Guernsey was probably more closely associated with the private equity sector, Jersey has now made up the ground in terms of credibility as a domicile.
'Both domiciles have kept their regimes up to date, particularly with faster application processes, but another driver is the much stronger need for good corporate governance,' he says. 'The mind and management issue has made Jersey and Guernsey far more attractive, because there is real infrastructure, genuine corporate governance and a pool of credible non-executive directors. In a world where corporate governance and mind and management offshore need to be real, the islands are more attractive than ever.'
Jersey has come a long way since 1987, when the Charterhouse buyout funds became the first group of private equity funds to be established on the island. Over the intervening years, McMahon notes, the island's activities in the sector have grown in tandem with the growth of European general partners and the ever-greater volume of funds at their disposal.
'We have seen many of the major players in the European market, such as CVC, Permira, Altor Equity Partners, Nordic Capital, Axa and Vision Capital, a cross-section of the industry from the large buyout houses to mid-cap firms and pure technology fund managers,' he says. 'When CVC established its first fund here in 1996, it closed with commitments of around USD650m. A decade later, we're seeing funds with committed capital of up to USD5bn. These are what one might call the more established European houses, but 10 years ago CVC was barely heard of, nor Nordic Capital, Altor or Doughty Hanson.'
Today the insistence by national tax authorities that funds demonstrate that management and control is genuinely being exercised in the offshore jurisdictions in which they are domiciled is prompting some private equity firms to establish substantial operations in Jersey. 'A number of managers have chosen not to outsource their administration to third-party providers in the island but to create a real physical presence, like Nordic Capital, which has a lot of people on the ground now,' McMahon says.
'In contrast to 1990, when the policy was basically zero job growth, there are no real barriers to managers bringing people in if they want to expand their presence. Politicians are now saying that to grow our economy, we must support those sectors that are actually generating wealth for the benefit of everyone here. There's a feeling now that Jersey is a place close to Europe from which you can manage operations.'
Members of the industry agree that the island benefits from having close links to European Union countries and organisations within them such as Euronext while remaining outside the EU. 'There are a huge number of advantages,' says Jersey Finance technical director Robert Kirkby. 'Most important is the absence of value-added tax on structuring fees when they are charged to the offshore vehicle by the partners doing the deal. That can be quite significant, especially given the higher rates of VAT levied by some EU member states.
'The EU Prospectus Directive is very prescriptive on how prospectuses should be drafted, but if you're launching a private equity fund from Jersey you can adopt a much more pragmatic approach. There is flexibility in accounting standards - if you primarily have US investors, you can use US GAAP, or UK GAAP in the case of the UK. And while MiFID may not apply directly to private equity, it includes quite an onerous definition of a professional investor. The Jersey regulation provides much greater flexibility.'
The island could also benefit just as much, he believes, from the current plans of the UK government in a range of areas that affect the private equity industry, from the planned abolition of capital gains tax taper relief, which would have the result of raising the effective tax rate on a fund's gains from 10 to 18 per cent, to the envisaged flat-rate tax on non-domiciled individuals, who are believed to include partners at many private equity firms.
'Things like the uncertainty over CGT and the non-domicile issue are an advantage for places like Jersey,' Kirkby says. 'We're always trying to attract people like hedge fund and private equity managers, and although tax is never the primary reason for them to move, it always contributes to the decision. Right now we are hearing reports of people looking to relocate their businesses as well as their own personal domicile and residence.'
Even if the UK proposals are rescinded or amended, he argues, the uncertainty they create can be equally damaging for London. 'When that happens, people look at structuring their business in other ways,' Kirkby says. 'You never want to go down that route, because once people start thinking about a change they may well decide to go through with it. We think that could have some benefits for Jersey.'
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