Thu, 27/11/2008 - 17:21
Over the past couple of decades, Jersey and Guernsey have both positioned themselves as key centres for establishing offshore funds, particularly in the alternatives sectors of real estate and private equity, for which BNP Paribas Securities Services provides fund administration, custody, fiduciary oversight, corporate services and banking. In establishing themselves as primary centres, the Channel Islands have continuously examined promoters' requirements in order to attract business to the islands.
As near neighbours they have both benefited collectively from a strong and evolving intellectual base and desire to ensure that their product and service offering remains attractive and competitive in a global context. The islands' longstanding engagement with the fund industry, their progressive regulatory frameworks and appetite to support the alternative fund market have delivered significant growth in both alternatives and private equity business.
There is no substitute for the 'doing', and both have had significant business streams, only marginally abated by the recent credit crisis, as new opportunities start to evolve and we see greater diversification into hedge funds, private equity, real estate, structured products and infrastructure investments by managers that aim to deliver consistent, uncorrelated, absolute returns.
With continuing institutionalisation of the alternatives space and further convergence of traditional long-only managers toward more specialist opportunistic investment, we will continue to see product widening and deepening as private equity managers adopt hedge fund techniques and vice versa, and real estate managers, for example, build portfolios that are less UK-centric.
Current market sentiment is driving transparency across a broad spectrum of structured products and similar calls for hedge fund managers and private equity players to show their hand more fully have raised the bar on investor reporting, performance fee analysis, independence of audit and administration and improvement in the overall corporate governance culture.
SAS 70-type reviews commissioned by general partners will be more widespread and private equity players will become a little less private, particularly where permanent capital vehicles are listed or their management firms take a similar route. The major private equity houses will probably become listed public vehicles in due course.
It is likely, with increasing sophistication and variation in the investment model and a wider investor base, that the need to disclose will drive alternative and private equity players to outsource more of their non-core activity to administrators and custodians who can manage data, deliver independence and produce clear and concise reporting on a diverse range of geographically spread investments.
Accounting and regulatory changes, along with the development of a voluntary code of practice, will undoubtedly increase the focus on the quality of reporting in respect of financial performance, balance sheet structuring and the valuation methodology, particularly as 'fair value' on exit can lead to greater volatility in the performance of the fund.
Taxation risk will increasingly feature as private equity managers invest further afield and seek to maximise returns at fund level without exposing their investors or their holding structures to successive layers of tax. Mitigation through well-structured and acceptable practices will be key, as will the need for well-defined investment flows and the timely provision of accurate information in order to consolidate investment and fund performance. The islands have been supporting tax-neutral or tax-efficient structures for many years and continue to develop tax treaties with a number of other countries in order to facilitate these requirements.
Functionary providers supporting the fund are therefore increasingly likely to create a hub-and-spoke model where the need for client proximity and close market association will help manage risk in location but be supported by core centres of excellence that deliver longstanding expertise in third-party administration, custody, fiduciary oversight and compliance.
Institutional suppliers will be better placed to trade off economies of scope and economies of scale as they utilise their existing resources, internal networks and strong service ethic to implement better contractual arrangements with local suppliers where they lack coverage. Having a 'centred' operation in a stable, consistent and well-regulated jurisdiction is vital to supporting and co-ordinating the activities of the fund with access to both local and global expertise.
The islands have therefore developed robust and well-tested legislation that allows funds to be structured through a variety of vehicles such as limited partnerships, unit trusts, limited liability companies and protected cell companies, complemented by a broad range of fund schemes that run from highly regulated to light-touch.
As a result, open- and closed-ended schemes can be delivered quickly to market, supported by experienced practitioners both at the formation stage and post-launch. With internationally-recognised law firms and accountants available in the islands to help with the structuring and significant expertise available to support ongoing administration, the islands have become strategically important to the private equity sector.
They are close to all the major European financial centres for raising capital, and private equity managers based in the islands are responsible for the majority of private equity fund assets in Europe. With the Channel Islands Stock Exchange available in situ and the ability to list private equity structures on the Euronext Amsterdam exchange without the need for a separate licence in the Netherlands, the islands continue to demonstrate the quality of their regulatory and business environment.
The scope of activity that takes place under the banner of private equity is extremely varied, but it remains vitally important to ensure operational integrity. BNP Paribas Securities Services is in the process of introducing a global administration, accounting and regulatory reporting platform to meet the requirements of both the largest and small to medium-sized firms for which a high-touch service is important. When combined with custody, banking and treasury services, we look forward to making our own contribution to the continued success of the Channel Islands' private equity sector.
Kevin Mundy is head of client solutions for BNP Paribas Securities Services, UK Offshore (Jersey, Guernsey and Isle of Man)
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