Innovation underlies industry’s growth
Jersey’s private equity industry traces its history back to the 1980s, when the island established itself as a domicile for private equity funds thanks in part to its proximity and convenient access to London, but also the existence of the Jersey limited partnership, which proved an effective structure through which private equity investments could be made. And once the efficacy of the structure had been demonstrated, other private equity firms were quick to follow.
The advantage of the Jersey partnership was that it did not set a limit on the number of investors in the partnership. The general partner would usually be a Jersey company that provided management of the partnership or fund, as well as corporate governance. Administrators like Kleinwort Benson would administer both the partnership and the general partner, and would usually provide directors for the general partner. The fund was managed and controlled offshore, while the investment advice would come from the private equity house in London.
Once momentum started to develop, other private equity firms also turned to Jersey – or a few miles away to Guernsey – to conduct their business. Today almost all the major UK private equity firms have established structures in the Channel Islands. The natural result of that development was a gradual evolution in the Jersey financial industry from one based on trust business to one dominated by fund services, assisted by a professional infrastructure including the Big Four accounting firms, banks to process transactions, administrators to the funds and lawyers to establish them.
Right from the start Jersey’s private equity industry was not about tax evasion. The partnership structure was transparent for tax purposes so it could accommodate investors based anywhere in the world.
Currently the industry is marking time as the financial industry and the global economy start to recover from the seismic shocks of the past two years. The disappearance of credit brought the leveraged buyout sector to a standstill; in particular large buyouts with a value of GBP1bn or more have almost completely dried up.
At the same time new fundraising has been slow, in part because of the decline in investor confidence, but also because some of the industry’s largest institutional investors such as pension funds have found their allocations to private equity overweight because their holdings in other asset classes have declined in value even further. New managers in particular have found it very difficult to raise assets.
The shrinking of bank credit has temporarily constrained the growth of an important niche area of the private equity industry, mezzanine funds, which has been a particular specialisation of Kleinwort Benson in the Channel Islands since the emergence of the market around seven years ago. Thanks to its experience in this sector, backed up by specially tailored IT systems, the firm has captured a large share of the market among London based mezzanine fund providers. However, the business is waiting for the resumption in earnest of secured bank debt, which mezzanine finance complements within a leveraged finance structure.
Jersey’s success as a private equity centre has been down to a combination of factors including experience, expertise, infrastructure, regulation and time zone, and they are the best possible assurance that it will continue to thrive as the market rebounds. With investors increasingly seeking the comfort of funds established in well-regulated jurisdiction, the island remains in pole position for the future.
Nigel Strachan is head of business development for the corporate clients department in Jersey with Kleinwort Benson (Channel Islands)
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