Learning from the crisis
By Ed Devenport (pictured) and Gavin Farrell - The past couple of years have seen a striking change in the type of work carried out by fund lawyers in the Channel Islands. Up to 2008, around 80 per cent of our activity involved the establishment of new structures, and the rest was recurring business. The liquidity crisis caused a substantial slowdown in the number of new products, but at the same time a huge increase in restructuring and other work involving existing fund vehicles.
Paradoxically, there have been significant benefits from the change as far as the legal profession is concerned. Instead of focusing principally upon transactional work, fund lawyers have been revisiting the basic principles governing fund structures and getting involved in court work during the restructuring processes. In our advisory work we’ve gone back to sources, amplified our knowledge of structures, legal mechanisms and issues surrounding the offshore world, and we will come out of the experience better lawyers as a result.
New fund activity and new instructions have rebounded in 2010, including a large number of follow-on funds. Although the past couple of years have seen the launch of various funds offering innovation in strategy, structure or asset class, there is now a greater focus on traditional fund products and strategies. The main difference has been the time-to-market impact of the crisis. Funds are taking longer to launch.
Guernsey has seen significant growth in traditional private equity funds, emerging market investments and infrastructure vehicles, investing notably in China and India. There has also been an upsurge in interest in funds capitalising on environmental issues through assets such as forestry and timber, alternative energy and carbon credits.
Although Jersey has seen fewer new launches over the past couple of years, hedge fund managed account platforms have been expanding strongly. Several of Europe’s largest platforms are domiciled in the island, and the addition of new funds to the platforms is an important source of new business.
The return to more traditional fund structures and strategies reflects an appetite for risk significantly lower than at the peak of the boom. In addition, confidence in distressed assets strategies has fallen, and investors remain gripped by uncertainty over regulatory change, cyclical movements of the economy and the value of assets.
Another significant trend is work on behalf of managers moving themselves and part or all of their business to the Channel Islands, and those restructuring management operations offshore. One showcase example was the physical redomiciliation of BlueCrest Capital Management to Guernsey, along with all of its managed, third party and proprietary, funds – a large-scale project that would have been very difficult without the flexibility of the regulator and the ability of industry members in the islands to work closely together.
In addition, private equity houses are setting up operations in the jurisdictions where their funds are domiciled both to save on third-party administration costs and to insulate themselves against potential tax liabilities in onshore jurisdictions by putting in place substantive locally managed general partner structures.
All this adds fresh expertise to the existing ranks of accountants and auditors, banks, administrators and custodians – as well as law firms – that have built the reputation of the Channel Islands within the global fund industry.
Approval of the AIFM Directive opens up real opportunities for promoters wishing to market in the EU to launch new Guernsey and Jersey funds as well as asset management structures targeting EU professional investors, given that national private placement regimes will continue at least until 2018 and there will be the possibility of EU-wide passporting for the islands' funds from 2015. It is business as usual in the Channel Islands for the non-EU investor base.
Ed Devenport and Gavin Farrell are partners with Mourant Ozannes in Jersey and Guernsey respectively
Click here to download the Hedgeweek Special Report: Implementing investment strategies in the Channel Islands 2010
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