Jersey’s private equity sector has continued to develop over the past year even as the global industry, affected directly by the credit crunch and indirectly by the global economic downturn that stemmed from it, has seen a pause in the headlong expansion underway before the crisis took hold. With confidence seemingly now recovering, the island is poised to consolidate its strong position as a domicile and service centre thanks to IMF recognition of its high regulatory standards and inclusion on the OECD’s ‘white list’ of co-operative jurisdictions.
The flavour of the activity carried out in Jersey changed significantly in the 24 months up to this autumn, with considerably less fund formation work. The fund formation business that took place in that period mostly involved the largest private equity houses, such as Mourant clients CVC, Axa, Nordic and Triton, which have been able to raise funds despite the difficult market because of a flight to quality on the part of investors more comfortable doing business with larger players.
By contrast, the small, start-up private equity firms that enjoyed considerable success in launching funds between 2004 and 2007 have encountered difficulty in raising capital from investors. Many of the successful fundraisings over the past year have focused on themes such as emerging markets and distressed debt as astute firms look to business areas that offer opportunities amid the downturn.
However, there has been extensive restructuring work for existing funds, particularly those launched since 2004, where funds committed have not been deployed in full or where deals have quickly run into difficulty. One response has been to reduce commitment sizes, as managers recognise it will be difficult to complete all the deals they envisaged, while limited partners facing calls on their resources have been happy not to have to invest the full amount committed in more propitious economic times.
At the same time, some general partners of funds partway through their life have encouraged their investors to deploy cash generated from exited deals toward existing or new portfolio companies rather than distribution. In some cases limited partners have been asked to provide new money to help distressed portfolio companies weather the storm.
These developments are leading to changes in the relationship between private equity fund managers and their investors. Limited partners are paying much closer attention to their funds’ progress and investor meetings are much more heavily attended. Obviously, any need to restructure a fund requires a much more intense ongoing dialogue between general partners and their investors. Managers are increasingly required to justify their fees by demonstrating the expertise they are bringing to the rehabilitation of ailing portfolio companies.
Against this backdrop, Jersey’s membership of the OECD’s white list demonstrates how it has successfully differentiated itself as a tax-neutral jurisdiction (thereby facilitating international flows of capital) as opposed to a tax haven, and people are starting to understand the distinction.
This, combined with the IMF’s highly positive report on key areas of the island's regulatory framework, underline Jersey's commitment to engage positively and co-operatively with the world, including both European and emerging markets. The island is now well equipped to measure up to the most intense international scrutiny – and its track record in private equity speaks for itself, having been stress-tested for more than two decades, in good times and bad.
Ben Robins is a partner and head of the funds team at Mourant du Feu & Jeune in Jersey