Christopher Reed of Walkers explores how private funds, first-time managers and the growing trend of an increasing share of capital in private hands all come together.
Q How do you define start-up funds?
A Start-up funds are established by first-time fund managers and promoters – the person behind the fund will not previously have established a fund, but will normally have experience from a previous role within an investment manager, investment adviser or investment bank. They tend to be people with a funds background spinning off on their own or with former colleagues, or private bankers with one or two key clients who are interested in setting up a fund with private capital. Typically, first-time managers and promoters will have a particular cornerstone investor in mind, or at least a particular type of investor that they will target – in my experience, having this investor on board is key to being able to attract other investors where the fund manager has no prior track record.
Q How do you see the potential of this part of the funds market for Jersey?
A The private funds market is vast, and Jersey's potential to earn a larger share of it has expanded with the introduction of the Jersey Private Fund (JPF) regime in 2017, which is targeted at promoters looking to fundraise from up to 50 professional and sophisticated investors. The JPF regime has proved to be attractive not only to first-time fund promoters but also to experienced institutional investors and sovereign wealth funds. Statistics from the regulator show that the JPF has had a strong uptake, and has been a popular addition to Jersey's fund products – recent figures from the Jersey Financial Services Commission show a 25% increase in the number of JPFs over the last six months with a total of £43bn AuM.
Q Why is this happening now?
A A major part of the trend is the rise in private capital – by which we mean wealth in the hands of families, as opposed to institutions. Private funds are now a recognised part of the wealth structuring toolbox, and that has created opportunities for start-up managers to set up on their own, usually with that cornerstone investor already lined up, in the way I described earlier. There's no reason to think that this will slow down – a report by the Boston Consulting Group last year found that global personal financial wealth grew by 12% in 2017, and more recent research here in the Channel Islands found that private capital can amount to between 75% and 100% of assets under management for start-up fund managers.
Q How are the needs of start-up fund managers different from others that you deal with?
A A first-time fund manager tends to be less experienced and is likely being pulled in lots of different directions, as they need to consider a lot of different things – fund structure, tax treatment, commercial terms, fundraising objectives, searching for investors, building a manager/adviser team and potentially dealing with regulatory applications as well. Having reliable and experienced advisers across the key areas of legal, tax, financial and administration takes some of the pressure off managers, allowing them to focus more on the commercial elements, and this can be essential to ensuring that a fund achieves a successful and timely launch.
Q What factors are changing the way that start-up managers look at the Channel Islands?
A The determining factor in choosing the jurisdiction of the fund is often the target investor base – where those potential investors are located will inform the decision on where the fund is set up. While traditionally first-time promoters may have looked to other jurisdictions which did not have the same level of regulatory oversight and which may have been quicker to market, now with the increasing sophistication of the global investor base and a focus globally on substance and transparency, first time-managers choose a jurisdiction like Jersey or Guernsey precisely because of the level of regulatory oversight and sophistication. If first-time managers can leverage that regulatory reputation to give investors comfort that the fund will be managed and administered to a high standard by well-regulated service providers.
Q What makes the Channel Islands appeal to managers?
A The Channel Islands are popular as a potential jurisdiction for new funds because they are recognised on the global stage for having a kite-mark of quality, and Jersey and Guernsey have had that reputation for quite a few years now. They are seen as well-regulated, well-managed jurisdictions with sizeable financial services industries, providing real substance behind the structures that are set up here. Like similar funds jurisdictions, Jersey is tax neutral, meaning that investors will be taxed on distributions in their own jurisdictions but not in Jersey (unless they are themselves tax resident here). Jersey and Guernsey also have a well-respected court system, body of case law and tried and tested company law procedures and partnership laws that are closely based on English law equivalents, so are familiar to investment professionals.
Q What are the potential stumbling blocks or problems for start-up managers?
A As I said at the start, the first-time promoters who already have that cornerstone investor on board are the ones that find it easiest to get off the ground. Things that may make the process more challenging or protracted are if there is some connection to a high-risk jurisdiction or if any person involved is a PEP. This should not be viewed as a barrier to entry, it is the Jersey regulatory regime working properly to ensure that the reputation of the Island is maintained and high-quality structures and funds are being set up here. I do not think that there is a struggle for first-time managers and promoters to set up in Jersey but it can take longer as the processes and requirements are not familiar to them. We work closely with a number of administrators in the Island but unlike some other law firms we are independent, and do not have an affiliated trust company business in Jersey.
Q How do Channel Islands fund administrators accommodate start-up funds?
A A number of administrators are specifically targeting smaller fund managers (e.g. those targeting commitments of up to c. £100m), recognising the potential for growth in this market, particularly when it comes to start-up funds. We are beginning to see a number of traditional trust company businesses (TCBs) seeking fund service business (FSB) licences due to the crossover between the private capital and funds spaces. Given the inflexibility of the TCB licence, which restricts administrators to JPFs with no more than 15 investors, a lot of TCB administrators are considering obtaining an FSB licence so that they do not need to turn potential clients away just as the fund is getting into its stride.
Q How does your firm serve the start-up sector?
A Walkers is one of the biggest names in legal advice to investment funds and fund managers globally, led by our dominant Cayman Islands practice, which has been the market leader in this area for many years. With our global experience we are able to assist first-time fund managers and really add value to the fund structuring, establishment and launch phases. I enjoy working with first-time fund promoters and managers as a significant part of my investment funds practice in Jersey and I find it particularly rewarding helping them to fulfil their objectives. The introduction of the JPF has led to a marked increase in this kind of work in Jersey – we're seeing a lot of inquiries and instructions in this area, often as part of the wealth structuring options deployed in respect of private capital.
This editorial was first published in HFM's Jersey Report.
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