GLOBAL BUSINESS: A VIEW FROM THE CHANNEL ISLANDS
funds EDITION OCTOBER/NOVEMBER 2023
• US fund managers • Impact of ESG • Funds performance • Skills crisis • AIFMD 2.0
ISSUE 85 OCTOBER/NOVEMBER 2023
Focus on the extraordinary
4 December 2022/January 2023
rising to the challenges THE MARKET VOLATILITY and other macroeconomic issues we have witnessed recently have certainly brought disruption to the global funds sector – the impact of which we explore in great detail across this dedicated funds issue of BL. As our issue finds, investors and fund managers have had to deal with considerable volatility and uncertainty over the past 12 months in particular. The continued impact of the Covid-19 pandemic on supply chains and consumer behaviour, followed by the Russian invasion of Ukraine and subsequent price hikes resulting from a global cost-of-living crisis – not to mention soaring inflation and interest rates in the UK, Europe, the US and beyond and now a new conflict in the Middle East – have all impacted sector performance. “It’s been a difficult environment,” one expert tells us. “Funds are holding on to assets for longer and it is harder to raise money in an increasingly competitive environment. For many investors, it has been more comfortable just to sit on cash. It is seen as the less risky option when looking at returns.” However, our analysis also finds that when there’s disruption, investors get creative – and there has been a shift from some areas to others. In the Channel Islands particularly, private equity and venture capital are still performing well, while in a more general sense investors appear to feel more confident that the darkest economic days are over.
GATEWAY TO EUROPE One area that is certainly seeing growth at the moment is that of US fund managers moving their operations to the Channel Islands. Jersey, for example, has seen funds business from US promoters more than double between 2017 and 2022, according to a recent Monterey Insight Jersey report – rising from $28.5bn to $58.7bn. US promoters are now the fourth biggest source of assets in Jersey. A similar trend is seen in Guernsey. The driver, it seems, is first and foremost the EU’s Alternative Investment Fund Managers Directive (AIFMD), which came into force more than a decade ago. The purpose of the AIFMD was to regulate the activities of alternative investment managers, and it requires reporting, disclosures and other regulatory processes. It also stipulates that anyone marketing an alternative fund in Europe must be registered
with the regulator. As a result, many major US funds looking to raise capital in Europe set up shop in the EU, with Luxembourg usually being the first choice. However, alternative investment funds do not have to be domiciled in Europe. They can also be based in an EU-approved third country and follow the National Private Placement Regime (NPPR) to market their funds into individual markets. And this is where the Channel Islands come in. In 2015, Jersey and Guernsey were included in the first wave of the EU’s approved third countries. Now, the islands are clearly benefiting from their position as a key gateway to Europe.
SKILLS CRISIS Of course, with more business comes the need for more talent and, just like a lot of sectors in many jurisdictions, the Channel Islands funds industry is struggling to find, attract and retain good people. A Guernsey International Business Association survey published this year revealed there are up to 600 vacancies across the island’s finance industry. It said the ability to attract and retain staff with the right skills was a “critical factor” of Guernsey’s competitiveness, as well as the ongoing health of its economy. The story in Jersey is similar, with one commentator stating: “With the skills crisis increasing, upskilling the local workforce is the only viable alternative to enable us to maintain a globally competitive and digitally savvy workforce. In the midst of a worldwide skills shortage, bringing skilled people to Jersey has never been more challenging.” In response, the islands are pursuing various routes – from seeking talent in other jurisdictions, to offering flexible working solutions and working out where technologies such as artificial intelligence and automation can pick up the slack. Their efforts might just be pivotal to the islands’ ability to continue to position themselves as leading financial centres – not least in the face of increasing interest from US fund managers and the growth we are seeing in demand for the islands’ services more generally. Enjoy the issue. n
In the Channel Islands, PE and VC are performing well, while investors appear to feel more confident that the darkest economic days are over
Jon Watkins is Editor-in-Chief of Businesslife
october/november 2023 5
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28 gateway to europe
Recent developments across Jersey and Guernsey
A look at why US fund managers in particular are turning to the Channel Islands to conduct their business
A close-up on the increasing importance of ESG in investment fund decision-making
The EU funds sector is crying out for stability, but will the latest Alternative Investment Fund Managers Regulations – AIFMD 2.0 – do the trick?
14 Appointments Some of the top-level job changes across the islands
16 fund performance How has the funds sector performed in the midst of an unusually challenging period – and what’s on an upward trajectory?
Businesses across the world are struggling to find, develop and retain the staff they need, and the Channel Islands are no exception
24 investing Demand for new investment opportunities is resulting in a range of unusual and unique solutions – we look at some of the key trends
data focus Investment in technologies slowing down
contributors The BL Global Discussion Forum
Follow us @blglobalnews Office: 7 Castle Street, St Helier, Jersey, JE2 3BT © Chameleon Group Limited, all rights reserved. Reproduction in whole or in part without written permission is prohibited. Views expressed by our contributors are their own and do not necessarily represent the views or policies of Chameleon Group. While every effort is made to achieve total accuracy, Chameleon Group cannot be held responsible for any errors or omissions.
David asks whether the Alternative Investment Fund Managers Regulations – or AIFMD 2.0, as the amended version is being termed – will bring much-needed stability to the EU funds sector.
Meanwhile, Len explores what’s making US fund managers choose the Channel Islands as a location to do business – and the gateway they provide to Europe is proving a crucial factor.
Following a period of huge turbulence across global markets and economies, David examines what’s on an upward trajectory in the funds sector as we start to look forward.
And Desné takes a closer look at how the mainstreaming of ESG measures will pick up speed as the shift of capital to sustainable investments makes more and more of an impact.
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in the NEWS PRIVATE CLIENT REPORT Ocorian has published The 2030 Trustee, which analyses the industry’s transformation over three pivotal periods: the 2008 financial crisis; the post-Covid era; and a look ahead to 2030 and the trends of the future. The guide is a compilation of nine articles contributed by industry leaders, who offer perspectives on the trust sector’s evolution and the shifting demands of clients. Michael Betley, Global Head of Private Client at Ocorian, said: “Our publication provides a critical examination of our industry’s past, present and future and what we as trustees need to heed as we plan ahead. “Looking forward now is timely as the economy continues to be subject to major disruptions and the political landscape evolves. This dynamic environment is once again giving rise to a shift in the private client industry. The responsive service providers of tomorrow will be the ones who adapt and change in step with our clients’ priorities and demands.” TOP 40 UNDER 40 Citywealth has published its Top 40 Under 40 listing for 2023, which includes two professionals working in the Channel Islands – Chris Cotillard, Offshore Director
SUSTAINABILITY AWARDS Jersey Finance has presented this year’s Sustainable Finance Awards. The winners – selected by a panel of judges including Andrew Mitchell, Founder and CEO of Equilibrium Futures, Simon Boas, Executive Director of Jersey Overseas Aid, and Amy Blackwell, Founder of Amy Blackwell Advisory – were as follows: • Leadership in Sustainable Finance – Banking: RBS International • Leadership in Sustainable Finance – Funds: JTC Group • Leadership in Sustainable Finance – Investment Management: Affinity Private Wealth and Cazenove Capital (joint winners) • Leadership in Sustainable Finance – Private Wealth: Accuro Trust (Jersey) • Leadership in Sustainable Finance – Professional Services: PwC • Innovation in Sustainable Finance: Paragon Impact • Outstanding Individual Contribution: David Postlethwaite, KPMG in the Crown Dependencies • Sustainable at Heart: Ogier and PwC (joint winners) • Future Individual Influencer: Indiana Latimer, PwC • Local Presence, Global Reach: KPMG in the Crown Dependencies.
Done Deals Carey Olsen has advised Guernsey-based investment firm Atlantis Japan Growth (AJG) on its merger with Nippon Active Value Fund (NAVF). AJG focuses on long-term capital growth from listed Japanese equities of varying market caps. UK-based NAVF invests in small- and mid-cap Japanese firms. AJG’s assets have rolled over into NAVF in exchange for the issue of new NAVF shares to AJG’s shareholders, or an option of a cash exit for up to 25% of AJG’s issued share capital. The Carey Olsen Guernsey corporate team advising AJG consisted of Partner Ben Morgan and Senior Associate James Cooke. Carey Olsen has also advised Quinbrook Infrastructure Partners on the close of the £620m Quinbrook Renewables Impact Fund – its original target was £500m. Partner Christopher Griffin led the team advising on all Jersey aspects of the fund’s formation and closing. Walkers in Jersey has advised Cineworld in connection with its financial restructuring. This includes the emergence of entities making up the firm’s UK business from Chapter 11 cases and the pre-packaged administration of Cineworld Group. Cineworld is one of the largest cinema chains in the world, operating in 10 countries with 8,181 screens. The Walkers team, led by Group Partners Jon Le Rossignol, Fraser Hern and Christopher Reed and Partner Richard Holden, advised on the Jersey law elements of the financial restructuring, as instructed by Slaughter and May and Kirkland & Ellis. Ogier’s Investment Funds team in Guernsey has advised on the establishment and final closing of Air Street Fund II, a $121m fund focused on AI-first companies. Air Street Fund II is a Guernsey-registered collective investment scheme and Air Street Capital is a venture capital firm investing in AI-first technology and life science companies in the US and Europe. The Ogier team, led by Partner Bryon Rees, advised Air Street Capital on all Guernsey legal and regulatory aspects of the fund’s launch, working with lead onshore counsel Morgan Lewis and Guernsey administrator HFL. Ogier in Guernsey has also advised the International Federation of Red Cross and Red Crescent Societies (IFRC) on the launch of a risk transfer mechanism that aims to transform its approach to disaster response. The tool, which uses a Guernseyprotected cell company and other Guernsey vehicles, has been launched with Aon, Lloyd’s Disaster Risk Facility and the Centre for Disaster Protection. Ogier advised IFRC on establishing the structure and the contractual relationships involved. The team was led by Partner Christopher Jones. n
8 october/november 2023
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Irish law firm Leman has rebranded to Ogier 18 months after the law firms merged. Established in 2007 as Leman Solicitors, the firm has seen strong growth since the merger in 2022, with a 40% increase in headcount and five new partners. Ogier in Ireland has extended its legal services to the Irish market to include banking, debt capital markets and funds services. Hawksford is to acquire Singapore-based Healy Consultants, which also establishes a presence in Dubai via Healy’s subsidiary operation. Healy supports the set-up of businesses through services including company registration, bank account opening, immigration, accounting and tax filing. As part of the deal, the Healy team will join Hawksford in their current roles. Jersey accountant Purpose, part of the Rialto group, has launched accountancy brand AllSorted, following the acquisition of ICN Toole & Co by Rialto Investment Partners in March. ICN Toole Directors Catherine Day and Denis Thérézien will remain with the new business. Purpose will continue to provide business advice and valuations. Its tax and accountancy teams have merged with ICN Toole & Co to form AllSorted. Vistra has completed its merger with Asian business expansion group Tricor. The combined business will now have more than 9,000 staff in 50+ jurisdictions. Simon Webster, who joined Vistra in November 2022 as CEO, will lead the business. Although Tricor and Vistra are now legally one company, there will be no immediate changes for clients. The business will operate as one brand from early 2024. Altum Group has acquired Link Fund Solutions (Luxembourg), which provides third-party alternative investment fund manager and management company services from Link Group. It is authorised to deliver manco services to alternative investment funds and open-ended mutual funds in the EU. The company is regulated by the Commission de Surveillance du Secteur Financier and completion of the deal is subject to its approval. n
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and Trustee at Alex Picot Trust in Jersey, and Donna Shorto, Relationship Director at Praxis in Guernsey. The annual listing showcases the rising stars in the wealth management industry, based on recommendations from clients and peers and independent research by Citywealth. IOD DIRECTORS OF THE YEAR The IoD has announced the winners of this year’s Jersey Director of the Year Awards. The judges included Kevin Keen (Chair), Kate Nutt, Lisa Springate, Paul Murphy, Lee Bosio, Heather MacCallum and Andrew Le Gallais. The winners were: • Director of the Year – Large Business: Chris Clark, Prosperity 24/7 • Director of the Year – SME Business: Steve Quinn, SystemLabs • Family Business Director of the Year: Robert Morton, Hawk Family Office • Start-up Director of the Year: Phil Slatter, Reel Creative • Third Sector Director of the Year: Fiona Vacher, Jersey Child Care Trust • Public Sector Director of the Year: Gareth Hughes, Victoria College • Young Director of the Year: Laura Kyle, Entrust • Director of the Year – Equality, Diversity and Inclusion: Jo Buckross, Lloyds Banking Group • Director of the Year – Sustainability: Gill Knights, JT Group
• Non-Executive Director of the Year: Helen Ruelle, Jersey Employment Trust • Chair Award: Tim Ringsdore, Jersey Competition Regulatory Authority. DIGITAL TRUST INSIGHTS PwC’s 2024 Global Digital Trust Insights survey has found that the proportion of businesses experiencing a data breach of more than $1m has risen from 27% to 36% since last year. The survey of 3,800 business and tech leaders across 71 countries also found that companies are viewing the rise of Generative AI with a mix of scepticism and excitement, with many investing in cybersecurity to protect against cyberattacks. Some 64% of respondents said they have increased their sales revenue in the past year, while 82% expect to increase revenue over the next year and 79% say cyberbudgets will rise. Organisations that show greater maturity in their cybersecurity initiatives report more benefits and a lower incidence of cyber breaches of $1m or any at all. Among business and tech leaders, there is increasing concern over the rise of GenAI, with 52% of respondents expecting it to lead to catastrophic cyberattacks over the next 12 months. Nearly eight in 10 (77%) said they intend to use GenAI in an ethical and responsible manner. But around three quarters of business and tech
Ocorian has completed its acquisition of Asia-Pacific Accounting & Secretarial Services (A-Pass), announced in June. In an all-share transaction, Ocorian acquired A-Pass from private investment firm Capricorn Capital Partners HK, the Hong Kong arm of Capricorn Capital Group. A-Pass has rebranded as part of Jerseybased Ocorian. Established in Hong Kong in 2006, A-Pass is a corporate services provider providing secretarial, accounting, payroll, trust and tax services and assisting company formations.
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Deloitte publishes Q3 CFO Survey Against a backdrop of higher interest rates, Deloitte’s Q3 CFO survey shows finance leaders continuing to focus on defensive balance sheet strategies. UK CFOs now rate bank borrowing as being more unattractive as a source of corporate financing than at any time since the survey began. Despite this, business confidence rose in Q3 and is slightly above average, with a net 9% more optimistic about financial prospects than in Q2. Conducted between 19 September and 2 October, the survey captures sentiment among the UK’s largest businesses. A total of 70 CFOs took part, including the CFOs of 13 FTSE 100 and 26 FTSE 250 companies. The combined market value of the 43 UK-listed companies is £345bn. CFOs’ attitudes to financing their businesses have shifted. They now see equity financing (net -10%) as more attractive than debt financing, either in the form of bank borrowing (net -37%) or corporate bond issuance (net -39%). Between 2009 and the start of this year, finance chiefs have rated equity ahead of bank borrowing and corporate bond issuance in only one quarter (Q2 2009). CFOs have also become more cautious about taking on debt, with a net balance of 15% seeing UK corporates’ balance sheets as being overleveraged. Debt reduction is rated as a strong priority at 30%.
DIGITAL TRUST INSIGHTS (continued from p10) leaders expressed excitement about the potential of GenAI. Chris Eaton (pictured), Director and Head of Risk Assurance at PwC Channel Islands, said: “Cybersecurity continues to be top of mind for business leaders, now more than ever. C-suites need to be agile and adapt to the changing market. With emerging tech developments hitting the market in transformative ways, executives must challenge the status quo by building security into the fabric of the organisation instead of reacting once there is a crisis.” As part of its survey, PwC developed an index to
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The survey shows that availability of credit saw a modest decline this quarter to a net -12%, but remains significantly higher than during the global financial crisis. The cost of new credit for corporates remains close to the highest level seen since the global financial crisis, at a net 84%. Cost reduction (54%) and increasing cash flow (43%) continue to top the corporate priority list for finance chiefs, while they report they are making greater efforts to reduce leverage – 30% rate it as a strong priority. CFOs see the Bank of England’s base rate falling only slightly from its current 5.25% to 4.75% in a year, consistent with market expectations that the UK is at or close to the top of the interest rate cycle. Geopolitical risk, higher inflation and the prospect of further interest rate rises continue to be seen as the most significant sources of external risk, while concerns around labour shortages and disruption to energy supplies have eased. CFOs ranked inflation as the second highest risk to business. Although inflation may have peaked for this cycle, CFOs expect it to be 3.1% in two years, above Bank of England expectations. They also think wage growth is likely to slow over the next 12 months from 6.2% to 4.3%. Firms’ operating costs have risen in the past 12 months, and 84% expect them
identify which organisations consistently followed best practice with cyber. Of all respondents, just 5% reported consistently implementing 10 defensive and growth-minded cyberpractices – PwC calls them ‘Stewards of Digital Trust’. More than half of these (53%) have revenues of $5bn or greater and are likely to be high-growth organisations. These organisations were also more likely to say that the most damaging cyber breach in the past three years cost them less than $100,000 overall. While 36% of organisations overall experienced a $1m+ cyber breach, the figure was 29% for Stewards of Digital Trust. They also gave more positive responses about the
to continue to increase. Reducing cost continues to be rated as the highest priority in the next 12 months, with 54% rating it as a priority for their business. CFOs view government policy as the biggest driver of their firm’s response to climate change (with a rating of 47), followed closely by customers (46) and employees (42). Some 58% of CFOs believe their businesses will face significant or wholesale change in the move to a lowcarbon economy in the next 10 years, with only 4% seeing little or no change. Most (82%) continue to see opportunities in the transition to a low-carbon economy. John Clacy (pictured), Head of UK Financial Services Portfolio Audit, based in Guernsey, said: “One of the surprising aspects of the survey was that even with the geopolitical turmoil, business confidence levels remain above average. “Locally, business leaders will be pleased to note that new technology and the transition to net zero will reshape the economy and play a major role in driving growth. Finance leaders also believe the application of AI will lift productivity and that the energy transition will create significant business change and new business opportunities.” n
potential impact of GenAI – many strongly agreeing it will develop new lines of business (49% vs 33% overall) and that they will use GenAI tools for cyberdefence (44% vs 27%). Despite the rise in climate change-related natural disasters, ongoing impacts of Covid-19 and inequality, business and tech leaders ranked digital and tech as the top risks for mitigation over the next 12 months. The top three cyber-related threats reported were cloudrelated threats, attacks on connected devices and hackand-leak operations. Despite this, more than one-third of companies said they haven’t instituted risk management efforts, and only one in four have made cyberresilience improvements. Only 2% of respondents said they were optimising and
continuously improving across all areas of cyber resilience. Equally important, more than 40% of leaders said they do not understand the cyberrisks posed by emerging technologies such as virtual environment tools, GenAI, enterprise blockchain, quantum computing and virtual reality/ augmented reality. Eaton added: “Organisations should adopt a responsible AI toolkit to guide the trusted and ethical use of AI. Although it’s often considered a function of technology, human supervision and intervention are essential to AI. “And along with security and privacy risks, they must now account for additional areas involving data risks, model and bias risks, prompt or input risks and user risks when they begin working with GenAI.” n
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Appointments Deloitte has recruited Jackie McLaughlin as Director of Advisory and Assurance, Islands and Gibraltar, based in Jersey. Jackie, a Chartered Accountant, has indepth knowledge of regulatory issues in Jersey, Cayman, BVI, Luxembourg, Hong Kong and Singapore. She joins from Collas Crill, where she has been a Senior Regulatory Consultant since 2021. Prior to this, she held senior compliance and risk roles with Hawksford, Sanne and Minerva. Earlier in her career, Jackie spent five years as a Senior Financial Analyst with the Jersey Financial Services Commission. She also worked for Sator and accountant Achta.
HSBC in the Channel Islands and Isle of Man has appointed Alvaro Teixeira to the role of Head of Wealth and Personal Banking (WPB), subject to regulatory approval. Alvaro will also lead the HSBC Expat business, which is managed from Jersey. Having joined HSBC in 2010, he most recently served as Head of WPB in Malta, where he played a key role in transforming the bank’s risk management framework in the jurisdiction. Prior to that, he worked in Brazil, Hong Kong, Mexico, the US and UK in different areas of HSBC’s WPB division. He has also served on the boards of several HSBC subsidiaries.
Invicta Wealth Solutions has announced three promotions. Irina Canty-Forrest (pictured) has taken over as the firm’s Finance Director. Irina joined Invicta in 2020 as Accounting and Finance Manager from Butterfield Bank, having previously worked for EY, Credit Suisse and Heritage Corporate Services. In addition, Karl Loeser joins the firm’s board. Karl joined Invicta in 2014 and most recently served as Client Relationship Director. And Kelly Roger has been promoted to the position of Head of Client Administration. Kelly joined Invicta in 2005 and most recently worked as Client Relationship Director too.
Oak Group has appointed Kim Sgarlata as its Group Chief Executive Officer, based in Guernsey. Bringing to the business an extensive background in international financial services, Kim joins Oak from HSBC in London, where she has spent the past two and a half years as Global Head of Wholesale Transformation, overseeing large-scale change programmes. Prior to joining HSBC in 2020, Kim spent nine years with management and technology consultancy Capco, latterly as Partner. Her earlier career included periods of employment with Merrill Lynch, Accenture and State Street.
TMF Group has named Tim Houghton (pictured) as Global Head of Private Wealth and Family Office Services. Tim joined TMF’s private clients team in 2019 after 20 years with RBC Wealth Management in Jersey. In January 2022, he became Market Head for the Channel Islands and has more recently served as Co-Market Head, British Isles and Ireland, alongside James Coughlan. James, also based in Jersey, is now the sole Market Head, British Isles and Ireland. In his new role, Tim will oversee TMF’s strategy for international pensions, employee benefits and management incentive programmes.
BWCI has appointed Anthony Brewer as a Senior Manager to lead the firm’s research and development activities. Anthony, based in Guernsey, will oversee technological innovation and support the investment services team. He brings to the firm broadranging pensions experience, having spent the past three years as a corporate pensions adviser with Zephyrus Partners in London. Prior to this, he spent more than eight years as a Senior Consultant with Aon Hewitt. Anthony is an actuary and qualified as a Fellow of the Institute and Faculty of Actuaries in 2015.
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BDO Guernsey has recruited Fraser Hiddelston as Head of Governance and Regulatory Compliance Advisory. Fraser will support new business development and serve as a coach and mentor to the advisory practice department. He specialises in auditing financial services clients, having gained experience in captive insurance with Aon. More recently, he has led the governance services division at Northern Trust. Fraser sits on the members board of the Institute of Chartered Accountants of Scotland and has also spent 14 years as Treasurer of the Guernsey Society of Chartered & Certified Accountants.
Investec Bank (Channel Islands) has appointed Jane Niles as its Chief Executive Officer, taking over from Brendan Stewart, who has held the position since 2018. Jane joined the bank in 2016, initially leading the corporate and family office segment, and she has more recently been acting as Head of Offshore Real Estate and Head of Lending. Jane’s earlier career included 11 years with NatWest, where she held senior roles in London and Hong Kong. She also serves as a non-voting member on the Committee for the Environment and Infrastructure for the States of Guernsey.
Hawksford has named Magda Stratford (pictured) and Gerry Gowans as Directors in Jersey. Magda will manage a team administering complex multi-jurisdictional structures for high and ultra-high-net-worth families, with a focus on the UK, Europe and the Middle East. She has more than 15 years in the Jersey fiduciary sector, including at Coutts & Co Trustees, BNP Paribas and most recently Zedra. Gerry will manage a team administering structures for private clients, particularly in the Middle East, Asia and Africa. He has held senior positions in the UK, Jersey and Guernsey, most recently at Zedra as a Client Director alongside Magda.
Ogier has promoted Henry Wickham, its Head of Estate Planning, Wills and Probate in Jersey, to Partner. Henry advises on all aspects of Jersey trusts, foundations and estate planning and related corporate law issues. He is experienced in local and international will and probate matters, particularly in the administration of highnet-worth and multi-jurisdictional estates, as well as complex succession planning and will drafting. A STEP member and former Chair of STEP Jersey, Henry joined Ogier in 2019, having previously worked for HSBC and Bedell Cristin in Jersey, and Lawrence Graham in London.
Bedell Cristin has promoted Sonia Shah (pictured) to Managing Associate in the litigation team in Jersey. Sonia joined the firm in March 2016 having qualified with Gordon Dadds in London. Her practice involves advising onshore law firms, fiduciaries and high-net-worth individuals in relation to trust, commercial, insolvency and regulatory matters. In addition. Bedell Cristin has also made promotions in the business support teams in Jersey, with Sarah Ferguson taking over as Deputy Head of ICT and Ebony Parker promoted to Senior Compliance Administrator.
JTC has recruited two Directors to its funds team in Jersey – Will Turner (pictured) and Ben Durbano. Will has more than 16 years’ experience in financial services in Jersey, Hong Kong and Singapore, particularly in real estate. He joins from Crestbridge and his earlier career included 13 years with Intertrust. Ben, who has more than 18 years’ experience in financial services, joins JTC after four years with Sanne. His career has also included stints with Crestbridge and Ogier. In his new role, Ben is responsible for the oversight of the fund services team and a diversified portfolio of clients.
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Funds in focus Words: David Stirling
16 October/November 2023
Following a period of huge turbulence across global markets and economies, how has the funds sector performed? and what’s on an upward trajectory as we look forward?
IS CASH KING? “It’s been a difficult environment,” says Yulia Manyutina, Associate Director, Climate and ESG, at RBS International. “Funds are holding on to assets for longer and it is harder to raise money in an increasingly competitive environment. “For many investors, it has been more comfortable just to sit on cash. It is seen as the less risky option when looking at returns.” However, as with most crises, where some investors see red lights, others look for the green lights of opportunity. Even in these troubled times, when the chips are down in one sector, things are looking rosier in others. Looking at the most recent quarterly statistics from Preqin, this has once again been the case. In its second quarter report for 2023, the investment data group found that private equity buyout horizon internal rates of return – or IRR – were 2.1% for the year ending 2022. This means these funds managed to tread water over the period, despite the challenges in public equity markets and concerns relating to the state of the global economy – in particular, rising interest rates. According to Preqin, this prompted fears that valuations are not being marked down to the extent they should have been given steeper declines in public equity markets. Aggregate capital raised declined 35% to $106.7bn, representing the weakest quarter for fundraising since the second quarter of 2018. After all, uncertainty and dealmaking are not natural bedfellows. Venture capital also suffered, with endof-second-quarter deal-making trending downward for the sixth successive quarter.
Aggregate capital raised has followed a similar trend, with 219 funds raising $26.1bn by the end of Q2 2023.
PRIVATE EQUITY AND VENTURE CAPITAL Private equity and venture capital are still performing well in the Channel Islands. The most recent Monterey Insight Guernsey Fund Report found that fund assets serviced on the island stood at $517.8bn at the end of June 2022, down just 2.8% compared with 2021. Private equity/venture capital funds remained the most popular product of serviced funds topping asset allocations with $379.8bn. In Jersey, fund assets serviced decreased from $605.4bn in 2021 to $585.2bn at the end of June 2022. Again, private equity/venture capital funds were the most popular products, accounting for $415.9bn of assets. Property/real estate funds ranked second, with $72.2bn.
For many investors, it has been more comfortable just to sit on cash. It is seen as the less risky option when looking at returns
INVESTORS AND FUND managers have had to deal with considerable volatility and uncertainty during the past 12 months. The continued impact of the Covid-19 pandemic on supply chains and consumer behaviour, followed by the Russian invasion of Ukraine and subsequent price hikes resulting from a global cost-of-living crisis – not to mention soaring inflation and interest rates in the UK, Europe, the US and beyond – have all impacted sector performance. On top of all this, a banking crisis that saw the collapse of US group Silicon Valley Bank and the sale of Credit Suisse has also shredded market nerves.
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Fund performance “From a fundraising perspective – private equity houses raising new funds – this has been more challenging, with interest rates on the up and general economic uncertainty,” says James Syrotiuk, Partner at Heligan Group. “Limited partners are taking longer to commit. Hence, new PE funds that would have historically been raised in 10 to 15 weeks are now taking between one and two years. “From an investment perspective, deploying the fund when it has been raised into investee companies has also been affected. Deal volumes are down across the board as companies sit tight and PE investors are more wary of relying on historic financial information to value businesses. “All of that said, those funds with a USP and a differentiated offering stand to benefit as investors seek to put their money into new opportunities and new markets.”
Elsewhere, Preqin said a strong June pushed global hedge funds toward a 2.46% return by the end of Q2 2023. Equityfocused strategies, relative value and eventdriven funds performed well. Private debt is the asset class that has most outperformed investor expectations, with 90% of those surveyed reporting that the asset class had met or exceeded expectations over the past year. Private equity real estate capital-raising surged to $57bn by the end of Q2 2023, above the $46bn quarterly average achieved since 2018. However, the number of funds closed fell in the quarter, marking the second consecutive quarterly drop. Natural resources’ 30.2% one-year horizon IRR was nearly double that of infrastructure (15.9%) and nearly three times higher than real estate (10.6%) by the end of 2022. ESG funds, according to Refinitiv data, showed a rare net outflow for the first half of 2023. This was due to economic and regulatory worries in Europe and an antiESG backlash in the US. Global ESG funds that invest in shares saw $15.4bn of net outflows in the second quarter. However, ESG fixed-income funds enjoyed net inflows. Manyutina believes that despite the volatility, the allure and evolution of ESG funds is still clear. “We’ve seen fund managers looking beyond the usual climate change and carbon emission piece towards new areas of ESG such as nature and biodiversity, sustainable supply chains and social aspects such as impact investing,” she says. “A bigger picture is emerging.”
Funds with a USP and a differentiated offering stand to benefit as investors seek to put their money into new opportunities and new markets
As for the vision of the next few months, investors appear to feel more confident that the darkest economic days are over. According to an August survey from Preqin, more than three-quarters of global investors believe we are on a decline or approaching the bottom of the macroeconomic and real estate market cycle. As a result, only 5% of investors were planning to sell down their private capital
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Most investors believe the real estate cycle is starting to decline or is approaching the bottom, but that short-term pain awaits allocations in the next 12 months, with over a quarter planning to increase. Private equity, Preqin added, is set to grow its position as the most-held asset class, with more capital expected to flow into it despite a “more pessimistic returns outlook over the short term” and concerns that it is currently overvalued. Infrastructure is the asset class that’s set to be second-most popular with investors in the next 12 months, with a particular focus on the US. The positive trend in private debt is also expected to continue, with most investors tipping it to perform even better over the next 12 months. Much of the interest in private debt, Preqin added, is due to the current economic environment and concerns around interest rates lingering. Investors point to reliable income as the main reason for investing in private debt, as well as some looking for high absolute returns. Both private debt and infrastructure are also benefiting from a continued appetite for more stable assets as investors await more certainty from the global economic picture. Elsewhere, Preqin found that most investors believe the real estate cycle is
20 October/November 2023
starting to decline or is approaching the bottom, but that short-term pain awaits. Indeed, more investors are looking to cut their allocations to this sector. Hedge funds are, however, poised for recovery, with the US presenting the brightest opportunities and the UK seeing a drop in sentiment.
MORE PAIN TO COME More pain is expected to come in venture capital, with most investors believing their VC portfolio is overvalued. Commodity price concerns are also expected to cloud opinion on natural resources investment. “Private debt continues to build awareness and ESG/impact is still strong,” says Syrotiuk. “The latter will continue as I can’t see things swinging back away from a focus on ESG – and nor should they. “So investing in businesses and sectors that have a greater ability to make an impact on ESG factors is a good thing and, in my view, will remain in a growth phase.” Manyutina adds: “ESG is not going away with a developing regulatory market in both the UK and the Channel Islands. ESG investors have a long-term outlook of 20 to 30 years. They are not held hostage to short-term volatility. I have a strong
belief that ESG and impact investing will remain a growing area.” Syrotiuk also points to sectors such as national security and crime prevention for potential funds growth. “Anything IT or cyber related will be strong,” he says. “We will probably see more investors looking for ‘platform’ assets where they can execute a buy-and-build strategy as opposed to one-off investments. This allows PE houses to get more money out the door in a market where new opportunity is sparse.” Manyutina says raising funds will remain challenging given competition levels and urges fund managers to be more open and upfront with investors on what they are trying to achieve with their strategies. “Engage early, be visible and very specific about what you want from investors and why,” she says. “This will differentiate those that will do well in the months ahead and those that won’t.” n
The funds landscape Alternative fund managers expect a dramatic rise in inflows from pension funds and private banks over the next 18 months INFLOWS FROM PENSION FUNDS PREDICTED TO RISE The fund management industry has endured a difficult period, with fewer funds launched and the amount of capital raised at some of the lowest levels seen for years. However, new research1 from Ocorian – a global financial services provider and leader in alternative fund administration – shows almost nine in 10 alternative fund managers (87%) predict that inflows into alternatives from pension funds will increase over the next 18 months. And almost two fifths of these (36%) expect a dramatic increase. More than eight in 10 (81%) expect levels of fundraising to be higher over the next 18 months compared with the previous 18-month period. The majority (69% of fund managers) are cautiously optimistic, stating they are expecting to see a slightly higher level of fundraising, while 12% believe it will be dramatically higher. The study from Ocorian, which manages more than 15,000 structures on behalf of 6,000+ clients globally, also looked at which jurisdictions will increase in
popularity for alternative fund managers targeting European investors over the next 18 months. It found strong support for Jersey and Guernsey, with 36% of alternative managers expecting an increase in the use of the Channel Islands to domicile structures targeting European investors.
ALTERNATIVES TO BE POPULAR WITH PRIVATE BANKS Ocorian’s study of alternative fund managers across the UK, US and Europe found almost three quarters (72%) expect inflows into alternatives from private banks to increase over the next 18 months, with 33% expecting these to increase dramatically. Meanwhile, six out of 10 (61%) expect inflows into alternatives from corporates to increase over the next 18 months, with 34% expecting dramatic increases. Ben Hill, Co-Head of Fund Services at Ocorian, says: “Our research shows that alternative asset managers are feeling very optimistic about the next 18 months, with increasing levels of inflows across all sectors – in particular from pension
funds, private banks and corporates who want to gain exposure to the benefits that alternatives can bring – helping lower volatility, enhance returns and increase diversification. “These inflows come with additional operational demands, with investors requesting automation, more bespoke reporting, and greater transparency. “These additional requirements can stretch the operational teams within alternative asset managers, leading them to turn to firms such as Ocorian to support their evolving needs and to handle their growing operational complexities.” n
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How can Ocorian help you to focus on maximising your fund’s potential? Ocorian’s expertise in establishing and administrating alternative investment fund structures can help you to fulfil your fund’s potential. Find out more about Ocorian’s awardwinning fund services offering and discuss your requirements with our funds business development team at www.ocorian.com/ funds-team.
HOW ALTERNATIVE FUND MANAGERS SEE INFLOWS INTO ALTERNATIVES CHANGING OVER THE NEXT 18 MONTHS Increase dramatically
Stay the same
Sovereign wealth funds
Fund of funds
Ocorian commissioned independent research company PureProfile to interview 100 alternative fund managers across real estate, private debt, private equity and infrastructure, residing across the UK, US, France, Germany, Netherlands, Sweden, Switzerland, Finland and Norway during April 2023
October/November 2023 21
Asset management in the age of uncertainty Steve Stormonth, Audit Partner at KPMG in the Crown Dependencies, offers some tips for navigating current market turbulence THESE ARE INTERESTING times.
Central banks have been raising interest rates aggressively and, coupled with low investor confidence, equity and bond markets have been heavily impacted. What really makes the current situation so interesting, however, is that this is all happening amid a massive global effort to re-engineer the world economy to be greener and more equitable. Add in the disruptive power of new technologies such as generative AI, as well as general dislocation caused by geopolitical turmoil, and it seems clear that global market fundamentals are under considerable stress. The impact on the wider asset management industry has been significant. High inflation and weaker markets have pushed down asset valuations. That, coupled with a clear shift of funds into cash and deposit accounts, suggests the amount of industry assets under management (AUM) is shrinking. For many managers, that means management fees are under pressure. While some asset managers may view this period as a massive risk, others see it as an opportunity. Most, however, seem to recognise that their business is in a period of significant disruption. This is not a short-term economic blip, nor a sort of market correction. The fundamentals of asset management are changing and the need for new ideas and new models has never been more urgent. KPMG believes that the most successful asset managers are likely to be those that realign their business around value, clients and purpose: • Value: This means different things to different investors. For some, it’s about preserving financial value, creating higher rates of return and reducing costs. For others, it may be about trust, confidence and relationships.
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Understanding what represents value for specific clients will be critical. • Clients: Whether you cater to the mass market or to select clients, the key is to get to know your clients in a way that allows you to not only provide them with value-driven products and services, but also to anticipate their expectations and trends. Understand your clients and you will understand your opportunities. • Purpose: Investors are increasingly influenced by what motivates their asset managers. So too are employees. Being able to articulate your purpose — particularly regarding the drive to net zero and decarbonisation — will allow asset managers to articulate their value propositions more clearly to clients.
FINDING TRUST IN TECHNOLOGY While this may seem like a challenging mix of priorities to juggle, technology is already playing an enabling role, particularly in allowing managers to get closer to their
clients, innovate their product offering and deliver transparency. Retail asset managers, for example, are exploring opportunities to tokenise electronic fund transfers (EFTs) using blockchain technologies – both to make their products more accessible and to get closer to clients, allowing them to cut out the intermediaries. In much the same way, hedge funds are beginning to think about digital assets as an investable asset class and real estate players are also looking at tokenising their asset portfolios. Technology is also allowing the more innovative asset management firms to create new revenue streams and solidify existing ones. Over the past few months in particular, a growing number of asset managers have brought their internal tools and platforms to the market as a service. Smaller asset managers are using these technologies to allow them to focus on creating the best products for their clients at the best price.
FIVE STEPS TO THE FUTURE
The fundamentals of asset management are changing and the need for new ideas and new models has never been more urgent
Our experience of working with asset managers to assess their future business models, operating models and value propositions suggests there are five things they could start doing today to prepare for the changes coming in the very near future: 1. Understand your clients: Client needs and expectations are changing rapidly, as are their investment goals. Consider how you can get closer to your clients, perhaps by working more closely with intermediaries to deliver personalised strategies (or removing some intermediaries entirely), to better identify and predict future trends. Think about the types of products and solutions they may want in the future, as well as how they will want to interact with their asset managers and what type of information they may require.
2. Articulate your values and purpose: Climate change is one of the world’s biggest challenges. Asset managers are in the unique position to use their investment decisions to achieve real impact and drive positive change – by helping their investee companies to reduce their environmental footprint and develop greener products and solutions. Those who can articulate their purpose to society and investors can differentiate in a highly competitive and value-driven market. 3. Communicate continuously: Communication is a key enabler of purpose and client-centricity. Today’s leading asset managers are continuously communicating with their stakeholders on a wide range of topics – helping them build trust with their customers, employees and regulators. 4. Reassess your business and operating model: The shift in client expectations and sagging margins is creating pressure on current business models. That, combined with a clear trend towards value-based products and 5. Explore technology: From opportunities services centred on clients, suggests that to use technology to drive operational new business models will be needed. efficiency and better client engagement, At the same time, asset managers through to the emergence of new should be looking for opportunities, investment opportunities and potential perhaps through technology, process revenue streams, technology can deliver or outsourcing, to improve operational significant value to asset managers efficiency and business flexibility in the in today’s environment. Carefully operating model. consider how technology, culture
Technology is allowing the more innovative asset management firms to create new revenue streams and solidify existing ones
and people intersect to ensure that technology investments are creating a positive impact and value for clients and employees. Understand your future state model and start developing your technology roadmap to get there. Unprecedented times call for unprecedented measures. Asset managers should not simply maintain the status quo and hope to ride this disruption out. Whether you are operating locally within our Crown Dependencies or on a wider basis, the only way to navigate the rapidly changing macroeconomic, geopolitical and social environment is to start undertaking radical change. In our view, those who do so with value, clients and purpose at the core are likely to come out on top. Find out how KPMG can help you realign your business around these principles by contacting a member of our Asset Management team or by visiting kpmg.com/cds n
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The KPMG firms in the Channel Islands and the Isle of Man have combined to create KPMG in the Crown Dependencies. This creates a professional services business of more than 500 people, locally owned and dedicated to serving the key industry sectors across the three islands.
October/November 2023 23
Out of the ordinary
a fund focused on national security, crime prevention and public safety… a systematic venture capital fund relying on system-based scoring rather than manager discretion… demand for new investment opportunities is driving an increase in unusual and unique solutions 24 October/November 2023
Words: Gill Wadsworth
absolutely not about that. We are investing in businesses that can make the world a safer place. “We look at the technology these businesses are building, be that in cybersecurity or bespoke electronics that focus on our chosen end sectors.” As an example, Heligan recently acquired a minority shareholding in Interrupt Labs, an international vulnerability research company focused on identifying and exploiting vulnerabilities in software and hardware, via its first private equity fund.
SECURITY CLEARANCE While firms such as Heligan are quick to espouse the benefits of such an approach, there are challenges that come with it. One of the challenges of such vehicles investing in companies that are, by their nature, secret is that accessing the usual financial information on which investment decisions should be made is not always straightforward. This is where the Heligan team’s background in national security and crime prevention further comes into play. Syrotiuk says: “In these [security] industries, there is a level of clearance required to have open discussions, which a large number of our investment teams have. Companies feel comfortable and have confidence in providing the level of detail we need to invest. “Again, that is in contrast to a generic investment house that does not employ individuals who are vetted to the highest levels, enabling open and protected conversations to take place.” Demand for such an esoteric fund comes, Syrotiuk says, from investors who are looking for an alternative to private equity funds that are “all doing the same thing”. “If you look back 15-20 years, there’s been a proliferation of new funds entering the market, which are all investing either in generalist sectors or picking traditional sectors such as manufacturing, IT or business services and consumer. “National security, crime prevention and public safety businesses aren’t something investors typically have exposure to and that’s driving a lot of interest.” Indeed, it is hard to find any other funds offering exposure to companies supporting national security.
The newer venture capital funds have a proven track record in private equity as well as expertise in the tech and security sectors
Aidan O’Flanagan, Head of Funds at fiduciary manager and funds services provider Highvern, says that while funds with a national security focus exist, these are not centred on technology. “There are older funds that are investing in the defence sector, but they are less on the tech side. The newer venture capital funds have a proven track record in private equity as well as expertise in the tech and security sectors.” Jersey, where the Heligan fund is based, proffers the requisite skillsets and infrastructure to run specialist venture capital and private equity funds from the island. Syrotiuk notes there “is no issue in investing in the UK. Any investment needs to be approved by the UK government in line with the National Security and Investment Act, which is the same for any M&A transaction in a qualifying sector”. He adds: “We are looking at a UK FCA fund as our next launch, but this will have the same requirements as the current Jersey-based fund.” Away from the glamorous world of espionage, but staying with venture capital,
October/November 2023 25
WITH A TEAM consisting of a former director of the UK’s National Criminal Intelligence Service, an individual responsible for delivering the country’s first active cyber defence programme, and people with decades of experience working for national security organisations, you’d be forgiven for thinking you were looking at a crack squad from 1980s TV show The A-Team. The reality is, however, that these are members of Heligan Investments who, alongside private equity specialists, provide investors with opportunities to allocate to companies supporting national security, crime prevention and public safety. Heligan’s proposition is that it “looks to generate sustainable, long-term growth for portfolio companies, impressive returns for clients and positive change for the world around us, making it more secure”. It says it does this by combining its national security, crime prevention and public safety specialisms with investment expertise. So is the Heligan approach a signifier of a growth of specialist, niche investment vehicles – and, if it is, does the approach of combining specialist sector experience with investment knowledge provide a cuttingedge opportunity for investors? James Syrotiuk, Partner at Heligan Investments, says: “Our USP is our unique combination of deep sector insight from [people] who have operational backgrounds across the national security and crime prevention and public safety sectors from within relevant government agencies (UK intelligence community, policing, National Crime Agency), as well as the acumen of hundreds of years of combined financial investment and private equity structuring, growth and exit experience. “That gives us deeper-level insights and the ability to assess and understand strategy, detail and technology that other more generalist investors out there cannot access or understand.” Heligan does not invest in companies that sell armaments and weaponry, he says, but in technology businesses that “help make the world a safer place and that help protect companies and nation states from external threats and bad actors”. “When you talk about national security, people automatically assume you mean projectiles or ordnance, but we are
The Channel Islands are experiencing a growth in new funds, thanks to the introduction of Guernsey’s fast-track application regime As with systematic hedge funds that have along with the securing of its licence to for overseas fund gone before, the idea is to remove as much conduct fund management into a single managers human bias as possible from the selection 10-day review period.
O’Flanagan agrees there are other new types of funds emerging. He reveals a first of its kind: a systematic venture capital fund that uses a systembased scoring approach to investment rather than relying on manager discretion. The fund, which is still in the testing phase, selects venture capital companies based on the information they provide to various questionnaires. The responses are verified and rated, and companies scoring above a certain amount are automatically entered into the fund. “The fund is now investing in 100 companies – which is very high for a VC fund – and it allocates the exact same amount into each company. The methodology behind the scoring is proprietary but it is based on verified information provided by the companies – and the ones with the highest scores are those that the managers believe give them the best chance of success.”
26 October/November 2023
process, relying instead on what the managers hope is a reliable and replicable approach that picks winners every time. O’Flanagan believes that while the fund will wait for demonstrable performance before marketing to a wider investor audience, if successful, the likely appeal of such a systematic private equity fund will lie in its operational efficiency and lower fees. “The brilliant characteristic of this fund is that – if it works – it can be fully invested within six to 12 months, then they’re done and can move on to the next one,” he says. “This is because they don’t need to do the full due diligence that normal funds carry out to find investible companies, which takes times and incurs costs that are ultimately picked up by the investor.” O’Flanagan adds: “[The systematic fund] is much faster because it cuts through all of that.”
ALTERNATIVE INVESTMENTS Elsewhere, the Channel Islands are experiencing a growth in new funds, thanks to the introduction of Guernsey’s fast-track application regime for overseas fund managers. Introduced in 2020, the process allows an incoming manager to gain Guernsey Financial Services Commission consent
Among those taking advantage of the regime is VinaCapital, a Vietnamese investment manager, which migrated its licence and registration from the Cayman Islands to Guernsey. While not referencing VinaCapital, Theo Brennand, Partner at Deloitte in Jersey, says he has seen an interest from investors for a Vietnamese fund. “I haven’t seen a specific request for an individual country fund in Asia. Typically, investors would be interested in Asian equities or perhaps in southeast Asian focused funds,” Brennand says. He adds that the islands are also seeing an increase in infrastructure funds, typically driven by managers shifting from Luxembourg, where regulatory costs are higher due to the Alternative Investment Fund Managers Directive requirements. “We have seen a few more infrastructure funds moving from Luxembourg to Jersey, which is clearly positive for the islands, and that’s predominantly driven by the fact that they don’t need that alternative fund manager protection,” Brennand says. The Channel Islands continue to assert their position as a trusted financial centre not just for established funds, but for new and innovative offerings. However, whether these latest funds live up to their promise will only be known in time. n
ensuring ongoing success in the Channel Islands Zedra Funds Director Mark Cleary and Guernsey Head of Funds Damien Fitzgerald on why the Channel Islands have always faced robust competition from other jurisdictions for their share of the international funds market – and this will remain the status quo in the future THE BAILIWICKS OF Guernsey and Jersey
share some unique historical characteristics that have helped us to be competitive in the past – political stability, an independent government and strong links to the City and the British Crown among others. But what got us here probably won’t be sufficient to propel the islands to continued success in the future. To remain competitive, we will need to lean into new markets and products and embrace emerging technologies.
NEW MARKET SEGMENTS Many of the conversations we have been party to over the past six months have shone a light on the growing importance of the first-time manager to the islands’ funds ecosystem. Indeed, many of the enquiries we have dealt with at Zedra have originated from emerging fund managers and there seems to be a clear trend developing. This represents an opportunity and should be welcomed, but there will be some novel challenges to address to ensure a win-win scenario develops. Some of the challenges include dealing with the economics of smaller fundraises, and the associated need for cost efficiencies and automation and to provide excellent customer experience. There is also the need to provide solutions to enable robust fund governance and oversight, especially as compliance obligations continue to expand seemingly exponentially. Getting to grips with the latter can be daunting for seasoned professionals, let alone first-time managers who are primarily focused on fundraising and investment strategy activities. Being able to lean on trusted partners becomes even more important. New jurisdictions and investment themes and strategies will also play a role in sustaining the investment funds industry in the islands into the future.
Much has been written and said about so-called ESG strategies, but in our view, this acronym will eventually disappear as managers incorporate ESG factors into their decision-making process as part of their business as usual. Impact funds and strategies are likely to accelerate and take their mantle in the years ahead and we should look to attract these types of funds to our islands. They typically have a dual goal of seeking financial returns (which can be +/– market return) and making a specific social or environmental impact at the same time. They can be particularly attractive to investors who associate strongly with purpose, specific causes and sustainable societal values. Funds with specific or niche investment strategies or market segments also seem to be gaining momentum and are attractive to investors who want specific risks or allocations in their portfolio.
NEW PRODUCTS Both the islands have been agile and responsive to demand for new products and solutions and we expect this to continue as a source of competitive advantage. This is not new; both of the Channel Islands have a history of innovation in the investment funds space and they will need to remain on their toes to outmanoeuvre competitor jurisdictions. This has recently been evidenced in Guernsey through the introduction of the Natural Capital Fund and in Jersey via the introduction of the Limited Liability Corporation (LLC). Both islands also introduced the private fund product around the same time, and this has been a great success story. The product landscape will continue to evolve as technology advances and client demand dictates, and both islands need to be ready to adapt and innovate. Fund vehicles are merely shells and are human-made constructs. It is entirely
conceivable that as technology evolves, new vehicles and constructs may be required – and we will need to be adaptable and responsive to such demand to remain competitive.
EMERGING TECHNOLOGIES Many businesses still rely on packages such as Microsoft Excel to undertake important client work. Very rarely, if ever, will this lead to productivity gains for businesses and/or efficiencies for clients. In particular, the use of spreadsheets to produce key documents for board consideration, such as business risk assessments, will rarely enable the dynamic management of risks or the exploitation of opportunities in real time. In the future, boards of directors will demand tech-enabled solutions to help them manage whatever changes in circumstances they face, in real time. Hence there is an opportunity for businesses in the funds ecosystem to develop holistic systems that can capture data, synthesize it and present it to boards in meaningful and condensed ways for their action via a user-friendly interface. Such a solution would also resonate strongly with first-time managers, who may not fully appreciate the enormity of regulation and compliance in the islands, while simultaneously raising and deploying investment capital. These are some of the key areas of the funds ecosystem that both islands remain fully focused on. Being innovative, adaptable and embracing change will be key to Jersey’s and Guernsey’s ongoing success in the international funds market. n
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Mark Cleary: email@example.com and +44 1534 844 321 Damien Fitzgerald: damien.fitzgerald@zedra. com and +44 1481 881 433
October/November 2023 27
Gateway to Europe a look at Why US fund managers are choosing the Channel Islands
FOR DECADES, WHEN US fund managers looked offshore, they would head to their own ‘back yard’ – Delaware, the Cayman Islands, the British Virgin Islands. But in recent years, a growing number have been shifting operations to Europe – and the Channel Islands in particular. “The statistics don’t lie,” says Alex di Santo, Group Head of Private Equity at Crestbridge in Jersey. He cites a recent Monterey Insight report, which says Jersey funds business from US promoters more than doubled between 2017 and 2022, rising from $28.5bn to $58.7bn. US promoters are now the fourth biggest source of assets in Jersey, and a similar trend is seen in Guernsey. The arrival of a growing number of US funds is surely welcome news for the islands. But why are US promoters choosing the Channel Islands now, and with what objective?
MORE THAN A NAME “There is a thought around the fact that there is a state called New Jersey in the US – and as a result people notice [the name Jersey], which creates curiosity,” laughs Philip Pirecki, Jersey Finance’s lead in the Americas. Pirecki spends a lot of time in the States promoting Jersey’s offerings, and the name recognition aspect certainly breaks the ice. But the reasons for the recent increase in US managers choosing the Channels Islands
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as a base is driven by far wider factors. First, and probably most important, is the EU’s Alternative Investment Fund Managers Directive (AIFMD), which came into force more than a decade ago. The purpose of the AIFMD was to regulate the activities of alternative investment managers, and it requires reporting, disclosures and other regulatory processes. It also stipulates that anyone marketing an alternative fund in Europe must be registered with the regulator. As a result, many major US funds that wanted to raise capital in Europe set up shop in the EU, with Luxembourg usually being the first choice. However, alternative investment funds don’t have to be domiciled in Europe. They can also be based in an EU-approved third country and follow the National Private Placement Regime (NPPR) to market their funds into individual markets. And this is where the Channel Islands come in. In 2015, Jersey and Guernsey were included in the first wave of the EU’s approved ‘third countries’. This allows US alternative investment funds to base themselves in the Channel Islands and raise capital in Europe, without needing to submit to all the onerous paperwork and reporting of the AIFMD.
Words: Len Williams
There is some truth to the idea that workers clock off at 5pm in other European countries, which can feel exasperating to US managers with their Protestant work ethic
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For some fund managers, being based outside the EU wouldn’t make sense. If you’re planning to raise investment from across the continent, being under the AIFMD would probably be more logical. However, Pirecki points out that 97% of funds only market into three European countries or less. As a fund manager, he says, “you really have to ask yourself, do I need to be onshore? What is the value of me being onshore?”. “If you are only marketing a fund into one or two markets, the NPPR route allows you to do much the same thing, but without having to comply with AIFMD. Besides the AIFMD, there are several other macro factors that are drawing US investors to the Channel Islands. One influence, Pirecki explains, is that “we are in an era where money supply is shrinking”. In the US, the majority of alternative fund managers would typically raise capital within their own country. But due to today’s high interest rates, less capital is available. And that means managers are going offshore to raise capital earlier than they would have in the past. Europe is typically the first port of call for many, including those who’ve never gone offshore before. As they investigate possible options in the region, they will likely come across the Channel Islands.
A NON-EUROPEAN OPTION The Channel Islands have several things going for them that set them apart from popular onshore European jurisdictions – those outside the EU (the UK, Switzerland) and those inside (Luxembourg, Ireland). Pirecki points to the legal system. While there are many differences between the US and Channel Islands’ legal systems, they are
Guernsey and Jersey have both introduced limited liability companies, a business structure almost identical to structures in Delaware and Cayman
both founded on common law, which feels familiar and is easier to understand than constitutional law found in much of the rest of Europe. There’s a shared language too, which has obvious advantages. And there are cultural familiarities. The so-called Anglo Saxon mentality, where customer service is prized, also feels familiar to American businesses. While it’s a stereotype, there is some truth to the idea that workers clock off at 5pm in other European countries, which can feel exasperating to US managers with their Protestant work ethic. Of course, US fund managers are attracted by the Channel Islands’ classic selling points too. Di Santo points to their
“political stability, economic stability and a well-respected regulator”. The islands’ tax neutrality cannot be ignored (there is no VAT, CGT or corporation tax). The fact that the islands are not on any ‘blacklists’ and have a good reputation also counts for a lot. The Channel Islands have strengths in fields that are relevant to US alternative fund managers, too. “Around 80% of our funds are in the alternative space,” points out Di Santo, which means US managers can find deep expertise in areas such as venture capital, real estate and private equity more generally. “It’s like a miniLondon,” adds Pirecki. A final draw held is regulatory innovation. Both Guernsey and Jersey have introduced limited liability companies (LLCs), a business structure that is almost identical to LLC structures in Delaware and the Cayman Islands. This makes it far easier for US offshore managers to shift over to the Channel Islands. Similarly, Jersey and Guernsey also have innovative Private Investment Funds – the Guernsey Private Investment Fund (PIF) and the Jersey Private Fund (JPF). Greg McKenzie, MD at Belasko in Guernsey, points out: “The PIF and JPF offer a lighter-touch regulatory framework suitable for sophisticated investors and most interestingly can obtain regulatory approval in 24 hours. “They are also recognised within the EU, benefit from the NPPR regime and have no legal restrictions on structure.” While setting up a fund in the Channel Islands would work for many US-based alternative investment managers, it’s not always right for everyone. As noted above, larger funds that are marketing themselves to investors right
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Channel Islands across the continent might find it preferable to be based inside the EU for AIFMD compliance. And there are some countries, notably in southern Europe, that may throw up barriers to NPPR applications from the Channel Islands. However, all the biggest allocators in the alternatives space – such as Germany, the Netherlands and the UK – are all accommodating to this approach.
BIG APPLE TO THE BAILIWICKS
Due to today’s high interest rates, less capital is available. And that means managers are going offshore to raise capital earlier than they would have in the past
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So, what kinds of businesses are US managers setting up in the Channel Islands? Ross Youngs, Group Commercial Director at Belasko, says they’re focused on two main kinds of activity. First, there are investments. Many US managers who wish to acquire UK assets benefit from the Channel Islands’ position as an asset-holding location for UK assets. But perhaps a more significant activity relates to capital-raising purposes. “European investors who do not wish to invest in Delaware or Cayman structures directly often feel more comfortable accessing US products via parallel structures domiciled in the Channel Islands,” says Youngs. Sometimes the US manager will be looking to create a feeder fund so that European investors can invest in an already successful fund based in the US or in the Caribbean. Due to AIFMD, that fund couldn’t market directly into the EU. However, if the manager sets up a feeder fund in Jersey or Guernsey, they could
still raise capital from investors on the continent thanks to the NPPR. The fact that the Channels Islands are tax-neutral and have relatively low compliance burdens would make this an effective way of raising capital from European investors. Another common scenario is when a US or Caribbean fund decides to move to Europe outright. They might have a specific investor who is keen to work with them but who can’t invest outside of Europe, or the manager might have spied an opportunity on the continent. Whatever the reason, they could choose to open a fund in the Channel Islands as a way of accessing this capital. Crucially, migrating their business from other offshore destinations is relatively easy – Channel Islands regulators are familiar with this approach, and there are plenty of legal experts who can arrange the move. There are of course other reasons and ways that US managers set up funds in Jersey and Guernsey. There’s been clear and growing interest in the Channel Islands from US fund managers in recent years – and that growth looks set to continue. In 2019, Jersey Finance began drumming up interest in the island in the US, and this seems to have been very successful. As Pirecki concludes: “What’s very encouraging now, compared with when we started, is that when we go into meet with people… [Jersey is] becoming more well-known year on year.” n
Advertising Channel feature Islands
Be wary of the green fog Ravenscroft portfolio managers David Le Cornu (Head of Discretionary) and Jamie Mourant (Senior Investment Manager) on the challenges of ESG ratings FOR MANY PEOPLE, environmental, social and governance (ESG) is much more than a three-letter acronym. It’s a practical, real-world process that helps them live their lives according to their moral principles. ESG investing is part of the broader process and enables them to invest their money in a manner that sits comfortably with their beliefs. By understanding how a company serves all its stakeholders (workers, communities, customers, shareholders and the environment), as well as the company’s balance sheet and business model, investors can seek to make attractive investment returns. They can also sleep soundly at night safe in the knowledge of the impact the business they are investing in is having on the world in which we live. The growing importance of ESG is reflected in the number of high-profile research businesses that now provide ESG ratings, including Bloomberg, S&P Dow Jones Indices, JUST Capital, MSCI and Refinitiv. You would think this would empower investors to easily make informed decisions for a better world. Unfortunately, things are never as straightforward as you would wish. Each firm has developed its own ESG rating system, and while their ratings will inevitably chime with each other, there will also be substantial differences between their rating systems. At the same time, the quality of ESG ratings is increasingly being called into question, with claims of greenwashing – whereby companies overstate or misstate the green credentials of the business – rising over recent years. One example of a successful greenwashing challenge resulted in HSBC having to pull an advert extolling their green credentials, on the grounds that the bank continues to back negatively impacting activities.
MIXED MESSAGES The lack of a uniform approach to ESG ratings and businesses’ desires to get the best ESG rating they can for marketing purposes leaves a green fog hanging over the ESG investment universe. Visibility is further impaired as many businesses awarded the highest ESG ratings are not actually changing their practices to be more environmentally friendly. Instead they are buying their ESG credentials by paying someone to plant trees in faraway places or by purchasing carbon credits. It becomes clear that unless an investor is prepared to do a lot of research, they should attach a ‘Buyer Beware’ label to broad-based investments being touted as ESG investments. Perhaps ESG funds should carry an additional risk warning along the lines of: “This investment may or may not sit comfortably with your moral compass.” That being said, there are a range of impact funds that provide absolute clarity on where an investor’s money is being placed to work. However, their focus on investing with the intention to generate positive, measurable social and environmental impact can outweigh their focus on generating attractive long-term returns for investors. These funds are also, by nature, concentrated on niche areas of investment markets, so can suffer very high levels of volatility.
investment objective, nor present itself as a sustainable investment, which we suspect may sit comfortably with investors’ moral compasses (as it does with us, as we too are investors in the fund). It is a diversified equity fund, so it has the potential to generate attractive longterm capital growth, and its diversified nature provides the ability to avoid the extreme volatility experienced in some impact funds. The underlying businesses in which the fund in question invests are trying to address problems that humankind and/ or our planet face. The fund is presently invested across 15 collective investment schemes that focus on environmental solutions, basic needs, emerging equality, energy transition and resource scarcity. Knowing that some of the investors’ money is focused on positive outcomes – such as finding a cure for cancer, expediting the transition to clean energy, and providing food and clean water to those who need it – could satisfy one’s conscience and presents the possibility of not having to seek out a questionable ESG rating. The lack of an ESG or impact label also leads one to believe that the manager of the fund is far more interested in where the funds are invested than a label that may assist the marketing of their fund. n
NAVIGATING THE FOG This begs the question: is there an easy way to navigate the green fog to ensure your investments are aligned with your moral compass while targeting attractive long-term returns? ESG will mean something different to everyone as it talks to your moral principles, so no investment will suit everyone. Intriguingly, there is a fund offered by a local investment company that does not have an ESG or impact-based
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If you would like to discuss responsible investing, greenwashing or discuss any other investment-related matter please reach out to any member of the Ravenscroft team: www.ravenscroftgroup.com Guernsey office: 01481 729100 Jersey office: 01534 722051
FINANCIAL PROMOTION: The value of investments and the income derived from them may go down as well as up and you may not receive back all the money which you invested. Any information relating to past performance of an investment service is not a guide to future performance and may not be repeated. Ravenscroft (CI) is regulated by the Guernsey Financial Services Commission and Jersey Financial Services Commission.
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Labour pains Globally and across sectors, a talent challenge is causing firms a massive headache as they struggle to find, develop and retain the staff they need. And the Channel Islands are not immune Words: Steve Falla
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HIRING THE RIGHT talent has always been critical to the success of firms. People are the strongest asset of any organisation, and an employment crisis is exercising all areas of the financial services industry, including the investment funds sector. In fact, the perceived fear of robotic solutions stealing people’s jobs could be overwhelmingly undermined by an estimated shortage of 85 million workers around the globe – a stark figure from the perspective that the entire population of the UK is only around 68 million.
One commentator values the manpower shortage at $8.5trn in unrealised annual revenues by 2030, if left unchecked. It is hardly surprising then, that governments are placing education, training and upskilling towards the top of their agendas. And the Channel Islands are no different. A Guernsey International Business Association survey this year revealed up to 600 vacancies in the island’s finance industry – and stated that the ability to attract and retain staff with the right skills is a “critical factor” of Guernsey’s
competitiveness and the ongoing health of its economy. In response, the objective of Skills Guernsey – just one of the initiatives set up to help tackle the issue – is to ensure that the island can develop a highly skilled workforce, equipped for the opportunities and challenges of the global economy.
SAVVY WORKFORCE The story in Jersey is similar. Tony Moretti, Chief Executive of Digital Jersey, states: “With the skills crisis increasing, upskilling the local workforce is the only viable alternative to enable us to maintain a globally competitive and digitally savvy workforce. In the midst of a worldwide skills shortage, bringing skilled people to Jersey has never been more challenging.” He has also called for Jersey businesses to match the investment from government through funding or other resources. Of the Guernsey survey, Paul Sykes, Chair of the Guernsey International Business Association (GIBA), says: “The results reflect anecdotal evidence that we have observed among industry over the past 12 months or so.
“There are a high number of vacancies in the sector and the survey further reveals several recurring themes. “Firms refer to the cost and availability of housing as significant issues when it came to recruiting and retaining staff, with several firms indicating this was one of the main reasons staff have left the island and relocated elsewhere. “The finance sector employs around 20% of Guernsey’s working population – but generates nearly 40% of the island’s GDP – and GIBA believes that urgent change is needed to avoid the impacts of a growing skills gap. “The island has a significant opportunity for further growth,” he says. “We estimate conservatively that the States of Guernsey would receive personal income tax revenues of approximately £6m annually if the sector’s vacancies were filled, and the economy could be boosted by at least £30m – and probably a multiple of £30m.”
ROBUST APPROACH Channel Islands businesses are well known for a robust and innovative approach to the challenges that come their way – and they
are delivering an enlightened response to the shortage of talent. Dominic Coyne, Funds Director at Fairway Group, says authenticity is important and could be a differentiator, given that benefits packages are generally “much of a muchness”. He believes businesses need to walk the walk. “It is very easy to promise the earth to candidates at the interview but, if you don’t follow through, new colleagues will quickly challenge,” he says. “And you never get a second chance to make a good first impression. “Getting it right first time is a mantra we strive for. Choosing the right candidates for roles within a client service company is crucial to client satisfaction and business success,” he adds. Sykes believes employees take much more note of their employer’s actions and words: “Corporate culture and a sense of corporate responsibility are characteristics of Guernsey companies that are attractive to many employees. “Equally, many companies invest generously in and are supportive of professional and vocational education,
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which means the island is well positioned to retain its reputation for high-quality services and competitive advantage.”
MORE THAN JUST MONEY Coyne acknowledges that remuneration packages also remain important to addressing the talent acquisition challenge, but agrees they must be complemented by the right corporate culture. “Treatment of staff through emotional intelligence is paramount to maintaining a consistent workforce,” he states. “At Fairway, we insist on the personal touch. Everyone has a voice and there are no closed doors. The senior management team sits out in the open office and are all approachable. Each team member is treated as a contributor to the success of the funds business; they are representing themselves, the organisation and the Jersey funds industry,” he adds. “I’m not going to pretend that money is not important. For many it is vital in times of inflation and cost of living challenges. “Your business needs to be paying topquartile in order to attract and retain the best employees. But the internal culture is also a pivotal part of the package and, in the long-run, just as important.” Coyne adds: “To attract staff there must be an added incentive – such as multiple jurisdictions or secondment opportunities – and flexibility is also important. “We have seen several interviewees in recent years who have approached us because we have an office in Madeira. The key part of our interview process is to deduce whether the candidate will be the right fit.” However, a balance must be struck between rewards and incentives and realistic expectations from employees. “Incentives can be financial or cultural,
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Bonus mechanisms should be transparent and fair and all employees should have equal access to work-life balance incentives
given the opportunity to grow – and that many “old-style managers” remain control freaks at heart, which can be demotivating for employees. “The best gift I have been given throughout my career to date is autonomy,” he explains. “Granted, people are different – some need more guidance than others. But it is recognising those differences that is important, and then responding accordingly. “By all means, deliver a strong lead. But also provide the opportunity to shine and recognise success when you see it.”
or a mixture of both, and it is important that employees have a clear understanding of what they need to achieve to progress,” says Coyne. “Bonus mechanisms should be transparent and fair, and all employees should have equal access to work-life balance incentives. “Working from home is on many employees’ agendas post-pandemic, and employers must have a policy to accommodate this to at least some degree. Flexible working may also be necessary if valued staff are to be retained. “Treating all staff fairly is the responsibility of all businesses and a good manager will respond positively to reasonable requests,” he continues. “That said, the business has to come first and customer service and satisfaction cannot be sacrificed in pursuit of staff retention. Sometimes difficult conversations must be had.” And the cultural shift must also be fully embraced by management. Coyne’s view is that team members should be nurtured and
Coyne concedes that hiring people onshore is an option for offshore firms in the face of the talent shortage before them, but he retains some reservations. “That is always an option and many of the bigger businesses in Jersey have been doing this for years,” he says. “It is a hostage to fortune, however, and it has never been more important to know your customers and clients to ensure that they are pleased with services provided.” Sykes believes there is big potential for the islands, with the right levers in place, to respond to the challenge and fuel further economic growth. As part of that, businesses are also keeping an eye on the rapid developments in artificial intelligence and automation. “Increased use of technology frees up employees to concentrate on customer service and satisfaction and it is important that businesses continue to invest,” concludes Coyne. “AI is in its infancy and unquestionably will impact employment as it develops. However, a customer will be reticent to shake hands with a robot for many years to come.” n
SFDR: what now? Ogier Sustainable Investment Consulting’s Director and Head Leonie Kelly and Senior Manager Dasha Kuts set out what Channel Islands-domiciled funds should know about the Sustainable Finance Disclosure Regulation ALL FIRMS FUNDRAISING from the EU or planning to fundraise in the EU need to be informed about the EU’s Sustainable Finance Disclosure Regulation (SFDR) and plan to comply, as it can take time. Even funds based in Jersey and Guernsey need to plan for SFDR compliance proactively. SFDR is one of a package of regulatory measures brought in by the EU to create a harmonised environment, social and governance framework for European financial services, and is part of the EU’s 2030 Agenda for Sustainable Development. Since Level 1 SFDR came into effect in 2021, followed by the application of Level 2 Regulatory Technical Standards (RTS) on 1 January, the financial market has been working to understand its implications for the asset management industry, including in-scope firms in Jersey and Guernsey. At Ogier’s Sustainable Investment Consulting, we work with asset managers and asset owners across Europe and other markets, including the Channel Islands, to understand the implications of SFDR and develop processes towards compliance. Similar to the recommendations provided by the Task Force on ClimateRelated Financial Disclosures (TCFD) framework, we encourage clients to follow the steps set out here when implementing SFDR or any other environmental, social and governance framework. Please note that these ideas are examples only.
NAVIGATING SFDR REQUIREMENTS First, governance. It is vital to think through sustainable investment agendas systemically, to ensure business processes and action plans are developed for implementation. This way, any risks of greenwashing or greenhushing will be minimised as responsibilities and processes will have been established, regardless of ongoing regulatory changes. Conducting an ESG assessment or health check will help to see how the company or financial institution compares with its competition and identify areas of improvement. Asset managers normally begin this step by reviewing alignment against SFDR’s Article 6 requirements at entity and product level. At this point, asset managers need to review and be aware of local supervisory requirements relevant to ESG as there are some differences depending on where the
fund is domiciled or will be domiciled. Starting with governance allows clients to engage relevant stakeholders, create mutual understanding and identify any gaps in their internal capacity for robust implementation and ongoing monitoring of SFDR reporting.
THE ROAD TO SFDR COMPLIANCE Once responsibilities are outlined, asset managers should focus on overall strategy, which entails a review of all products marketing into the EU. Asset managers should research best practices globally and get external advice to check compliance against Article 8 and Article 9 product-level considerations. This will help build an in-depth understanding of the market position and how you might look to achieve ESG characteristics or sustainable investment objectives. When considering the ESG characteristic or sustainable investment goal to be delivered, managers must think holistically to set out the targets or year-on-year performance they seek to achieve against the product’s binding characteristics. Accurate and complete data is critical to monitoring and managing your ESG characteristics – and increasing the ability of your investment teams to interpret and understand ESG data is critical. Asset managers can bring in external advisers to support with interpreting such data and ensuring all risks and changes in ESG performance are investigated thoroughly. The road to SFDR compliance is complex and involves many stakeholders across investment firms. To provide transparent and accurate disclosures and comply with the regulatory requirements, asset managers must overcome numerous challenges. But for asset managers who approach the requirements proactively and seek professional guidance, being a frontrunner in ESG reporting can bring about a number of benefits and opportunities. Sustainable Investment Consulting at Ogier has been working alongside financial market participants in Asia, US and Europe. It has advised on SFDR alignment, conduct fund classification assessments, health checks, gap analysis on managers’ pre-contractual disclosures and website disclosures, and fundamentally developing and implementing ESG methodologies. n
ABOUT OGIER With legal teams in Luxembourg and Ireland working with the dedicated sustainable investment consultants, Ogier is well positioned to offer: • Holistic approach to EU SFDR requirements across EU states • Advisory on structuring of funds, choice of domicile and ongoing requirements, including ongoing reporting as described by EU SFDR • Gap analysis of clients’ current approach to entity and product level requirements of SFDR Level 1 and Level 2 against best practices • Product market benchmarking • Drafting of all necessary sustainability-related disclosures and documentations at entity and product level, including website disclosures • Review of internal and external communications, policies and procedures to ensure that risk of inadvertent misstatements such as greenwashing are minimised • Advisory on fiduciary duties of directors around sustainable investment objectives defined by the fund, to ensure compliance with good governance as defined in EU SFDR • Training for boards and management, including access to ESG Align tool • Independent verification, including checks of in-house frameworks, evaluation of compliance with stated sustainable investment or ESG policy • Sustainable investment or ESG due diligence at a fund and portfolio company level • Development of ESG scorecards and ratings to make sure sustainable investment policy demonstrates alignment with Article 6, 8 or 9 strategies as defined by EU SFDR • Support with ongoing reporting, including development of periodic reports as defined by EU SFDR • Review of investor ESG factsheet against existing policies to support successful fundraising
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For further information, please visit: ogier.com/esg
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Responsible investing THE FUNDS INDUSTRY continues to push ahead with the implementation of increasingly onerous sustainable reporting and compliance measures – against the backdrop of a volatile geopolitical setting and fragile macroeconomic outlook. Extreme weather events, environmental destruction and rising inequality have also made sustainable investments more relevant than ever, for this generation and the next. The mainstreaming of environmental, social and governance (ESG) measures will accelerate with the continuing policy impetus to shift capital to sustainable investments. Demand for ESG funds should therefore remain robust despite recent mutterings of political resistance in the US and UK. Most regulatory developments have been primarily aimed at avoiding greenwashing – such as the European Union’s Sustainable
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Finance Disclosure Regulation (SFDR), effective from March 2021, and the UK’s Sustainability Disclosure Requirements (SDR), coming into force in July 2024. Further, the International Sustainability Standards Board (ISSB) issued its first Sustainability Disclosure Standards for climate and sustainability to set a global baseline of investor-focused sustainability from 1 January 2024. Meanwhile, in the UK, the Task Force on Climate-related Financial Disclosures (TCFD) reporting has been mandatory for asset managers since 1 January 2022. And in addition to all of this, the Taskforce for Nature-related Financial Disclosures (TNFD) requirements was launched in September. But are these numerous new provisions creating too much extra work for funds, adding to the cost of their administration
Words: Dr Desné Masie
and formation? Has the focus on ESG created too much emphasis on sustainability over returns? Industry figures are certainly vocal in their views. Yulia Manyutina, Associate Director, Climate and ESG, at RBS International, says: “While there are ongoing challenges associated with the rapidly changing regulatory environment, stringent reporting requirements and political sensitivity of the topic, confidence in ESG remains high.” Ali Cambray, Advisory Director, ESG and Net Zero, at PwC Channel Islands, backs up that view on ESG trends. She cites data from PwC’s 2023 CEO survey, which shows an expectation of impact from climate change this year, primarily to cost profiles and supply chains. “Business’s exposure to nature risk is extensive and recently becoming
The increasing importance of ESG in investment fund decision-making
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understood by private markets,” says Cambray. PwC’s analysis found that 55% of global GDP (around $58trn) is moderately or highly dependent on nature, meaning economic value from companies’ operations could be wiped out by disruption to natural ecosystems. “The opportunity to create value from investment in the transition to a more sustainable and inclusive economy remains the business opportunity of the century,” Cambray adds. “The regulatory landscape continues to evolve, with some encouraging progress this year towards globally recognised standards. Double materiality – understanding and managing risks to and societal impacts of investments – is becoming increasingly important.”
regardless of whether publicised or not and even more so with the increasing regulatory requirements that are forthcoming.” A lot of the regulatory burden Moynihan mentions will fall upon CFOs and COOs. According to Manyutina, one of the key challenges that CFOs and COOs are facing at the moment is availability of reliable data and analytics. “It is expected that developments such as AI and machine learning will have a significant impact on ESG measurement and reporting in the near future,” she says.
A CONCERTED EFFORT The industry is making concerted efforts to ensure that it complies with its responsibilities and is educating its workforce at pace, according to Dipak Vashi, Business Advisory Services Senior Manager at Grant Thornton. He explains: “Many conversations around ‘what keeps you up at night’ often turn to ESG factors as number one, as well as [dominating] board time, showing the issue is front and centre.” Despite the progress, Joe Moynihan, CEO of Jersey Finance, says: “We have noticed an element of greenhushing, whereby some firms are wary of publicising their sustainability efforts regardless of how impressive and genuine they are, due to fear of reputational risks or the effect it could have on its share price due to political polarisation.” However, he adds: “ESG has increasingly become a default position and a given, almost a minimum standard of acceptance,
55% of global GDP is moderately or highly dependent on nature, so economic value from companies’ operations could be wiped out by disruption to natural ecosystems
Indeed, a number of firms have proliferated to support the c-suite with the new reporting demands. The recent Reuters Impact conference in London included many such demonstrations of new reporting tools from providers such as Oliver Wyman, Wolters Kluwer and Eco Prism, all promising one-touch, high-tech sustainable compliance plug-ins for the financial statements. Cambray says these developments mean “the CFO’s job description is being rewritten” and those who can’t keep up with the demands of sustainability could have a difficult time remaining relevant. Kevin Smith, Executive Director at Ocorian, has seen an increasing trend of general partners and funds producing separate sustainability reports that “are pulling you outside of the financial requirements, and setting separate reports so the investors can get full visibility and transparency of the issues that are there”. But Smith says there has also been increased complexity for administrators, which filters down to investment decisions. “We’re definitely seeing across all our fund base, and promoters, an increase in the kind of ESG factorisation into their investment processes and into their structures. And that manifests itself in different ways from the outset. “For new investors coming in,” he adds, “we’re seeing increasing levels of the complexity of the due diligence questionnaires around ESG. So the investors themselves are much more querying about what is happening within the funds, within the supply chain, and also with the service providers of the funds.” With TNFD on the horizon, Smith highlights changes in Guernsey. “Last year a new designation was launched
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– the natural capital fund designation for funds that meet the specific natural capital requirements and criteria. These developments are definitely increasing and moving forward.” But Smith adds that it’s a difficult area to navigate, especially for determining hard KPIs and hard data, which will be essential to define. “You need to be able to do this in this day and age, and you need to substantiate it,” he says.
FUELLING GROWTH Despite the avalanche of reporting and compliance required alongside ESG and the political backlash, the industry remains committed to implementation. The prevailing view is that ultimately ESG will not sacrifice returns over the long term, and may even improve returns. Felicia de Laat, from the Jersey Investment Funds team at Mourant, says that she hasn’t seen much growth in sustainable, Article 8 or 9 funds, but she has seen her own funds (those not ‘sustainable funds’ per se) placing much greater emphasis on sustainability. De Laat agrees that ESG is becoming embedded at all levels of fund operation and investment, including the strategies used by private equity funds to create value in their portfolio companies. She says: “For quite a long period, there has been a focus on using ESG to improve sustainability at portfolio company level.
Investors are much more querying about what is happening within the funds, within the supply chain, and also with the service providers of the funds
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SFDR Article 6, 8 and 9 funds [But ultimately] funds still have a mandate to generate a return for their investors. They’re bound by their fiduciary duties.” De Laat continues: “It is very much a moving target. This is because people are still working out exactly how SFDR needs to be applied and to which category their funds should belong. “Key areas of focus include disclosure, investor reporting and value creation at the level of investment.” Moynihan says it is “a common misconception” that ESG is implemented at the sacrifice of returns. “It is, in our view, even a false dichotomy. Companies with high ESG ratings are more often than not top-quality, forward-thinking companies that in the long term will achieve the greatest returns, as opposed to companies that may have had a recent but short-lived rise in share price, perhaps due to stranded assets,” he says. Vashi, Smith and Cambray believe that although politicised, long-term trends driven by clients will determine the trajectory of ESG. Says Smith: “Over the coming years, and this has already been happening, especially in the private wealth circles, we have the younger generations looking for the environmental ESG side of things as much, if not more than, the actual return side of things. It’s a trade-off position, so it will be interesting to see how that develops.” n
SFDR requires asset managers to provide more information on the sustainability risks and impact of their investment products sold in the EU. The level of disclosure depends on whether these are defined by way of their prospectuses as Article 8, having environmental and/or social characteristics (light green funds), or Article 9 funds, having a sustainableinvestment objective (dark green funds). Article 6, meanwhile, requires asset managers to disclose the integration of sustainability risks in their funds – regardless of whether the fund is promoted as ESG or not. The Q2 2023 Morningstar review of Article 8 and 9 funds reported that overall, assets in Article 8 and Article 9 funds rose by 1.4% and for the first time passed the €5trn milestone. Article 8 funds, however, suffered net redemptions of €14.6bn in the second quarter of 2023, amid continued macroeconomic pressures. Meanwhile, investors continued pouring net new money into Article 9 funds, but the €3.6bn these attracted in the last three months represent the lowest inflows on record. Reclassifications of funds from Article 8 to 9 or Article 6 to 8 slowed down over 2023. Source: Morningstar
In conversation: Gary Maclachlan Gary Maclachlan is an Associate Director in Deloitte’s Guernsey tax team What is your focus and specialism? I have been working in the financial services industry in Guernsey for the past eight years, and during this time, my focus has shifted more and more to the funds sector. I do a lot of work around Guernsey’s economic substance rules, particularly in the private equity space. I am also involved with various aspects of Pillar 2 and how this new global minimum tax rate will impact the larger groups that have a foothold in Guernsey. My primary focus is the UK offshore reporting fund regime, and this side of my role is the most rewarding. Those overseas funds that I assist in obtaining and maintaining their ‘reporting fund status’ generally benefit any UK investors in those funds, whereby they may be subject to capital gains tax (in the UK) at a lower rate. This places the offshore funds on an equal footing with their UK fund equivalents. I enjoy working with large, complex entities that span multiple jurisdictions. This area of tax, along with the advisory work that follows, gives me the chance to work with really interesting clients. These clients range from large, openended funds based in Guernsey and Luxembourg, including London and TISElisted funds, to smaller, more bespoke private equity structures. I enjoy building those professional relationships and getting to know the clients and their structures to help them navigate the tax landscape, which is getting more complex. Which jurisdictions do you work across? I am based in the Guernsey office, but our Channel Islands UK reporting fund team also forms part of the wider London funds tax team. This allows me to work on a wide range of funds, with a large number of those being in Luxembourg. How long have you been working at Deloitte and what have you enjoyed about working with the firm? I’ve been with Deloitte for two years and the firm has given me the freedom to
develop and pursue my chosen specialisms and build on my career, but with support from all areas of the business. Having that trust placed in me was empowering and motivating, and there is always someone willing to assist when needed. Aside from having that trust placed in me, I really enjoy the culture and working with the people at Deloitte. The tax team are all very different people with different skills and focus areas, but we all work very well together. Of course, we operate under pressure at times, but it’s a very supportive team, with a real sense that we all work towards a common goal. We all want each other to succeed and get on well, which means we have the confidence to bounce ideas and help each other along the way. Who do you closely work with at Deloitte? One of Deloitte’s strengths is the team, which comes from us being a part of the UK firm. Locally, I work with Jo Huxtable, a Channel Islands Tax Partner, on general Guernsey tax aspects and Pillar 2 activity, and with Martin Popplewell on economic substance matters. In the UK team, I work closely with Joanne Mawhinney, a Tax Partner in Deloitte’s Investment Management tax. What else do you get involved in at work? Anything sports-related! I have enjoyed the opportunity to participate in a range
One of Deloitte’s strengths is the team, which comes from us being a part of the UK firm
of sporting activities arranged by Deloitte, including the Big Sports League, which sees accountancy firms compete in a series of sports events, each hosted by a different firm. We get a great turnout of supporters, which makes the whole event fun. Deloitte sponsors the Guernsey Netball Winter League, so we get involved in some fun matches, although the last one didn’t end well for me! Deloitte’s Five Million Futures charity partner is GROW, and I sign up for volunteer activities whenever possible (usually taking the GROW crew out for coffee and a chat or helping out at their new site). Last year, I enjoyed the 30/30 cycle for Les Bourgs, and this year, I volunteered to marshal at the Guernsey Island Games. How do you find island life? We came to Guernsey eight years ago from South Africa and settled here very quickly – it’s become home. We love how family-oriented and safe it is here. Plus, I can finish work, get home in minutes and be at the beach with my kids having ice cream with the whole evening ahead to enjoy. Here, you can build a great career balanced with a healthy lifestyle. n
FIND OUT MORE Contact Gary Maclachlan, Tax Associate Director, Deloitte, at: email@example.com
October/November 2023 43
AIFMD 2.0: strong and stable? Words: David Burrows
Will the Alternative Investment Fund Managers Regulations – or AIFMD 2.0, as the amended version is being termed – bring much needed stability to the EU funds sector?
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THE EU FUND landscape is changing. The European Commission published legislative proposals in November 2021 to amend the existing Alternative Investment Fund Managers Regulations (AIFMD). The review of AIFMD is part of an EU initiative called the Capital Markets Union, which has an overarching objective of creating a single market for capital across the EU and, in doing so, making the EU financial system more stable, resilient and competitive. Now, almost two years since the initial proposals, what benefits could AIFMD 2.0 tangibly bring to the European investment funds sector? Nick McHardy, Group Head of Funds at Belasko, believes the legislative outcome of the review should increase stability of the funds industry as it includes measures to reduce the risk profile of loan originating funds. It should also increase the focus on liquidity management and promote a model of leveraging technical expertise through transparency in respect of delegation as opposed to restriction. “One may argue that with any regulatory framework change, there will inevitably be a short-term period of adjustment while new requirements are embedded, but uncertainty will now be reduced by having an agreement of the rule changes under AIFMD 2.0 and should therefore be seen as a key milestone for longer-term stability.” Joy Kershaw, Senior Manager in Deloitte’s EMEA Centre for Regulatory Strategy, shares some of McHardy’s positivity and believes the agreement on new rules for European capital markets will provide greater clarity and certainty. “It allows for firms to understand the final direction of travel for AIFMD 2.0 and
Uncertainty will be reduced by having an agreement of the rule changes under AIFMD 2.0 and should be seen as a key milestone for longer-term stability
October/November 2023 45
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AIFMD to enhance their internal operating models to support the successful adoption of it,” says Kershaw. She points out that on delegation, during the policymaking process there had been some arguing for significant restrictions on delegating portfolio management to firms in non-EEA countries, including the UK. However, under the agreed text the delegation model is maintained. “Some of the new requirements – such as for AIFMs and UCITS management companies to have at least two full-time senior managers who are resident in the EU – are already required under national rules in major fund domiciles such as Ireland and Luxembourg. “Nevertheless, we do expect to see a strong supervisory focus on whether locally based managers are sufficiently senior and experienced, have adequate human and technical resources, and are providing effective oversight. “We also expect to see a strong interest from ESMA in ensuring that national competent authorities are taking a consistent supervisory approach.”
TRANSPARENCY AND LIQUIDITY
CHALLENGES AHEAD That all sounds positive. So what, if any, shortcomings might AIFMD 2.0 have? According to McHardy, there isn’t yet clarity on the precise reporting and notification obligation changes that
We expect a strong supervisory focus on whether locally based managers are sufficiently senior and experienced and are providing effective oversight
will be applicable under AIFMD 2.0. However, he concedes that this is likely to follow once the provisional agreement is finalised, legislation is updated and supervisory authorities along with ESMA issue guidance. “Once the requirements are clarified, it will be interesting to assess the industry reaction to the cost of compliance of the changes against the ability by supervisory authorities to leverage the data/reporting collected for net benefit and whether any costs are passed on to investors or absorbed,” he says. Gruna takes a similar line, suggesting AIFMD 2.0 may include an increased regulatory burden, with additional reporting requirements and compliance obligations on fund managers potentially increasing costs for market participants. He also believes adjusting to new regulatory requirements could pose challenges for fund managers and regulators, especially if the changes
are significant or complex, resulting in potential delays or confusion during the implementation phase. He highlights an investor protection versus market efficiency trade-off. “Striking the right balance between investor protection and maintaining market efficiency is always a challenge,” he says. “The revisions may introduce stricter provisions to protect investors, which could impact market liquidity and increase costs for investors.”
POST-IMPLEMENTATION McHardy insists it is too early to consider post-implementation impact while there is still significant market uncertainty and AIFMD 2.0 is still provisional. “As an initial step, however, I would expect existing AIFMs to start reviewing the scope of the changes to assess impact on their operational and risk frameworks,” he says. “Time will tell if AIFMD 2.0 is perceived to add a net increase in value and
October/November 2023 47
Kershaw believes new supervisory reporting requirements on delegation will increase transparency and inform supervisors – that overall firms will have greater clarity and certainty around the continuation of the delegation model and supervisory expectations in this area. She welcomes the fact that the agreement recognises the primary responsibility for liquidity management remains with the fund manager. “Firms will need to review and enhance their liquidity risk management frameworks and ensure they have detailed policies and procedures for the activation and deactivation of each liquidity management tool, as well as effective operational processes and escalation mechanisms,” she says. Mirek Gruna, Chief Commercial Officer at IQ-EQ in Jersey, believes the new rules for European capital markets represent progress. “By updating and harmonising these rules, the agreement aims to improve the functioning of capital markets and enhance investor protection,” he explains. “It could also contribute to increasing the competitiveness and attractiveness of the European investment funds market. Overall, the provisional agreement has the potential to be a significant step towards a new version of AIFMD.”
investor protection against the cost of compliance.” Kershaw maintains that overall the new regime is an evolution rather than a revolution, explaining: “It will increase scrutiny in some areas (including delegation and fund liquidity), and open up new opportunities – for instance, for loan origination funds to operate on a crossborder basis.” She adds: “We would expect to see an increase in focus on enhancing second line capabilities across AIFMs to meet the additional risk management needs of the AIFMD 2.0, and increased costs as a result of more detailed investor disclosures with better informed clients possibly challenging fund charges.” Kershaw also anticipates an increased emphasis on governance through clarification of the delegation oversight requirements, as well as a greater spotlight on the independence of boards and committees of AIFMs.
IMPACT OF NPPRS How effectively do National Private Placement Regimes (NPPRs) provide a way for alternative investment fund managers to promote alternative investment funds that cannot be marketed under AIFMD’s domestic or passporting provisions? Elliot Refson, Head of Funds at Jersey Finance, explains that Jersey’s AIFMD offering complements that of the onshore jurisdictions but Jersey’s key differential is its ‘opt in/opt out’ approach. “When marketing into the EU, AIFMs opt in to AIFMD via the NPPR, but opt out when marketing to the rest of the world. Within EU jurisdictions, AIFMs are in scope for the full AIFMD wherever they market,” he says.
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In terms of marketing into the EU, Refson says that by the EU’s own statistics only 3% of all AIFMs market into more than three European countries. He notes that this statistic is preBrexit and, with the UK being the largest investment pool, this number is likely to be significantly lower. “If an AIFM is part of the 3% that market on a pan-European basis or to the retail market, then they will most likely need to access EU markets via another jurisdiction under full scope of AIFMD or UCITS,” he says. “But if an AIFM is one of the 97% that do not market so widely within the EU, then Jersey and its European Private Placement agreements offers a more cost effective, faster and more efficient solution, outside the full scope of AIFMD.” According to Refson, the extent to which Jersey has provided a complementary offering to that of onshore jurisdictions is best reflected by more than 200 non-EU AIFMs marketing their funds into the EU through the NPPR via Jersey. “In terms of service provision, I would say there are two sides to this – infrastructure and service providers,” he says. “Jersey’s world-class infrastructure is highlighted, for example, by its accessibility – via a double-digit number of daily flights to and from London and many other places, the second fastest broadband in the world and the new IFC buildings. “In terms of service providers, there is a wide range of law firms, administrators and auditors encompassing global firms as well as local firms. “These firms are supported by broad and deep expertise from the nearly 14,000 people – or 44% of the working population – who work in the finance industry.”
2.0 will increase scrutiny in some areas and open up opportunities – for instance, for loan origination funds to operate on a cross-border basis
Gruna accepts that NPPRs provide a good mechanism for AIFMs to access investors in jurisdictions where they don’t have a passport to market their funds. However, he appreciates that NPPRs are not harmonised across the EU and each country may have different requirements and procedures. “This can create complexities and increase compliance costs for AIFMs, especially if they seek to market their funds in multiple jurisdictions,” he explains. As examples of how the NPPR regime may vary in different EU member states, Gruna explains that some member states impose extensive administrative requirements, such as additional documentation or lengthy registration processes, making it burdensome for AIFMs to utilise NPPRs effectively. Then there are language barriers, Gruna says: “If the NPPR regime is only available in the local language, AIFMs from other EU member states may face difficulties in understanding and complying with the requirements. This can create barriers to entry and limit their effectiveness in promoting AIFs across borders.” n
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Tech takes the hit In the wake of a decline in AUM, investment managers report a slowing of increased investment in technologies
According to the Deloitte 2024 Investment Management Outlook, the downturn on assets under management is driving a consistent decline in the percentage of firms expecting a large increase in technology spending, including crucial areas such as artificial intelligence and cybersecurity. The report states: “Investment managers’ financial performance is correlated to AUM, and the recent AUM decline has led to margin pressure across the industry, impacting the active managers to a greater extent.
“With this pressure, spending on technology – including disruptive emerging technology – is not expected to increase significantly. In fact, this year, fewer respondents are expecting a large increase in spending on technologies compared to last year and the year before. “A dynamic like this could further separate a small group of technology leaders from the rest of the pack, provided that the investments can actually lead to enhanced performance and delighted investors.”
Source: Deloitte, 2024 investment management outlook - Winning in tomorrow’s world with the lessons of today
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