It is not surprising that, with a backdrop of the current worldwide financial situation, there have been noticeable changes in the way in which funds are established and maintained in Jersey. Chief drivers behind the movement are obvious and understandable; a fear of risk; a desire for regulation; and costs.
Recent media coverage has focussed on failures within the financial sector, apparently the result of improper approaches to risk, coupled with a lack of regulation. As a result, investors and promoters alike are increasingly looking for at least some level of regulation within their investment structures.
Whilst the unregulated fund regime was an appropriate response to market demand at the time, there has been a movement away from this offering, with promoters taking the view that it would now be unappealing to investors. It seems that even the term "unregulated", such an appealing prospect for so many upon launch as recently as February 2008, is now an albatross about the neck and a reason to avoid an otherwise appropriate structure. This is not a universal view and I do not envisage it being permanent.
Other smaller and private equity structures, which could otherwise avoid being regulation as a "collective investment fund" (for the purposes of Jersey law) are now actively seeking regulation either through opting to be treated as a "collective investment fund" or by re-planning their structures to fall within the regulated sector.
Costs are key for so many new funds and a real consideration as to the way they will be managed, structured and regulated. Promoters are aware of the increased levels of funds failing to launch and as such, are increasingly making use of "red-herring" prospectuses, to test the market before going live with a real offer.
Converse to the drive towards regulation mentioned above, we are also seeing more smaller funds attempting to start life as a very private investment vehicle (ie. not a regulated fund) before then progressing to regulated fund status.
Recent high-profile judgments and investigations regarding investment fund structures have highlighted some key points to be borne in mind both by investors and by fund services businesses. Duties and responsibilities in fund structures generally lie with those managing the fund; the directors, trustees, fund administrators and other fund service business providers and if things go wrong, investors (particularly sophisticated or institutional investors) are acutely aware of their rights and potential lines of complaint. The recent issues in the media have led to a change in the general approach to management of funds, with an increased awareness of potential conflicts of interests (particular between fund services businesses and the board of directors/management of any fund). The use of non-executive/independent directors is likely to continue to increase.
Investors are increasingly looking for new and innovative forms of investment, away from the areas which have been greatly affected by the crisis. Real estate markets have been hit badly, particularly in the UK, primarily by a lack of bank funding and uncertainty as to the financial status of underlying tenants and property development groups. Stocks and shares are still unattractive to many, given the continued loss of values across the world's stock markets. Areas which formed only a small part of investment fund investment will grow; film and media finance, funds investing the high-end luxury goods, fine wine, arts, bloodstock; sports and image rights; and even rare stamps. Any asset offering a stable investment return to investors with a now more conservative approach will appeal.
Opportunities are now arising, primarily in the UK real estate and equities markets, to make investments in assets which have been seriously devalued by the crisis. Indeed, we have already seen those investment houses with some level of liquidity looking to take advantage of the lack of bank lending, through themselves offering mezzanine financing investment funds.
There are a number of reasons why an established fund may be restructured, but financial considerations are the primary driver at the moment. The managers of funds are looking at their current structures and questioning the costing and provision of services. Can services be consolidated or cut? Can agreements be re-negotiated and discounts obtained? Can we achieve a similar result through a different (perhaps newer) structure at a lower cost?
With funds part-sold or a lack of bank financing, promoters are looking to restructure their funds, often by collating two or more under-sold funds into one healthier, more fully-invested fund. This not only enables at least part of the investment to take place, but makes the overall product stronger and more likely to succeed. The restructuring is often cross-jurisdictional, with an awareness of the global offering comes and increasing trend to redomiciliation of funds or investment structures in and out of Jersey.
Aside from this, many funds are looking to take advantage of a restructuring proposal to apply to redesignate their fund's status, to take advantage of a newer regulatory regime, such as that applied to listed funds. This may then lead on to revisit of the consents issued to a fund by the Jersey Financial Services Commission. Can those consents be negotiated to align with more recent Commission policy and thereby save cost by, for example, no longer requiring a specific type of fund services business?
However trends in the funds industry continue to move over the coming months, one can be certain that Jersey's fund services businesses will be quick to respond. Jersey's finance industry in general has shown itself to be flexible over the years, able to react to changes in market demand, tax and regulatory issues here and abroad.
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