After many false starts, the metrics are now better now than they have been for a long, long time, says Collas Crill partner Mark Rawlins as he reports on a funds resurgence.
The headline story in April was that US hedge fund performance for the quarter hit nearly 5%, the best results for nearly six years. On top of this, US investor confidence is appearing to rise dramatically, and – depending on where you take your statistics – could be at the highest level for five years.
Then in China, we have the world's second largest economy, with an investor base (both sovereign and corporate) relatively untouched by the economic woes of the developed nations, and with a growing appetite, and domestic encouragement, to invest outside its home jurisdiction. With an ever increasing outward investment war chest (nearly $70bn in 2010 and 50% growth since 2002), this will continue to stoke the fire for private equity funds and joint venture/ co-investment opportunities. Indeed, Robert Zoellick, the World Bank president, has suggested that China help Europe by encouraging its investment funds to seek "business opportunities" in the debt-stricken region, rather than contributing to the International Monetary Fund to buy bonds. The slow down in the Chinese economy will serve only to increase this outward investment.
Closer to home, there may be austerity facing many of our close neighbours, but this is leading to a flight of capital away from banks situated in the more troubled countries to banks and alternative investments deemed to be more safe and secure. Reports indicate that €65bn left Spain in March 2012 alone. While a significant issue for these Eurozone countries, this movement of capital is – in itself – giving rise to an increase in investment opportunities into fund vehicles.
And then there are the speculators, seeing value opportunities in the volatile markets. While some of these may employ practices that could be considered to be morally questionable (in particular, the 'vulture funds', under consideration by the JFSC, and those restricted by the UK's Debt Relief (Developing Countries) Act), speculation and risk-taking can be a key driver to investment, and business, success and those willing to back a country or an outwardly failing company, with the intent to turn it around, can be seen as vital in ensuring ongoing profitability and economic stability. In short, private equity is an asset for the business landscape.
All of this is without looking at the increasing needs of pension funds to deliver returns to an aging population. UK pension fund allocation to hedge funds is up last year from 2.6% to 4.1%, representing a cash increase of £12bn to nearly £33bn.
Perhaps these pointers are, in part, responsible for the recent increase in optimism by the IMF in its global growth predictions (with the exception of Spain).
So, this is finally good news for the global funds industry, which is now starting to recover from the body blows of the massive outflows (globally, net outflows of US$470bn between June 2008 and April 2009), and adverse publicity and investor sentiment. Jersey itself is now just short of having £200bn under administration, although with some way to go to recover to its position back in 2007.
This in turn means that investment management and administration firms seem to be recruiting and growing.
While there are economic issues still to be resolved – with the most notable being the difficulty for funds (along with the rest of the world) to secure borrowing or leverage – the picture is starting to look somewhat rosier. We have had many false starts looking for the green shoots of recovery, but the metrics are better now than they have been for a long, long time.
Against the background of this new growth, there are new challenges. But as Albert Einstein said, in the middle of every difficulty lies opportunity. And so it is for Jersey and the funds industry: the important point for us here is to ensure we catch the wave, rather than being drowned by it.
There are major international initiatives looming, which either by design, or the law of unintended consequences, will have a significant impact on the way funds are established, managed and administered here. Each one is worthy of a separate briefing by itself, and our law firm has, and will continue, to run or participate in, seminars and briefings on these topics.
One of the largest thorns is the Alternative Investment Fund Manager Directive (the AIFMD), which still gives no clarity on how non-EU countries, such as Jersey, are to be measured for 'third country' equivalence, and provides a draconian regime for custodians (depositaries in euro-speak), who could end up being responsible for the fraud/failure of independent sub-custodians: a position that is even more onerous than the equivalent regime for regulated European UCITS. The opportunity for us in Jersey is that we have committed to ensuring that there will be an AIFMD compliant regime here, and that could attract investment fund managers, wishing to be close to, but not directly regulated by, our European neighbours, and funds wishing to take advantage of the European passport for their distribution.
Then there is FATCA. An American tax collection act which means that almost every administrator and bank in the Island (and across the globe) will need to establish new client identification and reporting systems to avoid withholding tax of 30% on income and capital. A huge financial burden on our industry here, but one that we see is being addressed and overcome.
And, in the global fight against systemic risk, there is a fearsome tsunami of further regulation aimed at, or affecting, the funds industry.
Perhaps counter intuitively, this actually puts Jersey in a very good position. It has a flexible and evolving, highly regarded and cost-effective regulatory landscape for funds and a pedigree stretching back 50 years. The recently introduced fast track self-certification private placement fund regime further enhances the argument (an equivalent regime for open-ended funds would be welcome too). Coupled with Jersey's pole position as the highest rated offshore international finance centre and the deep bench of professional expertise on Island, we should be able to look forward to a bright future. We must not tire, however, in our fight to remain competitive in this arena. It often only takes a small change to win or lose market attractiveness. A speedy and cost-effective regime, and ease of use, are the touchstones of our international business. Failure is not an option, and success will bring much wanted additional employment, and revenues to our government.
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