The Channel Islands have long been known as leading offshore centres for the establishment of investment funds and other investment structures. In particular, Channel Island vehicles are often used for alternative investment structuring - including for private equity, infrastructure and real estate. This article looks at the trends in the Channel Islands funds and investment structuring industry in recent years and in particular the real estate investment structuring industry.
CRISIS AND REGULATION
There has been a great deal of turmoil in all investment markets since the financial crisis, and the Channel Islands have not been immune. The absence of liquidity, and a collapse in investment values, impacted on Channel Islands' funds and investment structures just as they did elsewhere - whether temporarily, with funds having to suspend redemptions or put assets into side pockets, or more permanently, with structures needing to be refinanced, reorganised, or liquidated. But now, with many of the 'legacy' problems having been resolved, things have moved on.
A return to relative economic stability, has encouraged greater risk appetite from investors, such that investors have increasingly been looking to deploy capital to alternative investments. With alternative investments being an area where the Channel Islands have historically been strong, this investor demand has led to increased activity and opportunities in the Channel Islands for those assisting with investment structuring.
However, just as the investment landscape has changed following the crisis, the legal and regulatory landscape has also evolved. Globally, there is greater focus on the regulation of financial services - including the regulation of investment funds and "shadow banking" (or "the whole alphabet soup of levered-up non-bank investment conduits, vehicles, and structures", as Paul McCully put it when coining the term). Whilst the scope and detail of the increased regulation has left some investors thinking governments and regulators have overreacted, there is generally an increased inclination among investors towards stability and consistency, and for some degree of appropriate regulation of investment structures, or their service providers, which is aligned to international standards.
The Channel Islands enjoy international recognition of their standards of financial regulation and anti-money laundering measures, having been reviewed and assessed as meeting relevant standards by a number of international bodies - including the IMF, financial stability forum and Moneyval. The Channel Islands have also been quick to respond to new external legislation and regulations, in order to demonstrate compliance with, or an ability to interconnect with, relevant legislation and regulation in core markets (for example, the EU or the US), or which are global in effect. The Channel Islands' responses to the EU's AIFMD Directive was a particular case in point, with both Channel Islands rapidly introducing legislation, regulation and inter-governmental and inter-regulator arrangements to ensure that they had regimes which were 'AIFDM-ready' where this was relevant, whilst preserving existing regimes for those unconnected with the EU or otherwise outside the scope of the Directive.
Practitioners in the Channel Islands have a proven track record in managing complex and specialised structures through regulatory change, and have thus been well placed to adapt to the new environment. All together, this has enabled the Channel Islands to build, grow and prosper in what is an old industry, but with new rules.
THE REAL ESTATE STORY
As noted above, real estate funds and structuring have been one of the mainstays of the Channel Islands' investment structuring industry for some time. The Channel Islands provide a stable, well regulated - and tax neutral - platform for investment in real estate, and accordingly provide a home for a variety of asset holding structures and funds - including some global real estate funds with assets running into the £billions. The variety of structures in the Channel Islands reflects the variety of the real estate industry: single asset holding companies or trusts (JPUTs) sit alongside a variety of commingled investment structures, funds and listed property vehicles. The scope and extent of the regulation of those vehicles also varies, from lighter touch regulation of closely-held vehicles serving the needs of one or more institutional investors, to more 'retail' funds marketed to a broader pool of less-sophisticated investors.
The relative popularity of different types of real estate-focussed vehicles has changed somewhat in recent years. The model of an open ended unlisted real estate fund has been questioned by some as a result of experience of the potential difficulties around illiquidity, and 'blind pool' funds have fallen out of favour with certain investors. In contrast, there has been a significant strengthening in the demand for joint ventures, club deals and smaller investment syndicates - driven, in part, it seems, by investors focussing on selecting the underlying investments, rather than on selecting investment managers, and also by investors wanting a degree more control over their investments. There has certainly been a growth in transactional activity over the past few years, as the 'corporate real estate' sector has grown.
The resilience and diversity of the Channel Islands real estate structuring and corporate real estate market is confirmed by our own recent experience at Bedell Cristin, where we have been involved in a number of matters involving the structuring and financing of real estate funds, joint ventures, and asset transactions. Recent examples include:
- the establishment and launch for a global insurer of a series of Jersey Expert Funds constituted as unit trusts, which invest in real estate and infrastructure assets;
- transactional activity involving single asset structures, including structures holding Drapers Gardens, Blackrock's headquarters building in the City of London, the Gherkin and Tower 42 in the City of London, and London's Battersea Power Station;
- advising on a series of Sharia'h-compliant funds and investment syndicates for Middle Eastern investors, investing several hundred £million in European real estate.
Our own experience appears to be mirrored by the industry as a whole. The total net asset value of funds under administration in Jersey at the start of 2015 stood at £228.9 billion and in Guernsey at £219.4 billion , and latest business tendency surveys in the Channel Islands suggesting good levels of optimism about future business activity.
FOUNDATIONS OF SUCCESS
The Channel Islands remain, for many, the jurisdiction of choice for the establishment and administration of funds and other investment structures. There are numerous reasons for this, but include several key factors:
- a proven track record as leading fund and financial services jurisdictions over many years;
- robust but flexible regulatory regimes, which meet international standards;
- a critical mass of world quality professionals;
- tax transparency and tax efficiency; and
- an ability to adapt and innovate, including enhancements to both law and regulation in order to meet required standards, and to provide choice;
Taking into account all of the above, whilst the environment (both investment and regulatory) has evolved significantly over recent years, it is perhaps not so surprising that the Channel Islands continue to be a destination of choice for those structuring cross-border investment. The Channel Islands have adapted, and continue to adapt, to ensure that they remain safe and reliable conduits for funnelling capital from where it is held to where it is needed. Through ongoing evolution, and a preparedness to respond to the demands of all interested stakeholders, the Channel Islands are well positioned to continue their success in the future and to remain a key player in both the funds and corporate real estate sectors.
Previously published in Focus Europe, July 2015
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