Jersey: Private Equity Thriving Thanks To Alternative Thinking

Last Updated: 30 October 2017
Article by Michael Johnson

In a world short on socio-political certainty the amount of 'dry powder' in private equity is increasing as investors hold back and bide their time for the right investment opportunity. Additionally one of the consequences of uncertain traditional markets is a flight to alternative assets, something often structured through the Channel Islands. Michael Johnson, head of fund services at Intertrust in the Channel Islands, takes a look at some of the alternative asset classes that are on the rise and the reasons behind this diversification of investment.

After the geopolitical upheaval of 2016 it would have taken a brave forecaster to stick their neck out and predict a completely stable 2017 in the social and political spheres. Anyone doing so would have been made to look fairly foolish when Theresa May called a snap general election in April. That decision resulted in the FTSE 100 Volatility index climbing to its highest point in five months against a backdrop of near-constant pressure on equities and general wariness across global stock markets.

The early political forecasts were not reflected in the results of the election and, on the morning of June 9, a shock result saw a continued volatility in bond and equity markets as the future direction of the government's fiscal and monetary policies were completely up in the air.

This, combined with broader global uncertainty, contributed to investors either looking to keep their powder dry when it came to actually deploying the capital or seeking alternative asset classes that could represent more stable returns. In light of this and their recent strong performance, the private capital markets are larger than ever before – as a recent private equity (PE) report commissioned by Intertrust has found. Returns and distributions have remained robust and general partners (GPs) exiting from their investments find themselves in a seller's market due to intense competition.

Alternative assets research firm Preqin has found that private equity assets under management hit $2.49tn in June 2016 (an all-time high) and Tim Hames, Director General of the British Private Equity & Venture Capital Association (BVCA), in a foreword to Intertrust's recent report, said that the volume of uninvested capital could hit $1tn by the end of 2017.

So private capital is still plentiful, but the pressure to deploy it in a timely and meaningful fashion is greater than ever and the industry wants to ensure continued health through any future financial crises. This pressure has resulted in a flight to newer asset classes as managers look to diversify portfolios and find optimum efficiency in both long and short-term structures that offer greater security than traditional investment vehicles.

Building stable investments

One such alternative asset class is infrastructure, which has had a much greater role for private capital in recent years as a consequence of government cutbacks across the world. Governments have had much less money to spend since the 2008 financial crisis so large-scale infrastructure projects such as the building of roads, bridges, hospitals and schools have required the input of private capital.

This trend has coincided with an increased PE allocation from institutional investors such as pension funds and sovereign wealth funds, which are often looking for long-term assets and yield so are perfectly suited to investing in the infrastructure asset class.

As infrastructure projects are important for the functioning of society they represent a stable long-term investment with less sensitivity to external economic factors, the likes of which can have a significant and immediate impact on bonds and equities.

Infrastructure projects are often outlined and planned as a means of gaining political capital, as in the case of Donald Trump's infamous wall or Theresa May's industrial strategy for the UK, launched earlier this year. But just because politicians promise investment in order to win credit and votes; it doesn't mean that infrastructure projects are not for the greater good.

Intertrust has proven expertise in servicing infrastructure assets and is proud to be associated with the asset class as it provides real, tangible value to communities. On behalf of our clients we administer major infrastructure initiatives covering sectors such as healthcare, education, social housing, highways and street lighting.

Powering investments

Another area of growth over recent years has been the energy asset class, with the race being on to find the most sustainable and effective way to provide power to populations all over the world.

Traditionally, PE involvement in energy has been to increase the efficiency of fossil fuel sources or seed renewable energy companies like those that use biomass, for example. These are two relatively classic uses of PE – improving efficiency and finding new solutions – but are applied to an alternative asset class in this case.

The drive towards renewables for PE investment represents a significant growth area and a necessity as we move towards the future. This is an example of PE mirroring what's going on in the real world as individuals and companies face the challenge of providing sustainable energy.

Eyes on the future

As the world moves towards an increasingly digital future, so PE begins to make the transition as well. The technology sector has undergone rapid growth over the past 20 years but initially this was funded by angel investors and venture capitalists due to its inherent riskiness.

Now however, the technology sector has reached a point of maturation where investments look a lot more sensible and sustainable over the long term.

We are now seeing greater capital than ever being deployed by traditional limited partners (LPs) but also from tech companies who find themselves capital rich coupled with a thirst to ensure they continue to benefit from the '4th Industrial Revolution'.

At Intertrust our interest in technology funds is twofold as they are not only sensible investments for our clients but they also inform the direction of our own significant investment in emerging technologies so we can enhance our client experience and maintain our high credibility.

Broader reach for the Channel Islands

The flight to multiple alternative asset classes is a positive thing for the Channel Islands as it results in the widening of their sphere of influence. The areas noted above aren't generally centred in London, which is where the islands have traditionally done most of their work. Therefore alternative PE investments allow Channel Island practitioners to broaden their reach and expand their global footprints.

These assets are more global in nature so there is an opportunity for large, international firms like Intertrust to use our expertise and draw on the experience and knowledge of our colleagues in our 41 offices in 30 jurisdictions around the world.

Working globally also means we have increased the size of Intertrust's portfolio of non-Channel Island domiciled funds, which is a good Brexit buffer and a means of diversifying our local offering.

A diverse offering is also a real positive for our employees, as they get to engage with funds and asset classes that have real-world impacts.

Diversity is key in a volatile world and our multi-jurisdictional, multi-asset model is sustainable, effective and built with the long term in mind.

Click here to learn more about our private equity offering.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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