The Changing Face Of Alternatives: Structural Innovation On The Horizon

The global alternatives sector is being challenged like never before by technology, investor behaviors and a complex fundraising environment and, as Peggy Gielen, senior legal and technical manager for funds at Jersey Finance explains in this series, that dynamic is driving 'under the bonnet' structural innovation too...

There's no doubt about it – private equity structuring is changing.

Managers are diversifying away from their traditional institutional investor base to look to new audiences – including family offices and the broader high-net worth market. Research from JP Morgan & Bain, for example, finds that 53% of the high-net worth investor market plan to raise their allocations to the alternatives sector in the coming years.

At the same time, technology is having a big say. The rise of blockchain technology and tokenisation is further transforming the market, providing a way into alternatives and private markets for high-net worth investors. Real assets backed by blockchain technology can be securely traded, tracked and owned, and can greatly aid liquidity (in tandem with market demand and secondary trading platforms) and transparency, as well as substantially reducing minimum investment levels.

These trends are explored in a white paper Jersey Finance recently published in partnership with IFI Global – and are prompting underlying structuring innovation too, with managers looking for specialist support from service providers, legal experts, domiciles and advisers, to ensure that their vehicles are fit for the future, and ready to meet new investor demands.

A tangible impact

At a structuring level, evolution in the private equity space is having a very real tangible impact. One of the main developments we are seeing is a move away from standard fund vehicles towards deal-by-deal structures and innovative non-traditional entities, including corporate structures and special purpose vehicles (SPVs).

These structures are giving investors more control, transparency, and flexibility so that they can isolate targeted investments in a more streamlined, cost-effective way, with the ability to scale as needed.

Many managers now offer investors managed accounts, co-investments, funds-of-one and various other hybrid fund structures. According to IFI Global figures, just over half of managers (55%) are now using 'traditional' pooled investment funds, with the majority (82%) using partnerships, as well as managed accounts (32%) and co-investment vehicles (27%). Almost one in ten now use 'funds of one' (9%). Some private equity managers in the US have also diversified into open-ended (3)(c) funds - funds established under Section 3c of the US Investment Company Act 1940, which provides exemptions from registration for private investment funds.

In addition, the application of tokenisation is set to revolutionise access to alternatives – giving investors improved liquidity, transparency and control over their allocations, in a cost-effective way. This is particularly significant in high-value investments such as real estate, private equity and infrastructure.

How much structures have changed over the last five years is illustrated by what has occurred in Jersey – a domicile that has built a reputation for specialist alternative asset servicing over the past two decades; but recent years have seen the lion's share of growth from non-traditional entities, including special purpose vehicles and corporate structures, rather than from standard funds. This is illustrated through the growth in tokenised solutions, which are regulated in Jersey as corporate securitisation structures, rather than fund vehicles.

For many private market managers, the era of relying solely on traditional collective investment funds may be coming to an end.

Opportunity

The major changes shaping the private markets suggest that, over the coming years, managers will be able to bring new products to market like never before, whilst investors will have a wider choice of strategies and structures available to them.

This presents a massive opportunity to forward thinking fund domiciles, service providers and promoters. It's why in Jersey we've placed an emphasis on evolving our regulatory framework and product range, ready for this new era of private equity.

Last year, for instance, new guidance was introduced in Jersey around the tokenisation of real-world assets, which was warmly welcomed by the industry. We've seen a number of tokenised products come to market since then, with more on the horizon.

We also see a real opportunity in terms of synergies between Jersey and Switzerland, in the world of real-world asset tokenisation. Whilst Switzerland is known for its crypto and blockchain capabilities, Jersey can complement this thanks to its investor friendly regulatory regime and structuring options - incorporating technologies like smart contracts and AI, which can greatly enhance operational efficiency and compliance processes.

Jersey's funds industry has a relentless focus on innovation and competitiveness to meet the rapidly evolving needs of investors and asset managers, conscious that, in the years ahead, we are increasingly likely to see a coming together of the worlds of tokenisation and traditional finance. With asset managers looking to bring traditional investment products 'on chain', in order to offer investors exposure to new opportunities, structures will need to evolve further.

Enhancements to the Jersey Private Fund (JPF) announced this summer are a case in point, bringing the already popular JPF product for sophisticated investors into this new era - notably by removing the 50 investors/offers cap, enabling 24-hour JPF authorisation and streamlining 'professional investor' definitions.

This will become increasingly significant, as carry vehicles – an area where Jersey has earned a strong reputation - and JPFs become increasingly favoured for managing carried interest distributions and raising capital efficiently within bespoke private equity strategies.

And there are more innovations in the pipeline too, all geared up to help bolster Jersey's competitiveness, streamline the fund structuring and launch process, enable managers to fundraise quicker and open up access to the cutting-edge opportunities demanded by global investors.

It's a reflection of the ambition Jersey has to create a progressive framework that provides future-proof solutions for a new generation of investors – and progressive centres like Jersey will be pivotal in enabling the industry to realise its potential.

This article originally featured on The Drawdown.