Jersey Finance chief executive Geoff Cook on the latest developments in the island’s fund industry post AIFMD…
When I last wrote about the Jersey Funds sector in April of this year, issues and concerns surrounding the Alternative Investment Fund Managers Directive (AIFMD) were finally beginning to settle down, and we found ourselves in a situation where we could move forward.
Since then, the AIFMD has come into law and Jersey’s Private Placement regime continues to facilitate EU business. For those requiring AIFMD compliant access to EU markets, activity to achieve the criteria to participate in the passporting scheme is well underway, and expected to be complete in 2013, ahead of schedule.
While initially the AIFMD, in it’s original drafting, appeared to be a crushing piece of bureaucracy with the potential to stifle the global funds industry all together, what has happened in reality has been more of a shuffling about of funds offerings, rather than the full-blown Trade Bloc Tectonic earthquake we once feared. We have finally reached a point where in Jersey at least we can say – not only have we got through the worst of it, but there are now some positive benefits to what has happened. So what are these benefits?
Firstly, the crisis and the resulting industry scrutiny has motivated us to engage significantly more with Europe. When in the past, at times, it appeared that jurisdictions such as Jersey, and even the United States, would be disadvantaged in a discriminatory manner, we maintained a constructive dialogue and the resulting deeper links with the EU Commission, the new established presence of the Channel Islands Brussels Office (CIBO) and also our understanding of the new regulatory world we find ourselves in post-crisis, have all been the resulting benefits. Via our Brussels office, Jersey is now working on contributing to formal initiatives to add feedback and support while the level 2 rules are being formulated. Through this type of work, there is an even deeper understanding now, that our participation in, and adherence to, global standards on transparency, regulation and governance keep us in a very safe place.
This better engagement with Europe is also essential to counter any legacy of confusion that remains in the minds of a few about the stability of Jersey’s tax system. When the EU Code of Conduct review took place early this year, the complexity of the issues involved, (and how they were misrepresented by IFC critics), created some inaccurate perceptions. Through positive dialogue with the EU Code Group, these concerns have now been put to rest and it is clear that fears about significant changes to the Zero/Ten Tax Regime were unfounded. Jersey is committed to retaining tax sovereignty and to providing a certain, clear and competitive tax platform, now and in the future.
So while the US, EU and developing market trading blocs are still dramatically shifting, especially in recent weeks, further clashes of opinion and approach will no doubt continue, but the crucial awareness that regulatory measures must not damage world trade, is now hopefully understood by all. Although there is still some anxiety in the market place regarding what the level 2 measures will bring, it is much more likely that they will now be focused on developing appropriate and effective rules whilst encouraging, (rather than preventing), enhanced market access through passporting, a move which is likely to bring more investment, more trade and more jobs.
In fact the global debate about the future of the funds industry has moved on, from regulatory stability, to morality, just as it did for other financial sectors at the peak of the crisis. In parts of Europe, like Sweden and Norway for example, the merits and the demerits of the private equity model are now being debated from an ethical point of view, rather than a stability one, asking “Is it moral for funds to buy into health and education and what if they are not based in the country the services are provided in?” which effectively brings the private equity model into question.
While this is an interesting discussion to have, it is ultimately one that ignores the extensive benefits of the private equity model. In a recent study by McKinsey, which analysed 70 private equity deals, they found that the primary source of value creation was not financial engineering, price arbitrage, overall sector gains or stock market appreciation, but rather the outperformance of the company, i.e. simply better management of the business. The virtue of the Private Equity model lies in its long-term approach, where there are incentives to work through tough times – because of this, PE’s have much lower insolvency rates.
The old-fashioned viewpoint that Private Equity firms are “asset strippers”, which would justify the concerns about their involvement in a country’s Health and Education, is just that – old-fashioned. A study by Professor Oliver Gottschalg of HEC Paris in fact found that private equity firms produce significantly more of their returns from expanding what they invest in, than they make from initial restructuring. As the parts of the world worst hit by the credit crisis finally reenter a period of growth, the expertise private equity offers will be vital, to fix what is broken, and create value for investors. And this is something Jersey is well-placed to help with.
Positively, all of this debate has meant that Jersey has seen the opportunity to streamline and innovate our fund offering. We are now working on the provision of a new private placement fund, which will improve speed to market and ease of establishment. This time of review and amendment has given us some clear focus, and a chance to assess our funds industry fully – we have surveyed our client firms operating in the funds sector, to ensure that the developments we make are what they are looking for. This is an opportunity for us to significantly improve our offering by making it easier to use Jersey funds products, and providing more choice, whilst safeguarding regulatory standards.
It has also become clear that many of our existing features are now more appealing than ever. With a stable tax system, high quality but affordable office space, outstanding education, health, and premium housing opportunities, coupled with one of the most beautiful natural environments anywhere in the world, we have an unbeatable offer for booking and locating funds business and businesses.
In April, we faced the future with renewed optimism and confidence, and that mood is set to continue, as we begin to enjoy the benefits of the hard and worthwhile work that has been done during the summer.