Guernsey set to benefit from flight to quality
By Andrew Boyce – Several headline factors will shape the short- to medium-term future of the private equity sector. Funds that had reached the end of their investment periods before the financial crisis have been unwilling or unable to exit investments as a result of the consequential hit on values. At the same time, funds launched just prior to the crisis have not yet been able to hit investment targets despite the end of their investment periods fast approaching.
At the time of writing, events in Greece and the looming wider eurozone crisis threaten the raising of new funds and activity in the private equity M&A market by affecting the availability of debt finance and levels of investor confidence. But positive signs can still be found.
According to a recent survey of 400 institutional investors by SEI and Greenwich Associates, more than USD1trn in cash has not been deployed. The lack of exits and the investment capital overhang have hampered the ability of promoters to raise new funds and to reinvest in the market.
However, dwindling internal rates of return and investor allocations meant we were beginning to see an increase in exit activity, which had already outstripped 2010 and was expected to increase through the end of 2011. In anticipation of stimulation in the private equity market through exits and use of ‘dry powder’, many large buyout firms have begun to raise funds, or indicated they are looking to do so in the near future – targeting the final quarter of this year and the first quarter of 2012.
The continuing relative lack of depth in debt markets, potentially worsened by the eurozone crisis, should encourage a shift in manager/promoter behaviour toward a more traditional debt-structuring model, which will add momentum to the reinvestment cycle and begin to drive the market.
The headline factors must be viewed in the context of investor perception and reaction to the financial crisis. As investors seek to shore up returns, and increasingly demand a demonstrable track record from managers as well as transparency and accountability for returns, there is an inevitable flight to quality.
This, together with increasing regulation, such as the EU’s AIFM Directive and the US Dodd-Frank Act, look set to offer Guernsey a real opportunity to cement its position as the leading offshore private equity fund domicile.
The threats and resulting opportunities for offshore jurisdictions of the AIFMD are well documented and seem to favour moving structures offshore. The open question on this trend of a flight to quality is what effect the threatening Greek default and worsening eurozone situation will have on the private equity industry. These issues could increase the shift away from onshore European structures.
Additionally, either the private equity market will consolidate, as greater demands on available cash mean smaller players may struggle to raise money while larger players seek to diversify; alternatively, successful fundraising by bigger firms, and a return to more traditional forms of private equity and debt structuring, may encourage more investors to enter the market.
Guernsey and Carey Olsen are well placed in either scenario, with the private equity sector accounting for around half of Guernsey’s GBP220bn in investment assets. Our firm is at the forefront of advising this business as the market leader in Guernsey-domiciled funds for the sixth consecutive year in 2010 according to Thomson Reuters Lipper Fitzrovia, advising 47 per cent of funds domiciled in the island.
Andrew Boyce is a partner with Carey Olsen in Guernsey
Please click here to download a copy of the Private Equity Wire special report: Guernsey Private Equity 2011
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