Fund formations are few and far between at the moment, but it is still possible to launch niche strategies such as clean energy, high-tech and infrastructure.
These types of funds require specific expertise to set up, says Jane Pearce (pictured), a partner at the Ogier Group, which provides advice on all aspects of Jersey, BVI, Cayman, and Guernsey law and includes Ogier Fiduciary Services, which specialises in the provision of full administration services for private equity, real estate, infrastructure and mezzanine funds.
Pearce says, “It involves the same legal housing as many other funds, but VC-type funds contain very different provisions because they are typically set up to make smaller investments – in the knowledge that perhaps only one or two out of ten will deliver significant returns.”
One of the differences in the set-up is that the fund will be permitted to make seed pool investments that are intended to enable later and larger rounds of venture financing. There is a simplified investment and reporting process. “It is a straitjacket approach,” says Pearce. “If the transaction ticks the box, you can do it.”
This is distinct from the big buyout fund where there is usually a long approval process, extensive due diligence, negotiations over the contract, timing issues, cashflows and provisions for the management team, as well as transparency issues.
But new funds are perhaps less the story of the current private equity environment than the ongoing restructuring by banks. “There is still activity in restructuring and divestment of balance sheets as banks re-organise themselves,” Pearce says.
This can lead to extensive asset sales, such as Lloyds Banking Group’s £332m deal to sell about 70% of its Bank of Scotland Integrated Finance portfolio to Guernsey-based secondaries specialist Coller Capital.
Ogier was tasked with setting up new offshore vehicles for the transfer of the assets involved. This was no mean feat given that contractual consent as well as approvals under statute and other regulations were required. For the leading legal teams in London this was a considerable challenge.
Jersey is ideal for this kind of deal, given that it is outside the UK, where the regulatory response times can slow down the transaction.
In addition, where there are professional investors involved it makes sense to be regulated in Jersey on the basis that the structure will be regulated as a very private partnership structure for which there is a lighter regulatory regime. A further benefit is transparency for tax purposes provided by both Jersey and Guernsey.
With little visibility over the future global economic direction, private equity activity may be slow to return, leading to further consolidation among service providers, Pearce believes. “We will see a stop-start approach. Whereas everyone previously anticipated a strong economic uptick by 2010, this could now be 2012 or even 2013.
“This is likely to lead to a certain amount of consolidation in the fund administration sector,” she adds. “There is not a huge volume of new funds being launched, so people will try to buy market share by acquiring rivals. You can do this and receive a long-lasting benefit given that the duration of funds is usually 10-12 years.”
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