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Cautious optimism as service providers look for launch rebound

By Simon Gray – Jersey-based service providers to the private equity sector and the broader alternative fund industry mostly describe themselves as ‘cautiously optimistic’ as they look forward to a long-awaited rebound in fundraising that may come early next year and a reduction in the number of new projects that fall by the wayside or are slow to crystallise because of caution among potential investors.

With the deadlock over the European Union’s controversial Directive on Alternative Investment Fund Managers apparently broken and the most potentially damaging aspects of the legislation for non-EU jurisdictions seemingly removed or mitigated, industry members believe the ending of uncertainty may prompt a surge of new business for promoters that were waiting to see how the island would be positioned under the new EU rules.

Meanwhile, at a time when the sudden decline in available leverage has cut off the mega-buyout industry at the knees, Jersey has been carefully cultivating specialised sectors such as green technology funds and a range of so-called ëalternative alternatives’ that not only chime with the mood of the times but take advantage of the intellectual capital and capacity for innovation that represent the island’s most important competitive advantage.
 
‘The number of niche or esoteric funds is clearly growing, and the range of assets underlying the funds is incredible,’ says Ernst & Young audit partner Chris Matthews. ‘This work is coming here because Jersey is perceived to have the expertise to deal with these products, and they play to our strengths. We will never be a jurisdiction that can compete on mass resources – we’re not a number-crunching centre. Instead we want to be known as an innovative and professional centre for top-end niche products and services.’
 
Ian Gobin, a partner at international law firm Walkers, concurs: ‘I’m now seeing for the first time asset classes that I didn’t know existed. They are becoming ever more esoteric. There’s a lot of private equity activity around Russia and the former Soviet Union, which is a relatively new market. The sector is bouncing back.’
 
Robert Milner (pictured), a partner with law firm Carey Olsen, says that Jersey’s staple of closed-ended fund structures is attracting wide interest from current or potential fund promoters – including managers preparing to spin out from big institutions. ‘The appeal of closed-ended listed structures is that they give access to a broad investor base, from institutions large and small down to IFA-advised individuals,’ he says. ‘These vehicles can be set up in Jersey with an absolute minimum of fuss.’
 
Next year could see private equity benefiting from a significant uptick in capital raising and new fund formation. ‘The past 18 months have been characterised not so much by new fund launches but by lots of funds being restructured,’ says Nigel Strachan, chairman of the Jersey Funds Association. ‘No-one’s really been on the road this year for fundraising, but next year promoters anticipate being on the road from January 1 onward. They are looking to attract money allocated to alternatives but sitting on the sidelines as investors wait for an upturn.’
 
He is echoed by William Webbe, director of the corporate services division within Deutsche Bank International’s trust and securities services business, who says the sector is bubbling up nicely. ‘Many funds have undergone restructuring over the past couple of years, but the word is that 2011 will be a big year for private equity fundraising,’ he says.
 
This is partly because investors are looking for better yields than they’re currently obtaining from cash, but also because managers are at last in a position to look beyond issues within their existing portfolios. ‘Many managers have had to do a lot of work on their existing portfolios over the past couple of years, and therefore have not been in fundraising so much as portfolio management mode,’ Webbe says. ‘They’ve been spending a lot more time working on the underlying assets to try to realise some value within their portfolios.’
 
A number of factors have compounded the logjam, he argues, including investors unwilling to sign up to new funds until existing commitments are drawn down, and a slowdown in deals because of an expectation gap in terms of asset prices between vendors and purchasers over the past 12 to 18 months. But he says: ‘The majority of the dry powder has now been used up. New funds have been launched, and there are reports that fundraising during the final quarter of 2010 may be fairly robust.’
 
The signs of a rebound are welcome for an industry that has had to tighten its belt over the past couple of years. Says Matthews: ‘Opportunities remain subdued compared with two or three years ago. It’s taking longer to get things to market, but having said that our pipeline of new business is probably the highest it’s been in three or four years. The frustrating thing is it’s taking longer to convert those opportunities into actual business.’
 
He notes that a recurrent feature of the past couple of years for Jersey service providers has been the establishment of fund structures in the island that were subsequently wound up because the promoter could not attract sufficient capital to create a viable investment proposition. ‘That’s to be expected in the current climate, but it’s not what you want to see,’ he says. ‘It’s a big one-off investment for providers to establish a new relationship, and it’s unfortunate if it does happen to sink after a short period.’
 
Equally, the downturn has intensified the competitive climate in the industry. ‘There is more pressure on pricing than ever before,’ Matthews says. However, he argues that it’s often worth persevering with clients struggling to get funds off the ground because the picture may change once more favourable market conditions return. ‘We need to be supportive during that process and not close the doors, because one day they may come back with USD2bn.’
 
One area of the industry that has not yet shown signs of revival is the listed funds sector, which surged in the mid-2000s as managers sought ëpermanent capital’ not subject to the whims of asset allocation, while offering access to a much broader range of investors. The latter in turn were supposed to enjoy daily liquidity through trading on public markets as an alternative to the long lock-ups inherent in traditional private equity investments.
 
However, the listed funds sector lost much of its lustre over the past couple of years as some of the biggest alternative fund listings, especially on Euronext Amsterdam, failed to deliver the promised liquidity. Many such funds have been plagued by large differentials between their market price and net asset value.
 
Peter Rioda, director of the funds division at trust company and fund administrator Sanne Group, says that the current market is not open to promoters in listed funds other than for ëtechnical’ listings designed to satisfy the requirements of certain investors. ‘We are not currently seeing funds listing on the London Stock Exchange main market or AIM for liquidity in the secondary market,’ he says ‘It is uncertain when or if new placements will be possible in the medium†term.’
 
However, it’s not all bad news. Milner cites the case of income fund GCP Infrastructure Investments, whose projected income was so impressive the fund started trading at a premium to NAV. ‘This will probably be addressed by way of a tap issue,’ he says. ‘It’s an unusual situation but one we’re very pleased to be involved with.’
 
Ed Devenport, a partner with law firm Mourant Ozannes and vice-chairman of the Jersey Funds Association, notes that the service provider market has been characterised by a number of merger and acquisition deals – many of them indeed involving his own firm. ‘Over the past 18 months Mourant has been at the centre of a lot of changes,’ he says. ‘The private wealth business went to RBC at the beginning of 2009 and the fund administration to State Street in April, then the law firm merged with Ozannes in June.’
 
Devenport says the changes represent at least in part the maturity of the market, which now includes groups of the scale of State Street, JP Morgan and BNP Paribas as well as independent service providers. ‘One reason why the law firms ended up with these big administration outfits is that when they were starting off, there wasn’t really anyone else to do it,’ he says.
 
Click here to download the Private Equity Wire Jersey Private Equity Services 2010 special report

 

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