By Phil Davis – Even the most cautious private equity professionals are starting to believe that the industry is poised to bounce back amid a number of indicators that dealmaking and fund launches are on the rise. According to Mergermarket, the value of global buyout deals totalled USD62.9bn in from July to September, the highest quarterly total since the second quarter of 2008, before the financial crisis struck in earnest.
In fact, private equity groups have seen year-on-year deal value increase for four consecutive quarters, and old hands such as Michael Queen, the chief executive of 3i, believe that dealmaking could return to levels last seen between 2005 and 2007 if a substantial portion of firm’s uninvested ‘dry powder’ capital is put to work.
Even fundraising, which remains well down on its historic highs, has seen an uptick in recent months. According to data provider Preqin, a total of USD57bn was raised globally for new funds in the third quarter of 2010, a modest increase from USD49bn in the second quarter.
Signs that the industry appears to be recovering its momentum are good news for Jersey and its many intermediaries and service providers active in the global private equity market. The Jersey Financial Services Commission says asset values are higher so far this year than in 2008 and 2009, and director of securities David Banks says: “We have seen net inflows of capital in the first half of this year.”
Eve Kosofsky (pictured), a partner at law firm Carey Olsen, says: “There has been a serious period of consolidation. The private equity market was sorting out issues with previous acquisitions and there has been very little new activity until recently.” However, she says that while Jersey suffered along with the rest of the industry in the dark days of 2008 and early 2009, service providers had fewer worries than their counterparts in many other jurisdictions.
“While there has been a downturn in the market, Jersey has been cushioned by the calibre of its clients,” Kosofsky says. “Some of their investments may have suffered, but the businesses themselves have weathered the storm. Within our law firm, activity shifted from fund formations to restructuring and advisory work.”
This experience compares favourably to those of some law firms based in major onshore jurisdictions, which endured a distinctly rougher ride. “There have been no lay-offs in our pan-islands team,” she says. “In fact, we have just appointed a new private equity partner.”
Administrators also appear to be in good shape. Justin Partington, group commercial director of specialist service provider Ipes, says: “We set up in Jersey in early 2008, shortly before the financial crisis hit. We seeded the office with existing mandates but we have also added some clients since then to reach what we consider to be critical mass. If the current pipeline of opportunities converts, we will be looking for still more staff.”
All the same, there is residual caution. “We have set reasonable targets for growth to enable us to build the business while maintaining high standards of client service and real substance in each of the jurisdictions in which we operate,” Partington says. “We are not trying to achieve world domination.”
One of the reasons for the wariness is that fund formation is not recovering with the same speed as dealmaking. Says Geoff Cook, chief executive of promotional body Jersey Finance: “I can’t see many more launches at the moment, not until there is a much stronger trend in the economic indicators. It is all about confidence. Although in the first quarter we saw a big uptake in fund formation, funding is taking a bit longer at the moment because investors are more cautious.”
There are certainly plenty of promoters looking to get vehicles off the ground, and this may feed through in the coming months. “We are seeing three to four applications every week,” says Banks, “although it may be that not all of them proceed to full funding.”
Ipes Jersey director Kenneth Whitney says interest from potential new entrants to the industry is a signal of confidence that the sector will recover strongly. “We are getting inquiries from people with no track record at all,” he says. “Inquiries are running at more than one a week, a two- or threefold increase on this time last year.”
At the same time, the continued interest in launching distressed debt funds could presage further economic shocks ahead. Says Kosofsky: “There is a feeling among some of our clients and in the markets that there is a new wave of distressed debt ahead. Many of the big houses targeting the UK market are focusing on this.”
A continued strong uptick in deal volume will depend upon both the economic climate and on the ability of general partners to deploy uninvested funds. Lisa Le Gresley, a director at Kleinwort Benson in Jersey, says: “On the downside there is political risk and interest rates could rise and hit struggling companies. On the positive side, there is a significant amount of uninvested private equity capital that needs to be invested in the next 18 months.
“Fund managers have been very active over the past 12 months sourcing good quality investments at low prices, having taken more time over the selection and negotiation of deals in a market where there are currently excellent opportunities. Some private equity firms out there that have not relied exclusively on leverage are in incredibly good shape, and they will be the ones who can pick and choose the great deals available now.”
The slowdown in new business has offered an opportunity for restructuring and consolidation within the service provider industry. At the beginning of this year State Street substantially increased its footprint in Jersey with the acquisition of Mourant International Fund Administration.
US-based ACA Compliance Group acquired a controlling stake in Blueprint Compliance, a compliance consultancy with offices in Jersey and London, while in January Ipes took over back office services for the private equity business of an international French bank in a deal involving 13 entities and total assets of USD800m.
In order to benefit from the hoped-for recovery in private equity activity, Jersey recognises it must continue to innovate. For instance, Jersey Finance has made a shift from pure marketing of the island to fostering product innovation as well.
Says Cook: “When we were set up in 2001, it was mainly about marketing and promotion for the financial services sector. Now we have a technical unit of two lawyers and an economist to work on new product design, legislation and implementation of legislation and international standards. We make sure the offering stays fresh and relevant to make sure we keep pace with other international financial centres – competitor matching is critical.”
Jersey Finance also helps firms tailor their offering to local regulations. “We carried out a review with London Business School in 2008 where we interviewed 72 finance professionals from around the world,” Cook says. “On the back of this, we created Strategy 2015 to maintain our strength and to evolve. We want to be the leading international financial centre in our chosen markets.”
Those markets increasingly extend beyond the core regions of the UK and Western Europe as Asia and the Middle East have become a major focus. A bilateral deal enabling Jersey companies to list on the Hong Kong stock exchange has led to some high-profile listings including West China Cement, a Jersey company that is now one of the biggest companies on the Hong Kong exchange. Service providers are jockeying for position in these burgeoning markets; Carey Olsen recently seconded a lawyer to a Chinese firm in a reciprocal arrangement in order to obtain greater knowledge and understanding of East Asian markets.
Jersey Finance is also pouring resources into overseas activities. “We talk to professional gatekeepers around the world such as tax advisors, prime brokers and lawyers,” Cook says. “We make sure we listen to what the market wants.” The organisation has recruited a local banker in Hong Kong to explore the Chinese market and recently received funding approval for a Middle East office that will also cover India. “3i has structured some of its Indian investments through Jersey,” he notes.
Cook believes the work the industry is doing now will pay off handsomely over the long term. “Jersey now has business in 200 countries,” he says. “We are a global ñ not just a European ñ player.”
In the shorter term, ambitions may be more modest, but Le Gresley says the island is strongly positioned to attract future business. “Although fund promoters may continue to struggle to raise money in the short term, we positively encourage them to visit the island and seek information,” she says. “Jersey provides first-class financial services within a robust regulatory environment. It has built a reputation for being efficient, competitive and providing excellent levels of service that we hope will continue to attract fund promoters.”
Click here to download the Private Equity Wire Jersey Private Equity Services 2010 special report
