Of all the factors driving private equity business to Jersey, industry participants say, one of the most important is the quality of its administration services, built on a foundation of expertise
Of all the factors driving private equity business to Jersey, industry participants say, one of the most important is the quality of its administration services, built on a foundation of expertise accumulated over more than a decade and starting when the industry had a much lower profile – and considerably less cash at its disposal – than today
‘The general interest in private equity is obviously driving significant investment, with USD108bn raised in Europe last year, and Jersey is getting its fair share of that,’ says Robert Kirkby, technical director of the industry promotional agency Jersey Finance. ‘In recent years Jersey has been very much open for business, which has allowed us to build an excellent skill base of the administration side of private equity, where we were historically considered slightly weak.
‘Over the past couple of years there’s been considerable investment in administration skills and in private equity systems, as well as increasing awareness of private equity on the part of the law firms. We haven’t done anything radical, such as a new regulatory framework for private equity or attracting large numbers of buyout houses to set up in the island, but we’ve taken a much more pro-active and business-friendly approach.’
Kirkby notes that groups such as Mourant, which in addition to being the leading legal adviser to Jersey-domiciled funds is also by far the island’s largest administrator, have been active in the private equity sector for more than 10 years. ‘We have a particularly strong depth and breadth of experience now,’ he says.
The Channel Islands suddenly found themselves in the spotlight as a private equity centre in the US, following the USD5bn listing on Euronext Amsterdam of the Guernsey-domiciled co-investment vehicle KKR Private Equity Investors in May 2006. However, much of Jersey’s growth so far has come from the expansion of activity by general partners in Europe.
‘London obviously has a big private equity industry, and Europe is really picking up as well,’ says Nick Stevens, a senior manager with KPMG in Jersey. ‘Historically a couple of big private equity firms established their funds here because there was tax neutrality, along with very few legal requirements for private equity structures. The administrators who had their accounts have grown and developed with them over time.’
His colleague Heather MacCallum, an executive director at KPMG, adds: ‘There are some qualified and very experienced people here who understand that business and are used to dealing with private equity structures. It’s got out to the outside world that this is something Jersey’s very good at, and more funds are coming in.’
She acknowledges that if anything Guernsey has perhaps a longer track record of administering private equity funds, but argues that Jersey has caught up and may be better equipped for future growth because of the government’s willingness to countenance an increase in the island’s working population, an issue that is still the subject of vigorous debate in Guernsey.
‘We’re starting to see a trend of Jersey service providers administering more Guernsey funds than in the past,’ MacCallum says. ‘Guernsey still continues to provide compliance and registered office facilities, and all the things that are required by law, but much of the actual administration may be carried out in Jersey. A lot more Channel Islands firms are working together across the two islands, but there’s definitely more capacity in Jersey.’
Kirkby says that with limited administration capabilities available in many of the European countries that are home to private equity firms, Jersey has an opportunity to capitalise by extending its own fund servicing capabilities, and the flexibility of the island’s immigration policy is an important factor. ‘When the right people need to be recruited, they will be admitted if they match our needs,’ he says.
Another factor, he argues, is the ability of service providers to gear up with technology that enables them to process higher volumes of business more quickly and efficiently. ‘A lot of administrators are making very significant investment into new systems to make their existing work more efficient,’ he says. ‘Some of those investments are in seven figures, which is an indication of how confident they feel about the future.’
Bill Gibbon, head of the funds group at law firm Voisins, says: ‘Jersey has had to persuade the world that its administrators are sufficiently sophisticated. The island has always had experienced administrators, going back to the days of the retail fund industry. It has slightly relaxed its housing policy, which could encourage more administrators to come to the island, and it has the ability to attract specialists in a way that other island jurisdictions may find more difficult.’
The costs of building up staff and sophisticated IT systems would appear to favour the bigger, longer established administrators, but the nature of private equity, with its highly complex legal structures and transactions and relative lack of one-size-fits-all processes, continues to attract new specialist players.
MacCallum believes there’s still plenty of scope in Jersey for niche players, especially as across the alternative investment industry as big institutions reassess their client rosters and seek where possible to focus on their biggest and most profitable relationships, and indeed specialisations. ‘After growing for 10 years or so, several of the leading administrators have taken on so much business and filled their offices with so many people that they can’t take on any more work,’ she says.
‘What they want to do is concentrate on the most profitable business and perhaps leave behind some of their high-maintenance small clients. Niche players are starting to build business as they get some of this secondary market. And even some of the big players are questioning whether they can be everything to everyone. Can they really afford to invest in the technology and the teams to do both hedge funds and private equity funds well?’
People remain very important in private equity administration, cautions Horace Camp, managing director for fund administration for Kleinwort Benson in the Channel Islands, making it difficult for the big international financial service providers to get the lock on the business they enjoy in areas such as custody.
‘The global consolidators like State Street and Citi are dipping their toes in to pick up more of the ancillary business, but it’s much harder to put private equity into a sausage machine,’ he says. ‘It’s a more bespoke process that’s much harder to break it up into small elements. Private equity funds can move very slowly or very fast, and you need people who can react.
‘Often structures are so complex that while administering any single element of a private equity fund is very simple, administering and understanding all of it is very difficult, particularly ensuring that the money flows correctly from one entity into another, and that transactions are completed on time. It isn’t sending a ticket out to a broker to buy a hedge fund in Cayman. It can be an enormous amount of work, and at 1 a.m. when the final documents are coming through from the lawyers, it takes a different mindset.
‘The advantage of the Channel Islands is that because they’ve done private equity for at least a generation, they have people who understand it. It’s a good place for corporate governance, and with the new regulatory regimes it’s now possible to get structures up and running in a short space of time. Finally, both islands like private equity business because it suits the high value-added model, rather than the ‘stack ’em high, sell ’em cheap’ approach.’
The private equity administration industry is facing the challenge of moving beyond providing a simple book-keeping service to offer deeper and more sophisticated offerings, according to Brendan McMahon, a financial services partner with PricewaterhouseCoopers in Jersey and private equity leader in the firm’s global investment management practice.
He is encouraged by the growth of the Jersey industry through the arrival of specialist firms from other jurisdictions, such as Alter Domus, which was created in 2001 from the spin-off of PwC’s Luxembourg-based corporate, trust and payroll business, Saltgate, another group with Luxembourg connections, and International Private Equity Services from Guernsey, as well as moves by Northern Trust to bring in people to bolster its Jersey operations.
McMahon also notes that whereas in the past the industry tended to be self-contained and inward-looking, today many administrators – Mourant in the lead – have an increasingly global outlook. ‘They are moving to develop international networks that provide support services to promoters as they themselves go global,’ he says. ‘Those clients may have operations in London, Luxembourg and Singapore, and need a service provider that understands their business and provides services in those jurisdictions.
‘Ten years ago many of the new private equity houses were very much focused on building a European presence and perhaps setting up offices in eastern Europe. Now they are looking at the emerging markets and at the US, and administrators are responding to that by building their own global networks. Mourant is now in Singapore, Hong Kong, New York, San Francisco, London and Luxembourg. Aztec is already in Guernsey and Luxembourg as well as Jersey.’
However broad their international sweep, administrators must – along with their clients – deal with the specific challenges of the private equity business. ‘One of the biggest issues is often managing the tax profile of the vehicle,’ Kirkby says. ‘They require high-quality non-executive directors as well as administration, and these functions must all be carried out in the right location in terms of their legal framework.’
He observes that as in the hedge fund industry, reporting and valuation are increasingly keen topics among investors and regulators. ‘Private equity firms are being asked to account on a more regular basis and to provide valuations quarterly, rather than six-monthly or annually,’ Kirkby says. ‘That creates challenges in valuing a real business – it’s much easier by comparison for hedge funds to value instruments where there’s a market for them.’
Accounting standards are a constant theme, although Jersey’s legal framework is more flexible than most, allowing firms to choose between International Financial Reporting Standards (IFRS) and US and UK Generally Accepted Accounting Principles (GAAP), as well as to modify standards where this makes sense.
‘Private equity firms that account in US GAAP, for example, are facing challenges from a provision known as known as FIN 48 (Financial Interpretation Number 48), which covers the treatment of tax risk and tax exposure,’ Kirkby says. ‘It’s quite a challenging accounting standard. Some of the valuation standards are not so much causing concern as making people scratch their heads on how these should best be addressed.’
Says McMahon: ‘We’ve had 10 years experience of becoming familiar with what statistically are the major reporting environments. Most of our larger funds here have been accounting under US GAAP for the past few years, but there is a degree of flexibility that you can apply that allows exceptions to US GAAP or IFRS. If particular sections of GAAP are nonsensical, for example consolidation, you can typically carve them out.’
Administrators are also getting to grips with the new codes of practice for fund services business published last month by the industry regulator, the Jersey Financial Services Commission, consisting of high level principles for the conduct of fund services business, together with more detailed requirements in relation to each principle. The codes have been issued as part of the regulations accompanying the transfer of regulation of fund functionaries from the Collective Investment Funds (Jersey) Law 1988 to the Financial Services (Jersey) Law 1998, a change approved by the States of Jersey in early November.
The codes of practice also reflect the shift in responsibility for conducting due diligence on funds and their promoters from the regulator to service providers under the Expert Funds and subsequent regimes. Says MacCallum: ‘Jersey has already brought in codes of practice for fiduciary and investment businesses, and it’s now done the same for fund functionaries. In the past it was the product that has been regulated, but now it’s the fund manager and administrator. The codes of practice bring them up to the same regulatory level as other firms on the island that conduct fiduciary and investment business.’