Insights / 03 December 2020
Investor transparency is key in new fund structuring environment
The funds industry will need to continue to embrace change and focus like never before on investor transparency as it looks to navigate a shifting structuring landscape.
Those were the overriding thoughts to emerge from a webinar held this week by Trowers & Hamlins and Jersey Finance, looking at fund structuring trends in the GCC and beyond.
In a session featuring Trowers & Hamlins’ Brian Howard (partner in the firm’s Bahrain office), Nick Green (Dubai-based corporate partner), and Jeremy Ingham (resident managing partner in Bahrain), as well as Elliot Refson (Director of Funds at Jersey Finance), Faizal Bhana (Director of the Middle East, Africa and India at Jersey Finance), Paul Perris (Chief Commercial Office at Crestbridge), Wajdi Al Jallad (Managing Director of Keypoint) and Dean Hodcroft (Chief Financial Officer at Cale Street Partners), panellists explored a broad range of issues and trends in the GCC and wider fund structuring and domiciliation space.
Looking at the some of the current macro trends shaping the funds sector, Paul pointed to a sustained desire to allocate to alternatives:
“In a low interest environment, and against the backdrop of Covid, we’re seeing strong and sustained allocation to alternatives, with debt funds filling a big gap in financing and venture capital and private equity focused on key areas like healthtech, whilst real estate is an interesting area with investors being far more selective. We’re also seeing Covid as giving ESG and sustainable investment a shot in the arm, and that is likely to continue.”
Paul also alluded to a growing trend towards outsourcing, to deliver efficiencies, tap into bespoke specialist systems, help manage data better, and navigate an increasingly complex regulatory environment. Doing so, he suggested, meant that GPs could be left to focus on their “core competencies” and drive performance.
This sentiment was echoed by Dean, who highlighted that investors are exerting growing influence over structuring and domiciliation decisions, prompting GPs to adapt and seek expert outsourced support:
“LPs are definitely beginning to get more interested in the micro elements of GP performance, including being included in investment committee decisions. They are asking more questions, looking for more ad hoc reporting and generally putting greater scrutiny on GPs. At the same time, LPs are also far less casual in their approach to governance, but that’s ultimately a healthy thing for GPs in helping to drive up standards in this area.”
The pressure being felt by GPs was also emphasised by Brian:
“Management fees are reducing but at the same time the expectations on managers are increasing. It’s a much tighter environment for managers.”
“Investor confidence is absolutely key,” added Paul. “In terms of jurisdictions, there’s been a flight to quality and those jurisdictions that have been on the front foot in putting in place a robust, resilient platform, such as Jersey, Luxembourg and Dublin, are going to remain attractive because of the confidence they can offer investors. “
This resilience and certainty, it was suggested by panellists, was likely to remain a key driver for structuring over the coming years, particularly against a global regulatory agenda that is constantly shifting. In the context of the GCC regionally, regulation remains a key area of evolution.
“There’s been a race to regulate in the GCC and the respective regulators are doing it well,” explained Brian. “There’s certainly been a lot of developments in a number of areas with each of the GCC jurisdictions interpreting regulatory initiatives slightly differently – in terms of beneficial ownership and transparency for instance. We’re seeing GCC structures being used for both regional and international investment. For managers the flexibility of structures and an ability to navigate constantly changing rules is absolutely vital.”
Wajdi agreed, adding: “Covid has certainly prompted a lot more focus from the regulators across the GCC on enhancing governance - new regulations around LPs in Saudi Arabia, and a new trust law in the UAE, for example. At the same time we’re also seeing a rapid rise in private investment vehicles, with regulators being very flexible with these structures, whilst REITs are also a new addition to the GCC landscape, offering greater variety in terms of structuring in the real estate market.”
In terms of Shariah-compliant fund structuring, having knowledgeable, experienced advisors on board early was felt to be pivotal:
“There are key things you look for as advisers in supporting GCC investors,” said Nick. “Flexibility of structuring options is a must, as is depth of advice to help navigate the constantly changing rules and regulations, and a flexible and accessible regulator. We recently had an example of this with a structure in Jersey where the JFSC was impressively quick to react to an unintended tax consequence on a Shariah-compliant structure.”
Faizal agreed, commenting: “We’re seeing Jersey playing an increasing role in supporting the international aspirations of GCC investors and we’re working in partnership with firms in the GCC to help investors navigate the landscape, including through Islamic Finance structures. That sort of expertise and understanding of this evolving area is clearly in high demand.”
More widely, global markets remain of interest to GCC investors, with panellists pointing to ongoing interest in US funds, whilst Europe also remains a key market:
“Raising capital in the EU is dominated by the AIFMD regulation,” commented Elliot. “And post Brexit there’s currently no provision, in a no deal Brexit scenario, for UK managers to market into the EU and vice versa. That will be a key consideration for managers over the coming year – the fact that Jersey has seen a 76% rise in managers using its private placement regime to access EU capital over the past five years is a reflection of the demand there is from managers find a tried and tested solution to bridge the gap in the context of Brexit. We expect those sorts of structuring decisions to carry on into 2021.”
Looking forward, panellists agreed, the role investors play in the whole decision making process is only going to increase:
“What GPs are really looking for boils down to integrity when looking at structures and domiciles,” claimed Dean. “In this new era where investors are more scrupulous and proactive, GPs really want to make sure that their structures and decisions stand up to scrutiny, whether that’s tax, operational resilience or domicile selection.”
Elliot agreed, pointing to the fact that Covid had prompted managers to look much more closely at robustness and resilience from a domiciliation perspective - infrastructure, digital capability, on the ground expertise and an accessible regulator were all really important in giving managers – and by implication investors – confidence and certainty around future-proofing their funds.
There’s no doubt that 2021 will bring further change, according to the panellists, with greater investor transparency, more of a focus on ESG, and tax and substance likely to remain high on the agenda.
“The accelerated focus on ESG is perhaps one of the positives to come out of Covid,” said Paul. “Looking ahead, I’d also expect to see the trend to outsource and invest in digital capabilities to continue as managers look to put in place the kind of expert support they need to navigate the changing investment and regulatory environment.”
“The funds industry is Darwinian,” concluded Dean. “There’s a chance now to really embrace change and go the extra mile, beyond the basic requirements. Investors will respond very well to that.”