The credit crunch has brought challenges to the global funds industry and the offshore funds industry has been no exception. Some hedge and other leveraged funds have run into trouble. A number of property funds have imposed moratoriums on redemptions, and funds of all shapes and sizes have seen net redemptions in the months since the international credit market seized up late last summer.
Until the advent of the subprime crisis, the offshore funds industry was in rude health and there is no reason why it should not go back to being that way again in the near future.
The assets within investment funds may change with the fluctuations in economic prospects, but whatever the state of the global economy, people and institutions still need to invest and collective investment schemes are such a compelling proposition that it is hard to see the funds industry being subdued for long. The model of collective investment schemes is far from broken. Although much has been made, for example, of private equity funds’ reliance on debt to fund their activities, this understates the wide variety of activities and funding models engaged in by the private equity industry and the value that the expertise applied to their investments by private equity managers can bring.
Consequently, although some high-profile deals have stalled due to funding difficulties, there are still plenty of deals being done because lenders and investors can see the value in the private equity approach.
Special opportunity fundsAlready we are seeing signs that the offshore funds industry is springing back to life. Funds with proven track records and less exotic investment strategies have experienced net inflows from investors prepared to take a long-term view while at the other end of the spectrum new special opportunity funds have been launched to take advantage of the present climate across a range of asset classes, from mezzanine debt to commercial property.
In the present environment, the reasons to base many funds offshore are as strong as ever. There is more attention than ever on set-up and administration, and being able to react quickly to opportunities in the market is an invaluable advantage at a time of great uncertainty. In recent years, offshore jurisdictions such as Jersey and Guernsey have become the domiciles of choice for alternative and expert investor funds, such as private equity and hedge funds, which are attracted offshore for their tax-neutral and light-touch regimes, which significantly reduce the complexity and expense of establishing and running collective investment schemes.
Jersey has benefited enormously from its introduction of the light-touch expert fund regime in 2004 and now has more than £60bn of alternative investments under management, and £246bn in funds overall.
The island took a decisive step further this year with the introduction of Jersey’s new unregulated fund regime – a registration-only framework aimed at funds for sophisticated investors and exchange-traded funds. Although conceived before the credit crunch as a means to attract more hedge fund business, the new regime has already generated interest from a variety of alternative asset managers thanks to its combination of low establishment costs, high investment flexibility and the reputational benefits of being domiciled in one of the premier offshore jurisdictions.
Growth areaAnother key trend that is working to the advantage of offshore jurisdictions is the growth in the number of investment funds looking to list on stock exchanges. The Channel Islands Stock Exchange (CISX) has continued to successfully attract fund listings, but more recently competition for listings between the London Stock Exchange and Euronext in Amsterdam has led to the former introducing its new Specialist Fund Market (SFM) in November last year. The regulatory regime and tax rules for SFM-listed vehicles have enabled many of them to enjoy the benefits of both an onshore listing and an offshore domicile and a number of new funds have been established in Jersey for this purpose.
Long-term futureDespite the present financial turmoil, the mid to long-term future of the offshore funds industry looks reasonably well assured. Private equity and property funds may still be classed as ‘alternative’, but they have both become part of mainstream portfolios and post-credit crunch the regulators are unlikely to focus significantly on the role of collective investment schemes in the crisis. Although it would be an exaggeration to say that the climate for funds is particularly favourable at present, the future of the offshore funds industry remains bright. nMartin Paul is a partner and head of investment funds and private equity at Bedell Cristin