Guernsey taps into global trends

02 December 2019

Written by Dr Andy Sloan Guernsey Finance

Writing for Funds Europe, Guernsey Finance Deputy Chief Executive, Strategy, Dr Andy Sloan examines findings from research conducted earlier this year into private equity's relationship with private capital.

Reflecting our status as a leading centre for servicing funds, private equity and private capital, earlier this year at SuperReturn, Guernsey Finance undertook a survey to better understand several developing trends:

  • the increasing significance of private capital as a source of funds;
  • growing concerns with the regulatory burden and a ‘flight to service’; and
  • the growing investment appetite for green finance.

Our survey spanned the complete range of managers, from smaller, owner-managed boutiques to institutional. The sample represented managers of funds of more than $1.9 trillion AUM.

We published the results in reports which form part of our growing ‘Reporting Global Trends’ library. What became apparent was the strength of these trends and how they benefit substantive specialist jurisdictions.

In the decade following the global financial crisis, private financial wealth doubled in nominal terms. Meanwhile, allocations to alternative assets such as private equity and venture capital also doubled. We asked whether private capital is as significant a source of investment for private equity firms and their funds as these macro trends suggest.

It has become evident that private capital as source of funds has grown rapidly in significance, particularly for smaller, boutique and specialist managers – more than 50% of funding for some. Managers are increasingly being viewed as a source of deal flow as much as investment management expertise by the owners of private capital, though our survey suggested talk of disintermediation seems overdone.

Accompanying this trend is complexity in the structuring of private capital arrangements with family offices and other sources of private capital, demanding bespoke arrangements covering commercial, legal, regulatory, risk and operational matters.

Our respondents said that these issues combine to increase the importance of key factors – service and specialism – in their choice of jurisdiction for administration and domiciliation.

Concurrent with this ‘flight to service’ was a reported growing concern with technology and regulatory costs. Growing compliance costs from EU regulations were cited as an issue by two-thirds of managers. More than half suggested they would consider disaggregation of global and EU distribution to improve cost control and service. These trends were backed up by panellists at a Guernsey Finance seminar in London, who agreed that we are seeing the return of splitting the international/European client service model.

In mid-2019, the issue of climate change is impossible to ignore. Our survey’s responses suggested that, at least earlier this year, the private equity industry had not yet grasped the scale of the related climate finance requirement, nor the commercial opportunity, with most underestimating the scale of financing required to meet IPCC climate change mitigation targets.

Yet interest and appetite are clearly building. Most managers have increased their exposure to green and sustainable investment over the last year and no-one is suggesting they will not be following suit going forward. They stressed the need for transparent verification and certification as a precursor of unlocking greater demand for green investment.  

Expertise will be a key factor in the development of sustainable finance hubs – specialism in green finance was cited as key factor in determining locational preference for investment domiciliation.

Combined, these factors and trends are a powerful force driving the future shape of the sector. Guernsey is well-placed to respond, given our expertise in these areas.

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