Trends
in Investment Fund Structuring
by
Crill Canavan
Advocates & Solicitors
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It
is not surprising that, with a backdrop of the
recession, there have been noticeable changes
in the way in which funds are established and
maintained in Jersey. Chief drivers behind the
movement are obvious and understandable; a fear
of risk; a desire for regulation; and costs.
New funds
Recent media coverage has focussed on failures
within the financial sector, apparently the result
of improper approaches to risk, coupled with a
lack of regulation. As a result, investors and
promoters alike are increasingly looking for at
least some level of regulation within their investment
structures.
Whilst the unregulated fund regime was an appropriate
response to market demand at the time, there has
been a movement away from this offering, with
promoters taking the view that it would now be
unappealing to investors. It seems that even the
term “unregulated”, such an appealing
prospect for so many upon launch as recently as
February 2008, is now an albatross about the neck
and a reason to avoid an otherwise appropriate
structure. This is not a universal view and I
do not envisage it being permanent.
Other smaller and private equity structures, which
could otherwise avoid being regulation as a “collective
investment fund” (for the purposes of Jersey
law) are now actively seeking regulation either
through opting to be treated as a “collective
investment fund” or by re-planning their
structures to fall within the regulated sector.
Costs are key for so many new funds and a real
consideration as to the way they will be managed,
structured and regulated. Promoters are aware
of the increased levels of funds failing to launch
and as such, are increasingly making use of “red-herring”
prospectuses, to test the market before going
live with a real offer.
Converse to the drive towards regulation mentioned
above, we are also seeing more smaller funds attempting
to start life as a very private investment vehicle
(ie. not a regulated fund) before then progressing
to regulated fund status.
Recent high-profile judgments and investigations
regarding investment fund structures have highlighted
some key points to be borne in mind both by investors
and by fund services businesses. Duties and responsibilities
in fund structures generally lie with those managing
the fund; the directors, trustees, fund administrators
and other fund service business providers and
if things go wrong, investors (particularly sophisticated
or institutional investors) are acutely aware
of their rights and potential lines of complaint.
The recent issues in the media have led to a change
in the general approach to management of funds,
with an increased awareness of potential conflicts
of interests (particular between fund services
businesses and the board of directors/management
of any fund). The use of non-executive/independent
directors is likely to continue to increase.
Investors are increasingly looking for new and
innovative forms of investment, away from the
areas which have been greatly affected by the
crisis. Real estate markets have been hit badly,
particularly in the UK, primarily by a lack of
bank funding and uncertainty as to the financial
status of underlying tenants and property development
groups. Stocks and shares are still unattractive
to many, given the continued loss of values across
the world’s stock markets. Areas which formed
only a small part of investment fund investment
will grow; film and media finance, funds investing
the high-end luxury goods, fine wine, arts, bloodstock;
sports and image rights; and even rare stamps.
Any asset offering a stable investment return
to investors with a now more conservative approach
will appeal.
Opportunities are now arising, primarily in the
UK real estate and equities markets, to make investments
in assets which have been seriously devalued by
the crisis. Indeed, we have already seen those
investment houses with some level of liquidity
looking to take advantage of the lack of bank
lending, through themselves offering mezzanine
financing investment funds.
Fund Restructuring
There are a number of reasons why an established
fund may be restructured, but financial considerations
are the primary driver at the moment. The managers
of funds are looking at their current structures
and questioning the costing and provision of services.
Can services be consolidated or cut? Can agreements
be re-negotiated and discounts obtained? Can we
achieve a similar result through a different (perhaps
newer) structure at a lower cost?
With funds part-sold or a lack of bank financing,
promoters are looking to restructure their funds,
often by collating two or more under-sold funds
into one healthier, more fully-invested fund.
This not only enables at least part of the investment
to take place, but makes the overall product stronger
and more likely to succeed. The restructuring
is often cross-jurisdictional, with an awareness
of the global offering comes and increasing trend
to redomiciliation of funds or investment structures
in and out of Jersey.
Aside from this, many funds are looking to take
advantage of a restructuring proposal to apply
to redesignate their fund’s status, to take
advantage of a newer regulatory regime, such as
that applied to listed funds. This may then lead
on to revisit of the consents issued to a fund
by the Jersey Financial Services Commission. Can
those consents be negotiated to align with more
recent Commission policy and thereby save cost
by, for example, no longer requiring a specific
type of fund services business?
Conclusion
However trends in the funds industry continue
to move over the coming months, one can be certain
that Jersey’s fund services businesses will
be quick to respond. Jersey’s finance industry
in general has shown itself to be flexible over
the years, able to react to changes in market
demand, tax and regulatory issues here and abroad.
THIS ARTICLE IS FOR INFORMATION PURPOSES ONLY
AND NOT BY WAY OF LEGAL ADVICE. PROFESSIONAL LEGAL
ADVICE SHOULD BE SOUGHT BEFORE ANY ACTION IS TAKEN.
Contact:
Fund Enquiries: Adrian Odell - Head of Funds
40 Don Street, St Helier, Jersey, JE1 4XD
t: +44 (0) 1534 601753
f: +44 (0) 1534 601702
e: ajo@crillcanavan.com
w: www.crillcanavan.com
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