Walkers Fundamentals White Paper 2020 – Regional Update: Europe

Welcome to Walkers’ 2020 Fundamentals White Paper Series, in which we discuss certain trends identifiable among the hedge funds and private equity funds that we helped our clients launch over the last twelve months.

In last year’s White Paper, published in November 2019, managers and their funds appeared to be positioning themselves for market turbulence in the face of global uncertainties and a volatile economic and financial environment. One year on, with the benefit of hindsight, this was something of an understatement. 2020 has tested all aspects of managers’ businesses, from the boardroom to the back office, and in many parts of the world out of the office altogether. All of this, of course, is not to overlook the broader global context of the pandemic and the significant health, economic and political challenges that 2020 has brought and continues to present.

To visit the other parts of the series, please use the direct links below:

Guernsey

Despite difficult market conditions and uncertainty around global investment markets, Guernsey’s funds industry continues to excel; the most recently released figures saw total net asset values increase by 7.6% to £233.2 billion, including 12-month increases in closed-ended schemes (8.2%) and open-ended schemes (5.2%).

Guernsey’s versatile funds model is well understood by professionals within the European funds industry, with many having used Guernsey for years. Guernsey also continues to benefit from having a regulator that is willing to innovate.

The most recent examples of innovation are reforms to the regimes for migrating funds, as well as the creation of a new fast-track regime for migration of fund managers – lawyers from Walkers’ Guernsey Investment Funds and Corporate Law Practice Group were closely involved in the creation of the new regimes, and we have already advised on several migrations, from and to jurisdictions, including Malta.

During the year, Walkers advised on the launch of Guernsey’s first ever medicinal cannabinoid fund. The team advised Chrystal Capital Partners LLP in relation to the registration of cannabinoid investment fund, Verdite Capital Fund I L.P., which was registered by the Guernsey Financial Services Commission in July, and which was reported in the Financial Times. The regulatory approval for the fund demonstrates that Guernsey is a leading international financial centre that can provide innovative solutions for novel investment products. The coverage of the Verdite launch has sparked several inquiries to the team about similar funds launches.

During 2018, the Guernsey regulator approved the creation of the Guernsey Green Fund, a “kitemark” for funds with an environmental focus. As with any other type of Guernsey fund, the investment strategy and investments can be focused outside of Guernsey, while the fund benefits from an accredited green kitemark issued by the Guernsey regulator. Investors in a Guernsey Green Fund are able to rely on the Guernsey Green Fund designation and logo, provided through compliance with the Guernsey Green Fund Rules, to represent a scheme that meets strict eligibility criteria of green investing and has the objective of a net positive outcome on the environment. This is particularly relevant given the commitment by various governments to “Build Back Better” with more environmentally-focused infrastructure spending as the international COVID-19 economic recovery develops. At most recent count, Guernsey Green Funds held an aggregate net asset value of £3.3 billion.

The versatility of Guernsey’s regime was again illustrated by its selection as the jurisdiction for Hipgnosis Songs Fund Limited – a high-profile fund investing in rights over popular music tracks advised by various music industry figures.

Guernsey’s Private Funds’ model continues to be a successful offering for managers not seeking to raise capital publicly, with one of its main attractions being a light-touch regulatory regime. There are currently 62 PIFs registered – a mix of both closed-ended and open-ended – and their use for club deals, private wealth investment structures and for start-up managers demonstrates their versatility.

Guernsey also offers structures and platforms to cater for the rise in separately managed accounts ("SMAs"), which do not need to be registered as funds due to having a single investor. Since COVID-19 started to disrupt fundraising, we have seen an increase in inquiries about SMAs from large institutional investors and we have advised on several matters involving SMAs in the European market. In Guernsey, SMAs tend to be structured either as limited partnerships with a sole limited partner, or as segregated cells within a Guernsey protected cell company.

Geographically, Guernsey continues to see the majority of fund sponsors originating from the UK, the US and continental Europe. Germany and Scandinavia are particularly familiar with Guernsey fund structures, and the use of national private placement regimes to market to EU based investors continues to be a popular route of accessing European investment (particularly where investors are concentrated in a limited number of EU jurisdictions).

Ireland

The latest statistics show that the net asset value of Irish-domiciled funds exceeded €3 trillion at the end of Q2 2020. This represents an annual increase of 13% (€339 billion) from €2.71 trillion in Q2 2019. Since Q4 2019, the net asset value of Irish-domiciled funds grew by over €1 billion.

The number of Irish-domiciled funds (including sub funds) grew from 7,707 in Q4 2019 to 7,760 in Q2 2020. On an annual basis, the number of Irish-domiciled funds increased by 229, growing from 7,531 (in Q2 2019). In terms of the number of Irish-domiciled funds by category, Irish-domiciled AIFs (including sub-funds) reached 3,014 at the end of Q2 2020 and the total number of Irish-domiciled UCITS Funds (including sub-funds) reached 4,746. Out of all Irish-domiciled funds, 23.12% of Irish-domiciled funds are bond funds, 25.04% are alternative funds, 19.7% are money-market funds, 25.68% are equity funds, 4.8% are balanced funds, and 1.66% are other funds.

The total number of Irish-domiciled QIAIFs reached 2,731 at the end of June 2020 and total assets held by Irish QIAIFs reached €713 billion. This was driven by annual QIAIF asset growth of 12% up to the end of Q2 2020. As of the end of Q2 2019, Ireland is the top domicile for European ETFs, with a 62.58% share of the European ETF market and total assets of €450 billion.

As a consequence of COVID-19 and its effects on the Irish investment funds industry the Central Bank of Ireland has increased its focus on liquidity related issues throughout 2020. Despite the challenges faced as a result of COVID-19, regulation continued to shape the investment funds industry through 2020 with new requirements relating to beneficial ownership under EU’s Fourth Anti-Money Laundering Directive coming into effect in Ireland for certain types of entities as well as other requirements such as those introduced under the Shareholder Rights Directive II. Sustainable finance is another key area of focus for the Irish investment funds industry, with a refocus on Brexit occurring towards the second half of 2020.

The Investment Limited Partnerships (Amendment) Bill 2020 is currently working its way through the Irish houses of parliament. This bill is a positive step in the direction of making Ireland a more attractive domicile for private equity and venture capital funds. The reforms are predominately aimed at (i) redefining certain rights and obligations relating to LPs and the GP; (ii) harmonising the rules relating to, and the characteristics of, the ILP structure with other Irish regulated fund structures and certain legal and regulatory developments since the Act was introduced; and (iii) adopting market standard practices and features from other popular fund domiciles. Once enacted it is expected that Ireland will become a popular jurisdiction for managers looking to utilise a GP/LP structure given the ILP’s innovative features.

Jersey

Jersey’s investment funds industry continues to thrive. Against the historically difficult and uncertain global economic backdrop, the first six months of 2020 saw a rise in the value of regulated funds serviced in Jersey, up to a record high of £361.7 billion.

That rise of just over 5% was accompanied by another increase in the number of registered Jersey Private Funds (“JPF”), a new product for up to 50 sophisticated investors with a lighter-touch regulatory regime, introduced in 2017. This product has been a runaway success, with its versatile offering attracting use as a private wealth structuring tool for club deals and for start-up managers.

Hedge fund, real estate and private equity asset classes continue to dominate, and in the last published statistics in June 2020, accounted for 87% of Jersey’s overall funds business.

The uncertainty around Brexit has not diminished the Island’s appeal. The tried and tested NPPR route into the EU continues to work well for managers, while an AIFMD compliant regime is ready to be introduced once passporting for third countries is considered again by ESMA. Managers continue to make use of Jersey to access European markets, and in the last few months, we have seen more US managers using Jersey vehicles to target European capital.

At the same time, reforms to the Island’s regime for migrating limited partnerships have also simplified the process for managers looking to move funds to the Island.

Although COVID-19 has had an impact on the Island, one trend that began in late December has persisted through lockdown and beyond. This has been a slight shift away from the traditional closed-ended model, in which Jersey used to specialise, to open-ended funds (or “hybrids” a term coined for open-ended funds with less frequent dealing days, generally monthly or quarterly).

As a jurisdiction already used to demonstrating substance in its investment fund and investment management regimes, Jersey is well placed to meet the demands placed on it by the ever changing regulatory and political landscape. Jersey continues to stress test its product offerings and business models in order to comply with the highest global regulatory standards, while remaining a competitive jurisdiction in the investment funds market.

London

2020 has been a busy year for the London market, and despite a difficult first quarter, hedge funds managed to bounce back in the second and third quarter of the year and outperform the major public indices, taking advantage of the market volatility essentially driven by the coronavirus pandemic and the macro economic uncertainties - US presidential elections, trade barriers between the US and China as well as the growing tensions between the UK and the EU over Brexit.

During that same period, the hedge fund industry in Europe has also experienced positive inflows as investors looked to make significant allocations to macro and relative value strategies across a wide range of performing firms, from large asset managers, to mid-sized asset managers and smaller outfits. In addition to performance gains, this net inflow has translated into a growing AUM for the industry, which follows the global trend. It has also fuelled a good number of new hedge fund launches by institutional and established managers, as well as start-up managers spinning out of major institutions. This is not- withstanding the restrictions under the pandemic and the shadow of Brexit politics, as financial services have been able to function robustly in a more decentralised environment thanks to an ever improving technology infrastructure. Notably, it seems that a greater proportion of these new entrants are being FCA authorised in their own right, rather than being FCA hosted.

Despite the facilitative Cayman funds regime, fund launches below the £30 million mark are now a rarity. Barriers to entry, such as increased regulatory burden and compliance costs imposed on European man- agers versus the low AUM, make it hardly viable even when utilising hosting platforms. However, the comparative advantage of greater flexibility of Cayman funds means Cayman remains the domicile of choice for innovative entrepreneurial propositions, such as tokenised funds for listing and digital trading funds, and for funds with exposure to certain assets, such as commodities.

We have also seen a significant increase in London-based hedge fund managers launching hedge-fund co-investment vehicles, taking advantage of investment opportunities that do not fit within their flagship fund while, at the same time, providing investors with a way to reduce the average fees they pay to the manager across the funds they invest in. Typically such co-investments are structured through Cayman exempted companies or limited partnerships, relying on Cayman’s advantage of being a trusted jurisdiction to launch vehicles quickly and at a low cost. Speed of execution is often key to making the most of a co-investment opportunity.

For closed-ended funds, select private equity managers continue to take advantage of Cayman Islands structures to facilitate bringing their product market. However, we have seen fewer launch maiden Cayman private equity funds continuing in this region to prefer European Private Equity jurisdictions. There remain however real estate-focused managers who are committed to Cayman funds.

GUERNSEY
Matt SandersManaging PartnerT +44 (0) 1481 748 914matt.sanders@walkersglobal.com
Kate StoreyPartnerT +44 (0) 1481 748 924kate.storey@walkersglobal.com

IRELAND
Nicholas Blake-KnoxPartnerT +353 1 470 6669nicholas.blake-knox@walkersglobal.com
Jennifer FoxPartnerT +353 1 863 8531jennifer.fox@walkersglobal.com
Eimear KeanePartnerT +353 1 470 6622eimear.keane@walkersglobal.com
Sarah MaguirePartnerT +353 1 470 6691sarah.maguire@walkersglobal.com
Jill ShawProfessional Support LawyerT +353 1 863 8546jill.shaw@walkersglobal.com

JERSEY
Jonathan HeaneyManaging PartnerT +44 (0)1534 700 786jonathan.heaney@walkersglobal.com
Dilmun LeachGroup Partner*T +44 (0) 1534 700 783dilmun.leach@walkersglobal.com
Christopher ReedGroup Partner*T +44 (0) 1534 700 825christopher.reed@walkersglobal.com
Leanne WallserGroup Partner*T +44 (0) 1534 700 755Leanne.Wallser@walkersglobal.com

LONDON
Matthew BloomfieldPartnerT +44 (0)20 7220 4986matthew.bloomfield@walkersglobal.com
Tatziana Paraguacuto-MaheoPartnerT +44 (0)20 7220 4991Tatziana.Paraguacuto@walkersglobal.com
Hughie WongPartnerT +44 (0)20 7220 4982hughie.wong@walkersglobal.com