The outlook for fundraising, although challenging, is positive however firms will continue to face growing regulation according to industry experts.
Richard Watkins, Lisa Cawley, Mark Mifsud and Kate Downey, fund and regulatory partners at law firm Kirkland & Ellis made the comments at an Ipes hosted seminar on the fundraising environment and regulatory developments held in Jersey on 7 September.
On the regulatory side, topics discussed included the Bribery Act and the US Dodd Frank legislation which are impacting a large number of fund managers and Solvency II and the Volcker Rule, both of which will impact on the ability of insurance companies and banks to invest in private equity funds. Much of the focus however was around the EU Alternative Investment Fund Managers Directive and its potential impact on the Island’s funds industry.
According to Lisa Cawley, due to uncertainty as to how the final version of the Directive will look there are a range of views among the firm’s clients as to whether it is preferable to fully comply or stay outside the scope of the Directive. “It’s a difficult time for such firms to make decisions” she said.
This view is predicated on national private placement schemes continuing to enable funds outside the EU to access European investors. However, ‘reverse’ or ‘passive’ marketing from an offshore jurisdiction such as Jersey or the establishment of parallel structures could offer a means of mitigating the additional regulatory burden and costs associated with being in the EU.
A recent study by Charles River Associates, commissioned by the FSA put the one off costs for the private equity and venture capital industry at €800m with a further €280m of ongoing costs.
Mark Mifsud also commented on the impact of a range of new legislation on regulatory capital for investors and fund managers alike, which did not help the difficulties faced by firms currently seeking to raise capital.
Whilst it continues to be a difficult environment, there are signs of a pick up. “Firms are now recognising that timing is not as important as they though. There is no perfect time to go to market it will take longer and regulation will only increase” said Kate Downey. Kirkland & Ellis, who have advised over 280 fund managers globally over the last 15 years, have observed a general elongation of the fundraising period, which is supported by industry data.
This cautiously optimistic view is consistent with the latest statistics released by the JFSC earlier this month reported a 25% increase in new business instructions during the second quarter with further improvements anticipated subject to markets stabilising.
‘First close inertia’ was noted as an issue for many funds, as they struggled to get investor commitments for this important first milestone. Downey highlighted a knock on impact in fund terms and conditions including downward pressure on management fees, the use of economic incentives to attract investors to commit early and a focus on partnership expenses. One outcome of this latter point could be an incentive for fund managers to outsource more back office activity which is potentially good news for the islands fund services providers.
Nigel Strachan, MD for Ipes in Jersey said “regulatory change and the global fundraising environment both have a big impact on Jersey. With so much happening at the moment, it seemed like the right time for an update of this nature for the local funds industry, the team at Kirkland & Ellis did a great job and it also helped build the Island’s relationship with this key law firm”.