The world is flat for the private funds industry – which is why offshore financial centers are competing for market share in new lands.
Growing wealth in emerging economies is fuelling a need for nimble cross-border fund structures that can simultaneously accommodate a diverse population of LPs – from tax exempt to foreign, from private individuals to public pension funds. And as a greater share of economic activity shifts to Asia, Latin America and Africa, offshore financial centers sense an opportunity to win new business by showcasing their sophisticated vehicles and legal regimes to emerging market fund managers.
Sometime in late 2013, Guernsey Finance plans to send a team of local regulators, policymakers and funds experts to China to see what opportunities exist there for the island’s finance industry. The trip follows similar visits to Brazil and Moscow, where Guernsey officials discussed how its long-established funds regime might service the growing population of fund managers in Latin America, Russia and elsewhere.
“In the emerging markets, a lot of people aren’t aware of the structures and financial products Guernsey has to offer,” says Guernsey Finance chief executive Fiona Le Poidevin. “We need to make ourselves known.”
The competition for new business will be tough. “A lot of domiciles benchmark themselves with each other – so they know good bits to bad bits, and each jurisdiction catches up with each other,” notes James Mulholland, an offshore funds partner with law firm Carey Olsen.
Indeed, Guernsey’s Channel Island counterpart Jersey has been logging plenty of air miles itself. Jersey delegates have been meeting with political and business leaders in Mumbai and Abu Dhabi, as part of a wider campaign to lure business to the offshore island. Jersey Finance has opened offices in India and the UAE in recent years as part of that effort.
“[The office openings are] a natural extension of Jersey’s growing links with these regions, will complement our existing representative office in Hong Kong, and are a reflection of our commitment to growing our finance industry’s presence in international markets in the coming years,” Jersey Finance chief executive Geoff Cook said in a past statement.
Keen not to sacrifice any tax revenue, onshore governments are competing for fund managers’ attention as well: Shanghai recently sent a delegation to Greenwich, Connecticut to learn how the city developed its fund sector. Learning best practices developed over decades in the West is one reason why places like China and Brazil are welcoming delegates from offshore domiciles.
“We’ve seen these places introduce legislation to develop equivalent regimes to ours,” says Le Poidevin.
More difficult to replicate will be the reputation that traditional private equity destination spots like the Cayman Islands and Channel Islands have built over time. A change in law, or a misinterpretation of the rules in place, present compliance risks for fund managers. Classic private fund domiciles are more “well-recognized” and have judicial systems that are more tried and tested relative to fund regimes only just being implemented in places like China, says Leon Santos, a Singapore-based private funds lawyer with Collas Crill.
But as emerging markets take on a greater share of global economic activity, there’s a possibility that these favored jurisdictions will face new competition from domiciles in the Asia-Pacific and Latin America regions. Mauritius does not enjoy the same reputation as Guernsey when it comes to available private equity fund structures; but its culture, language and time zone is more closely aligned with sub-Saharan Africa and India, two increasingly important markets for alternative asset managers. If places like Mauritius could develop an infrastructure and credibility on par with places like the Channel Islands, some in the industry believe they will become serious hubs for private fund managers in the years to come.