First published in The Financial Times.
Some things are difficult for alternative asset managers to control. For example, new macro data may mean an asset allocation strategy that looked perfect one day requires urgent alterations the next.
But where such change is often unavoidable, there are areas where managers can achieve solace in stability. Fund domicile is a significant one.
Established, well-regulated jurisdictions like Guernsey can reliably enable the distribution of alternative products to various client types across many geographies.
They are lifting the historical regulatory barriers that constrained private asset investing to one geographical market and pool of investors. And in a world where alternative strategy demand is soaring, this expanded access is critical.
As a recent Cerulli Associates report commissioned by Guernsey Finance highlights, global private investment assets have increased by 92% since end-2018. The market was valued at US$8.7 trillion as of Q3 2022, with a further US$3.6 trillion in hedge fund assets.
To seize this asset growth opportunity, alternative asset managers must carefully evaluate the comparative advantages of different jurisdictions before settling on a domicile. Here are some of the key dynamics that should be evaluated.
1) Regulation, structure, and tax
Alternative investments are subject to different regulations than other structures due to their relative complexity and target client bases. As such, managers will need to identify the applicable regulatory regime in a potential jurisdiction and decide whether it suits them.
Fund structuring must also be considered. A bad fit can lead to “doubling up” of taxation and inadequate investor protections.
2) Service providers
Alternative asset managers looking to gather capital from international investors are reliant on the guidance and input of service providers such as external counsel, fund administrators, and accountants. Jurisdictions like Guernsey have built-up offerings in every area required.
Availability is the baseline consideration. But managers must also evaluate the quality and experience providers have with alternative strategies specifically.
3) Speed to market and switching costs
Changing domicile can be onerous. It is, therefore, critical to get things right the first time and avoid a never-ending stream of onboarding and offboarding costs. Finding a new domicile that can offer a clear, low-cost, and highly effective switching process is key.
4) Regulatory frameworks
In Cerulli’s report, participants reported that the most established domiciles can come with a heavy regulatory burden and underwhelming support. These factors are likely to be manageable for large alternative strategies. However, mid-sized firms may struggle to receive the attention they require.
Managers should be aware that National Private Placement Regimes (NPPR), available in jurisdictions like Guernsey with more flexible frameworks, offer more nimble access to specific markets. This is a key benefit for strategies that are not focused on accessing capital everywhere at once.
5) Investor preference
As a rule, investors prefer domiciles with strong regulatory frameworks and convenient time zones. Some respondents to Cerulli’s work also said they felt that most-used domiciles can also be among the most bureaucratic and inefficient. This is leading jurisdictions like Guernsey to emerge as increasingly popular alternatives.
Sustainability considerations can be another driver of investor preference, with many focusing increasingly on ESG factors. Domiciles can play a role in facilitating this.
6) Listing options
Listed markets provide managers with an opportunity to expand their investor base even further. In the instance a manager seeks to list a US fund, most domiciles will have the optionality for a NYSE or NASDAQ listing, but from there it can vary. Guernsey boasts the greatest number of LSE-listed companies outside of the United Kingdom.
The domicile selection process requires careful evaluation from alternative asset managers. Simply opting for the brand-name choice or the most-used jurisdiction may not be optimal for the investor segment they are trying to reach or product type being offered.
To replace uncertainty with stability, managers should follow a discerning process. They must align their product and distribution strategy with domicile comparative advantages.
It’s likely that many seeking access to new markets and distribution would benefit from a domicile offering greater regulatory flexibility and optionality via lower expenses.
Guernsey offers a strong and efficient regulatory framework, fast-tracked migration, a broad ecosystem of experienced service providers, and competitive operating costs.
First published in The Financial Times.