Massive inflows of capital to the private funds market have boosted expansion into global markets. But what opportunities and pitfalls await fund managers?
Many fund managers are considering their next moves into the U.S., Asia, and Europe, keen to tap into the benefits of new markets. But challenges exist when entering new fund jurisdictions.
At the recent Private Funds Industry Live event I was joined by two speakers with a wealth of experience on the topic: Amie Patel, Partner & CEO at Elevar Equity, and Christopher J. Kula, Partner at Dentons US LLP. Our panel was moderated by Colin Leopold, Head of Research & Insight at Global Fund Media.
How to choose the right fund jurisdiction for expansion
Chris Kula began the discussion by highlighting recent trends. While Luxembourg remains a popular gateway for investors and investments abroad, particularly in the EU, Ireland has also gained popularity as a jurisdiction following Brexit and regulatory reforms around institutional limited partnership rules.
In Asia, Singapore has taken positive steps towards developing its private fund regime and onshoring is gaining popularity. Legislative changes have also supported new flexible fund structures such as the increasingly popular Singapore Variable Capital Company (VCC).
What private fund regulations should you consider when setting up in new markets?
Chris said that, following a busy fundraising market in 2021 and 2022, now could be a good time for asset managers to map out and assess their five-to-10-year growth strategy.
“You can’t overstate the importance of the infrastructure in a jurisdiction in terms of access to legal, accounting, tax, and compliance support with experience in the private fund industry,” he said. “Without local knowledge or help from an experienced service provider, fund managers can underestimate the timeframes for setting up a new fund and the costs that are involved.”
I explained that it’s imperative to understand the direction of regulation in a jurisdiction and to have a reliable vendor ecosystem. This is because funds have a seven-to-14-year lifecycle and moving out of a jurisdiction can be difficult and costly.
The mindset and the perspective of the regulator are highly important. In many jurisdictions, private capital is important, and governments and regulators are making a conscious effort to support the industry.
When expanding private funds in global markets it may be risky to choose a jurisdiction in which the industry was not supported by the government and the regulator.
Amie said fund managers should be aware there is far more stringent private fund regulation now than five years ago, whatever your jurisdiction.
How to manage private fund strategies during difficult investment times
The panel discussed the challenges when a region falls out of favor or it’s necessary to withdraw funds due to widespread sanctions, as happened recently in Russia.
I cited two aspects of private fund strategies around divesting from a jurisdiction–the investor side and the investment side. This is something a manager needs to think about when expanding into other regions. Do they want to tackle both the investor and the investment side at the same time? Once you’re in, it’s tricky to get out.
Trust is your one and only asset when it comes to your investors, who are committing blind pools of capital for 10-plus years at a time. Once you decide to expand into a new jurisdiction, the firm must have commitment from the top as well as the operators. It’s important not to overpromise and underdeliver to investors or regulators.
Chris noted that on the fund manager side, key considerations include the regulatory environment, barriers to entry–in terms of becoming registered with applicable governmental authorities–and whether a local presence is required. This might affect your ability to outsource administration.
A robust regulatory environment, while potentially raising barriers to entry for some players, can create greater credibility for investors. “That’s really the trend and the U.S. also appears to be going in that direction in view of the SEC’s proposed Private Fund Adviser rules,” he said.
Amie recommended that fund managers ensure they’re getting the right service from third parties and that it complements their back office. “You should be thinking now how to build that muscle internally because even if you bring a third party to the table, they’re still going to need the information from you, so how do you build that into your process?” she said.
“We’ve been reassessing internally what is a cost versus what is an investment with engaging in these jurisdictions. There’s a lot to be said for long-term partners, creating that trust, and building consistency with your LP base.”
Overall, there is still a massive amount of capital flowing into our industry. I’m curious to know how this will play out–and whether it will lead to competition among jurisdictions, or the decision by jurisdictions to become specialists in individual sectors such as real estate.
Looking for more information about the future of fund operations? Our Next Evolution in Private Capital Insight Report explores the trends and innovations redefining operations across the closed-end funds life cycle. Download it here.
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