December 2007 Jersey Private Equity Services 2007 · Jersey Private Equity Services 2007 ......

‘Open for business’attitude drivesfund growth

Administratorsbuttress island’sskills base

Regulation andfund innovationattract managers

Jersey PrivateEquity Services2007

December 2007

In Jersey, Mourant International Finance Administration operates through Mourant & Co. Limited and its affiliated companies which are regulated by the Jersey Financial Services Commission in the conduct of trust company business under the Financial Services (Jersey) Law1998. Registered office: PO Box 87, 22 Grenville Street, St Helier, Jersey, JE4 8PX, Channel Islands. In Guernsey it operates through Mourant Guernsey Limited and its affiliated companies which are regulated by the Guernsey Financial Services Commission in the conduct ofinvestment business and in the conduct of trust and company business. Registered office: First Floor, Dorey Court, Admiral Park, St Peter Port, Guernsey GY1 6HJ. In the UK, it operates through Mourant Fund Services (UK) Limited Firm Number 448301, which is authorised andregulated by the Financial Services Authority. Registered office: 8th Floor,68 King William Street, London EC4N 7DZ. In Luxembourg, it operates through Mourant Luxembourg S.A. which is regulated by the CSSF to provide Domiciliation, Registration and Transfer Agency ServicesRegistered office:6 rue Philippe II, L-2340 Luxembourg. R.C. Luxembourg B No 88409. In the Cayman Islands, it operates through Mourant Cayman Limited which is regulated by the Cayman Islands Monetary Authority in the conduct of trust company business. Registeredoffice: Strathvale House, 90 North Church Street, PO Box 10378 APO, George Town, Grand Cayman, Cayman Islands. In Hong Kong, it operates through Mourant Fund Services (Hong Kong) Limited Company Registration number 1152147. Registered office: Level 39, OneExchange Square, 8 Connaught Place, Central Hong Kong, China. In Singapore, it operates through Mourant Fund Services (Singapore) Pte. Limited Company Registration number 200712750Z. Registered office: Level 31, Six Battery Road, Raffles Place, Singapore 049909

A fund administration solution,that integrates with your businessIt is essential that outsourced fund administration provides the right benefits to suit your organisation.

With offices operating from nine locations worldwide, Mourant has over 260people providing a tailored single or multi-jurisdictional service with overUS$100 billion of funds under administration.

Mourant’s award winning fund administration service can integrate seamlesslywith your organisation and provide the perfect solution to meet your specific requirements.

Please contact:Matt Wood T +44 (0)207 469 [email protected]

For Jersey please contact:Carl HansenT +44 (0) 1534 [email protected]

www.mourant.com

Cayman | Guernsey | Hong Kong | Jersey | London | Luxembourg | New York | San Francisco | Singapore

In this issue…04 ‘Open for business’ attitude drivesJersey growthBy Simon Gray

07 A strategy that’s paying offBy Gary Clark, Mourant

09 Record year for Jersey fundsBy Beverley Le Cuirot, Jersey Finance

10 New administrators build private equityexpertise baseBy Simon Gray

11 Pioneering exchange offers newbenefits By Tamara Menteshvili, Channel Islands Stock Exchange

13 Image counts for offshore privateequity industryBy Nick Stevens and Heather MacCallum, KPMG

JERSEY Private Equity Wire Special Report Dec 2007 www.privateequitywire.co.uk | 3

CONTENTS

Special Reports Editor: Simon Gray, [email protected]

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Publisher/Editor-in-Chief: Sunil Gopalan, [email protected]

Marketing Director: Oliver Bradley, [email protected]

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Photographs: Courtesy of Jersey Tourism

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With a history of serving the private equitysector dating back at least 20 years, Jerseycan boast a longer pedigree in the industrythan most of its rivals. But one of its mostimportant assets, say practitioners, is a pro-active approach to encouraging businessthat represents a major step forward from afew years ago.

“There’s much more support for growingbusinesses here than in the past,” saysBrendan McMahon, a financial servicespartner with PricewaterhouseCoopers. “Icame 20 years ago from Ireland, a countrythat was very ambitious to grow a financialservices industry, to Jersey, where theattitude was that we could turn the tap on oroff if we needed to.”

Today the island has moved a long wayfrom that ambivalent stance, says McMahon,who is also a private equity leader in PwC’sglobal investment management practice. “It’svery much a case of whatever the industry

needs, we need to provide,” he says, citingthe efforts made by Geoff Cook, chiefexecutive of the industry promotional bodyJersey Finance, to drum up business for theisland. “He’s asking all the private equityhouses for their view on what we’re doing inJersey and what if anything we still need todo. We’re taking a very proactive role inengaging with our clients.”

McMahon says global industry confidencein offshore jurisdictions is a fragile construct,easily damaged and slow to rebuild, and hecautions that Guernsey’s public debate aboutthe merits or otherwise of population growthmay prove an obstacle to attracting newbusiness. “We appear to have lessconstraints over employment growth thanwhat we’re hearing in Guernsey,” he says.“When you talk about zero populationgrowth, as Jersey did in 1990, it took 10 yearsto overcome. By contrast, the governmentnow says it wants to grow the working

O V E R V I E W


‘Open for business’attitude drives Jersey growth

By Simon Gray

population by 500 per year, which is a lot ofpeople in an environment like this.”

That’s not to say Jersey has a perfectrecord of seizing opportunities. McMahonnotes that it was Guernsey that stole a marchon its neighbour some two years by reachingagreement with the Dutch authorities onrecognition of Guernsey’s fund regulation asequivalent to that in the Netherlands. Thisallowed Guernsey vehicles to be listed on theEuronext Amsterdam exchange withoutundergoing further regulation, a statusachieved by Jersey a year later.

In the meantime, however, the domicilingin Guernsey of KKR Private Equity Investors,Europe’s largest publicly-listed private equityvehicle, had grabbed the attention of thelargest US buyout houses. “The listing ofpermanent capital vehicles is the maindifferentiating factor between the islands afterKKR used a Guernsey structure to establish avehicle listed on Euronext,” McMahon says.

“KKR went out to raise USD1.5bn and theyended up with USD5bn. It was a bit of a fauxpas on the part of the Jersey authorities thatthey never got around to responding to theDutch. Because of the herd factor, after KKRdid it, Carlyle, Apollo and a number of otherlarge groups went to Guernsey on the backof that.”

While Euronext and to a lesser extent theLondon Stock Exchange have garnered theheadlines, there is a listing solution muchcloser to home for private equity fundsdomiciled in Jersey and Guernsey, accordingto Tammy Menteshvili, chief executive of theChannel Islands Stock Exchange, which wasestablished in 1998 and now has a total ofmore than 2,400 listings. At least half of thesecurities listed over the past two years havebeen funds, a large proportion of theminvesting in alternative assets.

Menteshvili believes the benefits of listingin Amsterdam or London have beenexaggerated.

“There was one very large deal on theprivate equity side that went to Euronext,KKR, and everyone assumed that this mustbe the way forward, but that doesn’t meanthat what we have to offer isn’t as attractive,”she says. “We can raise that kind of interestfrom investors through our exchange just aswell as any other.

“Not only can we raise capital here but we

have secondary-market liquidity on a numberof our funds. We have market-makers, anorder book and most importantly anelectronic settlement system, which at themoment is just a vague idea in people’sminds at some of these other exchanges likeEuronext – which isn’t even a stockexchange, by the way, but an inter-dealermarket like AIM.”

Menteshvili also notes that secondarymarket liquidity, one of the main argumentscited for listing on markets such as Euronext,can be very thin for listed private equityvehicles. Kohlberg Kravis Roberts has justannounced plans to use its funds to buyshares in KKR Private Equity Investors tosupport its sagging share price. While its netasset value per share amounted to USD25.77at the end of September, the vehicle’s shareprice had fallen to less than USD18 at thebeginning of December.

Nevertheless, the trend toward listing ofprivate equity vehicles and other alternativefunds domiciled in the Channel Islands islikely to continue, and it has been boostedby the introduction in January this year of theListed Fund Guide by the Jersey FinancialServices Commission. Like the Expert Fundsregime introduced in 2004, Listed Fundsbenefit from a streamlined approvalprocedure, with authorisation promisedwithin three days, thanks to the fund’sadministrator taking over the burden of duediligence from the regulator.

“The Listed Fund Guide has taken off verywell, because we are seeing a significantinterest in getting funds listed, more so thanat any time since the 1980s, when listingwas part of the process of establishing fundsfor the retail market,” says Richard Thomas,

O V E R V I E W


a partner with law firm Ogier and chairmanof the Jersey Funds Association. “Now we’relooking at it more for the institutional market.In addition, there are cases where fundpromoters targeting the UK independentfinancial adviser market for investmentthrough self-invested personal pensionsrequire a listed product.”

While the KKR deal sparked a surge ofinterest from the US, most private equitybusiness continues to flow to Jersey from theUK and other parts of Europe. “There was aninflux of US groups, but there won’t be aflood of business,” says Horace Camp,managing director for fund administration forKleinwort Benson in the Channel Islands. “InEurope, Scandinavia has always been a veryattractive area for business and the UKremains a big source of promoters, but manyfund administrators in Jersey or Guernseyhave business from all over the world.”

Gary Clark, head of hedge fund services atMourant International Finance Administration,the island’s largest administrator of alternativefunds and one of the largest providers ofservices to private equity both in Europe andinternationally, believes that the introduction byJersey next year of unregulated funds willprovide further impetus for the industry. Thisnew type of fund, aimed at highlysophisticated investors and with a USD1mminimum investment, is not subject to ongoingsupervision and does not require a Jersey-based administrator or even an audit sign-off.

Clark believes there will prove to beconsiderable appetite for this type of vehiclein the European time zones and that it willhelp Jersey to compete more effectively withthe Cayman Islands, which are not only the

world’s leading hedge fund domicile buthome to a large if hard to quantify share ofthe world’s private equity structures. “If we’dhad an equivalent product to Cayman 10years ago, we’d have had a lot of thesefunds domiciled in the Channel Islands, forno other reason than it’s more convenient,”he says. “But that regime wasn’t there –Expert Funds were the first step.”

Even with completely unregulatedproducts, he argues, Jersey’s reputation forbeing at the top end of the offshorejurisdiction quality spectrum will serve it well.“The island wants to lead internationalstandards and maintain its reputation, butequally it needs to respond to therequirements of the market,” Clark says.“With a product that’s very open as to howit’s serviced, managers have a greater choiceof service providers. Greater competition toprovide services leads to better corporategovernance and greater investor protection.”

Camp argues that both Channel Islandsare likely to benefit from a blurring of thelines between alternative asset classes.“Private equity is changing,” he says. “We’reseeing convergence between what is aprivate equity fund, a property fund or ahedge fund as managers seek to dosomething different to deliver a return to theirclients.” He believes that while in the pastGuernsey was probably more closelyassociated with the private equity sector,Jersey has now made up the ground interms of credibility as a domicile.

“Both domiciles have kept their regimesup to date, particularly with faster applicationprocesses, but another driver is the muchstronger need for good corporategovernance,” he says. “The mind andmanagement issue has made Jersey andGuernsey far more attractive, because thereis real infrastructure, genuine corporategovernance and a pool of credible non-executive directors. In a world wherecorporate governance and mind andmanagement offshore need to be real, theislands are more attractive than ever.”

Jersey has come a long way since 1987,when the Charterhouse buyout fundsbecame the first group of private equityfunds to be established on the island. Overthe intervening years, McMahon notes, theisland’s activities in the sector have grown in

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➧ p8

Private equity has been one of thecornerstones of Jersey’s dramaticemergence as a leading funds jurisdictionover the past four years, although it hasbeen an integral part of its financial sectorexpertise for much longer. For the Mourantgroup, which is by far the largest fundadministrator in Jersey through MourantInternational Finance Administration, andalso the foremost legal advisor to the sectorwith Mourant du Feu & Jeune, private equityhas been a major driver of business growthin recent years.

Today the private equity side of thebusiness is enormous, making Mourantprobably the largest private equityadministrator in Europe if not the world,thanks to a client base that includes many ofthe leading names in the industry, such asCVC and Axa. While all alternativeinvestment sectors are flourishing in Jersey,private equity is probably the largest of all,ahead of property funds.

Alternative fund business has grownvigorously across all asset classes since thelaunch of the island’s Expert Funds regime in2004. Over the past five years, the assetvolume of funds serviced in Jersey has risenfrom GBP100bn to a new record ofGBP221bn at the end of September. Over thepast year the number of Expert Fundsestablished in Jersey has grown by nearly 45per cent to 349, with assets growing by 71per cent to GBP43.5bn.

The past 12 months have seen bothorganic growth from existing clients and thearrival of new promoters for whom Jersey isbecoming the domicile of choice, thanks tothe combination of flexibility and highstandards in its regulatory structure, and thegrowing expertise across the island in areassuch as legal advice, audit, andadministration and accounting services.

The private equity sector has enjoyed aboost from the introduction of streamlinedauthorisation procedures for closed-endedfunds and, especially in the light of therenewed interest in stock market-listedalternative investment vehicles, fromrecognition of its regulatory regime by theFinancial Markets Authority in theNetherlands, exempting Jersey-domiciledfunds from the need for licensing when theylist on Euronext Amsterdam.

Jersey is also benefiting from uncertaintyabout the future direction of UK tax rules,particularly regarding the status of non-domiciled individuals, to attract alternativefund managers keen to benefit not only fromfiscal advantages and lifestyle benefits butfrom a can-do business culture. Meanwhilethe island has adapted its own tax structurein order to create a sustainable long-termbase for high value-added businesses toflourish.

The next step will be the launch at thebeginning of 2008 of unregulated funds,which will see funds destined for highlysophisticated institutional investors exemptedfrom ongoing supervision. Because thesefunds do not carry any requirement to useJersey-based service providers, they willease some of the constraints of a growingvolume of business on a sector withlimitations on the talent pool it can access;but the island is unlikely to miss out onsophisticated work in areas where it hasproved it can compete with the best.

The constraints can also be eased bytechnology, and Mourant and its competitorsare all investing in systems that will lessenthe need for growing staff numbers. With thegroup’s alternative asset base rising by 50per cent last year alone, with the majority ofthat growth coming in Jersey, it’s a strategythat’s already paying off. ■

M O U R A N T


A strategy that’spaying off

By Gary Clark

Gary Clark is head of hedgefund services with MourantInternational FinanceAdministration in Jersey

tandem with the growth of European generalpartners and the ever-greater volume offunds at their disposal.

“We have seen many of the major players inthe European market, such as CVC, Permira,Altor Equity Partners, Nordic Capital, Axa andVision Capital, a cross-section of the industryfrom the large buyout houses to mid-cap firmsand pure technology fund managers,” he says.“When CVC established its first fund here in1996, it closed with commitments of aroundUSD650m. A decade later, we’re seeing fundswith committed capital of up to USD5bn. Theseare what one might call the more establishedEuropean houses, but 10 years ago CVC wasbarely heard of, nor Nordic Capital, Altor orDoughty Hanson.”

Today the insistence by national taxauthorities that funds demonstrate thatmanagement and control is genuinely beingexercised in the offshore jurisdictions inwhich they are domiciled is prompting someprivate equity firms to establish substantialoperations in Jersey. “A number of managershave chosen not to outsource theiradministration to third-party providers in theisland but to create a real physical presence,like Nordic Capital, which has a lot of peopleon the ground now,” McMahon says.

“In contrast to 1990, when the policy wasbasically zero job growth, there are no realbarriers to managers bringing people in ifthey want to expand their presence.Politicians are now saying that to grow oureconomy, we must support those sectorsthat are actually generating wealth for thebenefit of everyone here. There’s a feelingnow that Jersey is a place close to Europefrom which you can manage operations.”

Members of the industry agree that theisland benefits from having close links to

European Union countries and organisationswithin them such as Euronext whileremaining outside the EU. “There are a hugenumber of advantages,” says Jersey Financetechnical director Robert Kirkby. “Mostimportant is the absence of value-added taxon structuring fees when they are charged tothe offshore vehicle by the partners doingthe deal. That can be quite significant,especially given the higher rates of VATlevied by some EU member states.

“The EU Prospectus Directive is veryprescriptive on how prospectuses should bedrafted, but if you’re launching a private equityfund from Jersey you can adopt a much morepragmatic approach. There is flexibility inaccounting standards – if you primarily haveUS investors, you can use US GAAP, or UKGAAP in the case of the UK. And while MiFIDmay not apply directly to private equity, itincludes quite an onerous definition of aprofessional investor. The Jersey regulationprovides much greater flexibility.”

The island could also benefit just as much,he believes, from the current plans of the UKgovernment in a range of areas that affect theprivate equity industry, from the plannedabolition of capital gains tax taper relief, whichwould have the result of raising the effectivetax rate on a fund’s gains from 10 to 18 percent, to the envisaged flat-rate tax on non-domiciled individuals, who are believed toinclude partners at many private equity firms.

“Things like the uncertainty over CGT andthe non-domicile issue are an advantage forplaces like Jersey,” Kirkby says. “We’realways trying to attract people like hedgefund and private equity managers, andalthough tax is never the primary reason forthem to move, it always contributes to thedecision. Right now we are hearing reportsof people looking to relocate theirbusinesses as well as their own personaldomicile and residence.”

Even if the UK proposals are rescinded oramended, he argues, the uncertainty theycreate can be equally damaging for London.“When that happens, people look atstructuring their business in other ways,”Kirkby says. “You never want to go downthat route, because once people startthinking about a change they may welldecide to go through with it. We think thatcould have some benefits for Jersey.” ■

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p6 ➧

Private equity funds business in Jersey is setfor a further boost when new unregulatedfund categories are implemented early in2008. The attraction of Jersey to the privateequity community has been growing sincethe introduction of the Expert Fund Guide in2004, which streamlined the regulatoryapproval process. This served as aspringboard for an increasing number offund promoters to domicile their alternativeinvestment fund vehicles in the island andhas helped consolidate its reputation as apremier centre for funds business.

A number of leading private equityhouses, including 3i, CVC, Cinven andNordic Capital, now have operations inJersey. Feedback from recent visits toLondon has indicated that the island isrecognised for its credible and experiencedfund administrators and for the quality of itsregulation and strength of its legislation.

The introduction of unregulated fundcategories can only add to the jurisdiction’sflexibility. Promoters using the new regimewill not need to seek regulatory approvalwhen applying to set up a fund in either theUnregulated Eligible Investor Category orUnregulated Exchange Traded Category.

Consultations continue with the JerseyFinancial Services Commission to fine-tune theproposals, but there will be no requirement fora Jersey-domiciled administrator, directors orcustodian and, significantly, no auditrequirement. Jersey will be the first Europeanjurisdiction to offer this level of flexibility to theprivate equity community.

Unregulated Funds will be suitable forprofessional and expert investors and thosewho have taken appropriate professionaladvice. Prominent investment warnings willindicate that such funds are unregulated, andexisting funds will not be able to transfer tothe new regime.

Professionals in Jersey believe the new

categories will appeal to promoters particularlywhere speed in bringing the product to marketis essential. For the private equity market, theEligible Investor Unregulated Fund will offer aneasier set-up process and avoid the delay ofregulatory approval as notificationrequirements are minimal.

The latest additions to the island’s fundcapabilities come as the net asset value ofJersey funds under administration rose bymore than 30 per cent to GBP221bn duringthe 12 months to the end of September. Morethan half of all assets – GBP113bn – are inalternative funds, and the 349 Expert Fundsapproved since 2004 account for GBP43.6bn.

The unregulated fund categories are thelatest in a string of enhancements introducedto maintain the island’s competitiveness inthe alternative funds sector, afterconsultation with the industry and withsupport from the financial regulator.

The Non-Jersey Domiciled Fund Guideallows local functionaries to act for non-Jersey domiciled funds under a streamlinedauthorisation process. This offers promotersthe choice of domiciling their fundselsewhere but still taking advantage of theisland’s administration or custody capabilities.

Earlier this year the Listed Fund Guideintroduced a fast-track authorisation process forclosed-ended collective investment funds thatare to be listed on recognised stock exchangesor markets. The guide is set to build on amarked increase in the number of listedalternative asset funds established in Jersey.

Jersey’s fund industry believes thesechanges will make the regulatory system moretransparent and more efficient. Thecombination of a flexible regime, a strong andgrowing administration and custodian sector,the ability physically to locate the manager inJersey and the ease of travelling to and fromthe island has made it the jurisdiction ofchoice for many alternative asset managers. ■

J E R S E Y F I N A N C E


Record year forJersey funds

By Beverley Le Cuirot

Beverley Le Cuirot is directorof marketing at Jersey Finance

Of all the factors driving private equitybusiness to Jersey, industry participants say,one of the most important is the quality of itsadministration services, built on a foundationof expertise accumulated up over more thana decade and starting when the industry hada much lower profile – and considerably lesscash at its disposal - than today

“The general interest in private equity isobviously driving significant investment, withUSD108bn raised in Europe last year, andJersey is getting its fair share of that,” saysRobert Kirkby, technical director of theindustry promotional agency Jersey Finance.“In recent years Jersey has been very muchopen for business, which has allowed us tobuild an excellent skill base of the

administration side of private equity, wherewe were historically considered slightlyweak.

“Over the past couple of years there’sbeen considerable investment inadministration skills and in private equitysystems, as well as increasing awareness ofprivate equity on the part of the law firms.We haven’t done anything radical, such as anew regulatory framework for private equityor attracting large numbers of buyout housesto set up in the island, but we’ve taken amuch more pro-active and business-friendlyapproach.”

Kirkby notes that groups such as Mourant,which in addition to being the leading legaladviser to Jersey-domiciled funds is also by

A D M I N I S T R AT I O N


New administratorsbuild private equity

expertise baseBy Simon Gray

➧ p14

Long before the recent boom that has madeprivate equity investment known around theworld, the Channel Islands Stock Exchangehas led the field as one of the first stockexchanges in Europe to allow the listing ofinterests in limited partnerships. Today theCISX has a number of these listings,particularly from the Scandinavian region,where this type of structure has been usedby pension funds to invest in asset classessuch as property and for mezzaninefinancing.

The Exchange, which earlier this yearmarked the approval of its 2,000th securityadmitted to the Official List, is widely usedfor the listing of a range of alternative fundstructures, including property and hedge aswell as private equity funds. In addition, ithas also established a specialisation in trulyalternative funds that invest in a diverserange of assets; the CISX already lists thefirst wine fund, two art funds, a forestry fundand a tree fund.

But just as important to the private equityindustry is the Exchange’s role in providing atax-efficient means for UK private equity tofinance acquisitions. Over the past fouryears, issuers in England and Wales havebeen responsible for more than GBP30bn indebt listings on the CISX.

The listing of debt on a recognised stockexchange, as the CISX is by the UK taxauthorities, exempts UK issuers fromwithholding tax on interest payments toinvestors outside the UK, a provision knownas the Quoted Eurobond Exemption. This isimportant given the role of debt in privateequity acquisition structures and the use ofso-called payment in kind notes (PIK Notes)to pay interest in order to minimise cashpayments during the life of the loan.

While these payments in kind trigger taxdeductions for the issuer, withholding tax

becomes payable, hence the importance ofthe Quoted Eurobond Exemption to mitigatethis liability. Since the exemption is appliedto interest paid as opposed to accrued, itmeans unpaid interest that accrued beforethe listing of the debt can escape the tax if itis paid subsequently.

As well as the CISX, various other stockexchanges within the European Union arerecognised for the purposes of theexemption. However, because the ChannelIslands are not members of the EU, issuersare not subject to a wide range ofEuropean legislation including theProspectus Directive and the TransparencyDirective.

This means, for example, that there is norequirement to prepare accounts accordingto International Financial ReportingStandards, with all the additional costs andcomplexity that entails; the Exchange offersissuers the flexibility to use US or UK GAAPinstead. This is on top of flexibility in otherareas, such as continuing obligations, andthe speed and efficiency that gives theExchange an advantage in terms of listingturnaround time.

The Exchange benefits, of course frompractical advantages such as being in theright time zone to serve European issuers,but it also offers an impressive andcomprehensive track record, the imprimaturof recognition from tax and regulatoryauthorities in other jurisdictions, and theability to offer efficient trading infrastructureand genuine market liquidity.

This matters to issuers seeking investorswho may not invest in securities unless theyare fully listed on an exchange with fullrecognition status, and the number speak forthemselves - at the end of November theCISX had some 2,400 listings, around 80 percent of which are on a primary basis. ■

C H A N N E L I S L A N D S S T O C K E X C H A N G E


Pioneering exchangeoffers new benefits

By Tamara Menteshvili

Tamara Menteshvili is chiefexecutive of the ChannelIslands Stock Exchange

KPMG’s Private Equity Group in the Channel Islands provides arange of independent professional services for both funds andfund managers covering:

• Audit of financial statements• Accounting opinions• Carried interest reviews• Loan covenant compliance checks• Tax advice for private equity structures• Tax returns including Form K-1 reporting• Investment valuations and fairness opinions• Transaction due diligence

We pride ourselves on our independent advice andcommitment to our clients.

KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 148 countriesand have more than 113,000 professionals working in memberfirms around the world.

For more information contact:

Heather MacCallum, KPMG Channel Islands Limited (Jersey office) at +44 (0) 1534 608403 or e-mail [email protected]

Rob Hutchinson,KPMG Channel Islands Limited (Guernsey office) at +44 (0) 1481 741810 or e-mail [email protected]

kpmg.com

Dedicated toprivate equity

Dedicated toyour success

© 2007 KPMG International. KPMG International provides no client services and

is a Swiss cooperative with which the independent member firms of the KPMG

network are affiliated.

In a world of increasing onshore regulation,new private equity funds being establishedoffshore are likely to provide furtherammunition for the industry’s critics.However, Jersey’s reputation and attitude toreform may help to silence their concerns.

Private equity is increasingly seen as amainstream asset class. The industry hasgrown significantly over recent years andhas a track record of delivering excellentreturns to its investors. It is also seen by itsproponents as a force for good, creatingvalue and growth in the wider economy.

It is therefore of some concern that theindustry is under such fierce attack. In arather sinister portrayal, it is accused ofstripping portfolio companies of their assetsand employees and loading them with debt.It has also come under fire recently forpaying too little tax and being under-regulated.

As a result, private equity firms are quicklyrealising that it is important to fully engageall their stakeholders, be they governments,tax authorities or members of the public, ifthey are to run some of the largestbusinesses in the world.

It has never been so important for theindustry to demonstrate to the outside worldthat it is committed to reform and theinterests of all its stakeholders. A primaryway to do this is through the choice ofjurisdiction when establishing new funds. Itwill be vital for private equity fund managersto choose the right jurisdiction in order tomaintain credibility. Selecting a co-operativeand transparent offshore regime will naturallyhelp this cause.

Jersey recognises that the investment fundlandscape is continually changing,

particularly for the private equity world. Inresponse, it has committed itself in recentyears to overhauling its financial servicesindustry and the way it conducts business.This includes a revised legal framework, anever more effective local regulator, an almostcompletely revised tax regime, and continueddevelopment of its highly skilled workforce.

The objective of all of this has been tobuild a reputation for quality. Jersey takesvery seriously its standing as a jurisdiction ofrepute among the many financial servicescentres in the world. It has engaged all itsstakeholders outside the island, including theUK government, the International MonetaryFund, the Financial Action Task Force, theFinancial Stability Forum and the EuropeanUnion. Through co-operation andtransparency, it now has a relationship withall these organisations that is benign andpositive.

This is exactly the kind of businessclimate that the private equity industry iscurrently in search of. Amid the regulatoryturmoil in the onshore world, fund managerswill naturally look for jurisdictions that arecredible and transparent when establishingnew funds. As an offshore jurisdiction, Jerseyoffers the appropriate level of regulation andtax neutrality for investors and generalpartners alike.

But what sets it apart is the emphasis itplaces on continuing reform and the qualityof its reputation, both of which are so highon the agenda for the private equityindustry. Jersey’s image positively lendscredibility to those setting up funds in theisland. This is why it is becoming theoffshore location of choice for private equityfund managers. ■

K P M G


Image counts foroffshore private equity

industryBy Nick Stevens and Heather MacCallum

Nick Stevens is a seniormanager and HeatherMacCallum is executivedirector with KPMG ChannelIslands in Jersey

far the island’s largest administrator, havebeen active in the private equity sector formore than 10 years. “We have a particularlystrong depth and breadth of experiencenow,” he says.

The Channel Islands suddenly foundthemselves in the spotlight as a privateequity centre in the US, following theUSD5bn listing on Euronext Amsterdam ofthe Guernsey-domiciled co-investmentvehicle KKR Private Equity Investors in May2006. However, much of Jersey’s growth sofar has come from the expansion of activityby general partners in Europe.

“London obviously has a big private equityindustry, and Europe is really picking up aswell,” says Nick Stevens, a senior managerwith KPMG in Jersey. “Historically a couple ofbig private equity firms established theirfunds here because there was tax neutrality,along with very few legal requirements forprivate equity structures. The administratorswho had their accounts have grown anddeveloped with them over time.”

His colleague Heather MacCallum, anexecutive director at KPMG, adds: “There aresome qualified and very experienced peoplehere who understand that business and areused to dealing with private equity structures.It’s got out to the outside world that this issomething Jersey’s very good at, and morefunds are coming in.”

She acknowledges that if anythingGuernsey has perhaps a longer track record

of administering private equity funds, butargues that Jersey has caught up and maybe better equipped for future growthbecause of the government’s willingness tocountenance an increase in the island’sworking population, an issue that is still thesubject of vigorous debate in Guernsey.

“We’re starting to see a trend of Jerseyservice providers administering moreGuernsey funds than in the past,” MacCallumsays. “Guernsey still continues to providecompliance and registered office facilities,and all the things that are required by law,but much of the actual administration maybe carried out in Jersey. A lot more ChannelIslands firms are working together across thetwo islands, but there’s definitely morecapacity in Jersey.”

Kirkby says that with limited administrationcapabilities available in many of theEuropean countries that are home to privateequity firms, Jersey has an opportunity tocapitalise by extending its own fundservicing capabilities, and the flexibility of theisland’s immigration policy is an importantfactor. “When the right people need to berecruited, they will be admitted if they matchour needs,” he says.

Another factor, he argues, is the ability ofservice providers to gear up with technologythat enables them to process higher volumesof business more quickly and efficiently. “Alot of administrators are making verysignificant investment into new systems tomake their existing work more efficient,” hesays. “Some of those investments are inseven figures, which is an indication of howconfident they feel about the future.”

Bill Gibbon, head of the funds group atlaw firm Voisins, says: “Jersey has had topersuade the world that its administratorsare sufficiently sophisticated. The island hasalways had experienced administrators,going back to the days of the retail fundindustry. It has slightly relaxed its housingpolicy, which could encourage moreadministrators to come to the island, and ithas the ability to attract specialists in a waythat other island jurisdictions may find moredifficult.”

The costs of building up staff andsophisticated IT systems would appear tofavour the bigger, longer establishedadministrators, but the nature of private



p10 ➧

equity, with its highly complex legalstructures and transactions and relative lackof one-size-fits-all processes, continues toattract new specialist players.

MacCallum believes there’s still plenty ofscope in Jersey for niche players, especiallyas across the alternative investment industrybig institutions reassess their client rostersand seek where possible to focus on theirbiggest and most profitable relationships,and indeed specialisations. “After growing for10 years or so, several of the leadingadministrators have taken on so muchbusiness and filled their offices with so manypeople that they can’t take on any morework,” she says.

“What they want to do is concentrate onthe most profitable business and perhapsleave behind some of their high-maintenancesmall clients. Niche players are starting tobuild business as they get some of thissecondary market. And even some of the bigplayers are questioning whether they can beeverything to everyone. Can they really affordto invest in the technology and the teams todo both hedge funds and private equityfunds well?”

People remain very important in privateequity administration, cautions Horace Camp,managing director for fund administration forKleinwort Benson in the Channel Islands,making it difficult for the big internationalfinancial service providers to get the lock onthe business they enjoy in areas such ascustody.

“The global consolidators like State Streetand Citi are dipping their toes in to pick upmore of the ancillary business, but it’s muchharder to put private equity into a sausagemachine,” he says. “It’s a more bespokeprocess that’s much harder to break it upinto small elements. Private equity funds canmove very slowly or very fast, and you needpeople who can react.

“Often structures are so complex thatwhile administering any single element of aprivate equity fund is very simple,administering and understanding all of it isvery difficult, particularly ensuring that themoney flows correctly from one entity intoanother, and that transactions are completedon time. It isn’t sending a ticket out to abroker to buy a hedge fund in Cayman. Itcan be an enormous amount of work, and at

1am when the final documents are comingthrough from the lawyers, it takes a differentmindset.

“The advantage of the Channel Islands isthat because they’ve done private equity forat least a generation, they have people whounderstand it. It’s a good place for corporategovernance, and with the new regulatoryregimes it’s now possible to get structuresup and running in a short space of time.Finally, both islands like private equitybusiness because it suits the high value-added model, rather than the ‘stack ’emhigh, sell ’em cheap’ approach.”

The private equity administration industryis facing the challenge of moving beyondproviding a simple book-keeping service tooffer deeper and more sophisticatedofferings, according to Brendan McMahon, afinancial services partner withPricewaterhouseCoopers in Jersey andprivate equity leader in the firm’s globalinvestment management practice.

He is encouraged by the growth of theJersey industry through the arrival ofspecialist firms from other jurisdictions, suchas Alter Domus, which was created in 2001from the spin-off of PwC’s Luxembourg-based corporate, trust and payroll business,Saltgate, another group with Luxembourgconnections, and International Private EquityServices from Guernsey, as well as moves



by Northern Trust to bring in people tobolster its Jersey operations.

McMahon also notes that whereas in thepast the industry tended to be self-containedand inward-looking, today manyadministrators – Mourant in the lead – havean increasingly global outlook. “They aremoving to develop international networksthat provide support services to promotersas they themselves go global,” he says.“Those clients may have operations inLondon, Luxembourg and Singapore, andneed a service provider that understandstheir business and provides services in thosejurisdictions.

“Ten years ago many of the new privateequity houses were very much focused onbuilding a European presence and perhapssetting up offices in eastern Europe. Nowthey are looking at the emerging marketsand at the US, and administrators areresponding to that by building their ownglobal networks. Mourant is now inSingapore, Hong Kong, New York, SanFrancisco, London and Luxembourg. Aztec isalready in Guernsey and Luxembourg aswell as Jersey.”

However broad their international sweep,administrators must – along with their clients– deal with the specific challenges of theprivate equity business. “One of the biggestissues is often managing the tax profile ofthe vehicle,” Kirkby says. “They require high-quality non-executive directors as well asadministration, and these functions must allbe carried out in the right location in termsof their legal framework.”

He observes that as in the hedge fundindustry, reporting and valuation areincreasingly keen topics among investors andregulators. “Private equity firms are beingasked to account on a more regular basisand to provide valuations quarterly, ratherthan six-monthly or annually,” Kirkby says.“That creates challenges in valuing a realbusiness – it’s much easier by comparisonfor hedge funds to value instruments wherethere’s a market for them.”

Accounting standards are a constanttheme, although Jersey’s legal framework ismore flexible than most, allowing firms tochoose between International FinancialReporting Standards (IFRS) and US and UKGenerally Accepted Accounting Principles

(GAAP), as well as to modify standardswhere this makes sense.

“Private equity firms that account in USGAAP, for example, are facing challengesfrom a provision known as known as FIN 48(Financial Interpretation Number 48), whichcovers the treatment of tax risk and taxexposure,” Kirkby says. “It’s quite achallenging accounting standard. Some ofthe valuation standards are not so muchcausing concern as making people scratchtheir heads on how these should best beaddressed.”

Says McMahon: “We’ve had 10 yearsexperience of becoming familiar with whatstatistically are the major reportingenvironments. Most of our larger funds herehave been accounting under US GAAP forthe past few years, but there is a degree offlexibility that you can apply that allowsexceptions to US GAAP or IFRS. If particularsections of GAAP are nonsensical, forexample consolidation, you can typicallycarve them out.”

Administrators are also getting to gripswith the new codes of practice for fundservices business published last month bythe industry regulator, the Jersey FinancialServices Commission, consisting of highlevel principles for the conduct of fundservices business, together with moredetailed requirements in relation to eachprinciple. The codes have been issued aspart of the regulations accompanying thetransfer of regulation of fund functionariesfrom the Collective Investment Funds (Jersey)Law 1988 to the Financial Services (Jersey)Law 1998, a change approved by the Statesof Jersey in early November.

The codes of practice also reflect the shiftin responsibility for conducting due diligenceon funds and their promoters from theregulator to service providers under theExpert Funds and subsequent regimes. SaysMacCallum: “Jersey has already brought incodes of practice for fiduciary andinvestment businesses, and it’s now donethe same for fund functionaries. In the past itwas the product that has been regulated, butnow it’s the fund manager and administrator.The codes of practice bring them up to thesame regulatory level as other firms on theisland that conduct fiduciary and investmentbusiness.” ■



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