The rise of sustainable finance, the impact of Brexit, EU regulation and the fallout of the pandemic all have the potential to shape considerations around alternative fund domicile selection, according to new research published this month by IFI Global and supported by Jersey Finance.
Based on the views of alternative managers, law firms and advisers from across North America, Europe and Australasia, including some of the world's largest investors in alternatives, the research for this new report - entitled ‘The Future of International Fund Domiciliation 2021' - was carried out between October 2020 and February 2021.
Building on the first IFI Global report in this series, published in April 2020, which found that investors and managers want stability when it comes to fund domiciliation, this new report explores how investor and manager attitudes have changed in light of some key developments in the investment space landscape over the past twelve months, including ESG acceleration, Brexit and regulation.
the rise of ESG, Brexit, and evolving substance demands, coupled with a business environment emerging from an unprecedented pandemic, are new factors that are increasingly shaping domiciliation."
Overall, the survey found that investors continue to be the key driver behind domiciliation decisions, and they want to allocate to funds that are domiciled in well-known jurisdictions that have a good reputation.
In addition, however, the survey found that there are differences in what UK and US managers consider to be their priorities in domicile selection.
While the majority of UK managers need funds to be domiciled in jurisdictions that meet a certain regulatory threshold to meet EU investor expectations, US managers said that, aside from familiarity, cost considerations and local regulatory requirements matter most to them.
Among the report's other key findings were:
• 69% of all interviewees believe that ESG considerations will play a growing role in their decision-making, including domiciliation
• Investors are generally more interested in ESG than managers - 100% of investors thought including ESG criteria in the selection of fund jurisdictions and service providers will become more important in the future, compared to 74% of managers, with most of those who said no being based in the US
• Just 12% of all interviewees believe it would be beneficial for there to be an agreed international standard of regulation for ESG, with most suggesting that jurisdictions should develop their own ESG regulatory standards
• 37% of managers did not see any real opportunity for growth in EU markets. There is much more interest in the US and Asia-Pacific region.
• Covid-19 has not impacted fund domiciliation patterns but, should travel restrictions continue beyond this year, it may very well begin to affect domiciliation
Elliot Refson, head of funds at Jersey Finance, said: "The previous study we supported just over twelve months ago was clear in its conclusions - that investors are key influencers in domiciliation decisions and that they prize stability and jurisdictional reputation. While that message remains fundamental to domiciliation today, there is no ignoring how much has happened since the collation of that research.
"As this new analysis shows, the rise of ESG, Brexit, and evolving substance demands, coupled with a business environment emerging from an unprecedented pandemic, are new factors that are increasingly shaping domiciliation, with diverging attitudes between North America, Europe and Asia all creating a picture that is more complex than ever.
"The findings of this new study provide a valuable insight into the thinking of alternative managers and investors at a time of unprecedented change and underline just how important it is for Jersey, as a forward-thinking specialist fund centre, to stay focused on providing a straightforward, investor-friendly platform."
Simon Osborn, CEO of IFI Global and author of the report, said: "2020 was certainly an eventful year for the international asset management industry and the pandemic was just one of several reasons for this. ESG, Brexit, EU blacklists, and related issues such as BEPS and demands for yet more substance in all fund jurisdictions, are also having - or threaten to have - an impact on future domiciliation decisions. Domiciles need to be alive to these trends if they are to continue to serve the needs of investors globally."