1. The regulation era
Private fund compliance teams are not short of challenges to keep them on their toes, as the volume of regulation, tax rules and greater transparency demands, among others, continue to ramp up with every passing year. This is especially true, it seems, in Europe.
Add to that a more unstable economic and geopolitical climate globally, particularly over the past 12 months, and private real estate fund managers are right to harbor concerns about the potential impact on their businesses and investment activities.
2. Domicile elites
Where a fund manager chooses to hang their hat is an even more critical decision amid a tighter regulatory and socio-economically tense climate. That is likely why managers largely continue to gravitate toward jurisdictions perceived to offer stability and predictability.
The Cayman Islands, Delaware and Luxembourg are the clear first choices, considered to offer optimal regulatory and tax frameworks and business conditions. But, as the domicile analysis within highlights, there are indications that their stranglehold may come under pressure in years to come.
The domicile whose long-held dominant position is currently being shaken is Cayman Islands. In February, the offshore haven found itself on the EU’s list of non-co-operative jurisdictions for tax purposes.
For managers looking to raise capital from EU-located investors, this is problematic with one commentator reporting that managers have had to switch domicile “literally last minute” because they can no longer use Cayman.
4. Onshore vs offshore
While Cayman is soon expected to find its way back onto the EU’s good tax books with the introduction of a new private funds law, its current status in the region harks to a wider debate about whether more managers will turn longer term to onshore options as some investors grow more “nervous” of jurisdictions “perceived as unregulated,” says Gavin Anderson, partner at Debevoise & Plimpton.
Delaware and Luxembourg are most primed to strengthen their hold as a result, but other island jurisdictions like Jersey, Guernsey and Ireland are also positioning themselves to sweep up business from Caribbean domiciles marked, rightly or wrongly, as tax shady.
Yes, we are all weary of it, but the possible repercussions make it unavoidable. As we hit the home stretch of 2020, a no-trade deal scenario now seems a very likely outcome. Not only could this be a “drag on investment,” as one commentator aptly puts it, it could also force a domicile rethink, particularly for UK managers looking to access capital in Europe.
Jersey Finance’s director of funds, Elliot Refson, reports some managers have already moved AIFM structures to Luxembourg and Ireland in anticipation of the passport arrangement ceasing. Meanwhile, Jersey and Guernsey are looking to capitalize on their geographical position to act as a vital bridge between the UK and continental European markets. But the UK government’s planned review of the fund regime implies the country is also positioning itself as a serious domicile contender.
The domicile landscape could have a much wider set of players.
6. Non-financial risks
Since the global financial crisis, assessing the impact of financial regulation like AIFMD, BEPS and FATCA on private funds has been second nature to compliance experts. But there are new areas impacting real estate investment, namely ESG, tech and big data.
With these come a whole new set of risks factors. Are buildings meeting the latest environmental and health and wellness standards? Are managers complying with data privacy and protection? Covid-19 has only highlighted the importance of being on top of these risks. More, not less, rules and regulation on these issues is surely on the cards.