Guernsey Fund Forum 2015: Key Points

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Operations
15 May, 2015
  • Guy Hands of Terra Firma outlined his views on where he saw the private equity industry going. He acknowledged capital raising was a difficult undertaking and many small shops were struggling to raise meaningful capital. He said the big private equity houses such as Blackstone were in an all powerful position that could not realistically be challenged. His advice to small to mid-sized private equity houses was not to try and emulate those big players, but to recognise they will earn less money although that does not mean they won’t be successful. He said it was essential firms have skin in the game, or at least more so. This is one area where SME private equity shops can differentiate themselves from bulge bracket players.

 

  • Key issues investors are discussing when meeting managers is that they want exposure to alpha and not beta, which appears to be what a lot of large players are providing. Other issues SME managers need to be conscious of is whether their investors have confidence in them that they can effectively execute a deal. Small shops have key man risk, and if a key employee leaves at an inopportune moment, this can wreck deals. This is obviously a problem large houses are better placed to deal with. There is also pressure on the traditional private equity fee structure, he said. There is a huge amount of dry powder available at the moment, and investors appear willing to take on risk through higher risk ventures.

 

  • Base Erosion and Profit Shifting (BEPS), an OECD initiative, is going to have a significantly challenging impact on the offshore fund model. A Clifford Chance paper highlights funds and special purpose vehicles (SPVs) reliant on tax treaties to receive income from debt and equity investments free from withholding tax will be impacted. BEPS does not exempt fund managers and actively targets organisations that shift profits to low tax countries or use double taxation treaties to minimise their tax bills. BEPS will require corporates to have a material reason or to have a substantive presence if they wish to operate in a low tax jurisdiction.   While the OECD’s intention was to target large multinationals with imaginative tax practices, it has unwittingly ensnared fund managers (albeit those not regulated under UCITS). The OECD is an organisation many lobbyists do not understand as it is not a regulator per say but a quasi-intergovernmental think-tank. As such, there has been little transparency into how it is formulating the rules around BEPS.

 

  • The AIFMD has benefited jurisdictions such as Guernsey because the national private placement regimes (NPPR) have worked as planned, panellists argued. However NPPR could be shut off in 2018 which could challenge Guernsey’s position as a fund domicile. It could force managers to either become AIFMs or to reside offshore and focus on US/Asian investors.

 

  • Basel III capital requirements are going to force banks to retreat from lending and this could provide an enormous opportunity for non- bank lending. While non-bank lending is relatively common in the US, it is less so in Europe. As such, it is to be expected that a growing number of private equity, hedge funds and other non-banks could enter the fray. 

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GuernseyFund Forum

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