Regulations and Compliance are necessary but risk stifling business and investment; it’s not all bad though, technology and the developing markets provide new opportunities.
Peter Kristensen is a partner in the JP Integra Group (www.JPfunds.com) – a multi-award winning financial services group of companies focused on servicing managers and owners of international private capital. The JP Integra Group offers structuring, project management, administration, corporate and trustee services and a wide range of ancillary services as required on a project by project basis. The Group began life in 2007 as JP Fund Services providing fund administration and trading support services to alternative fund managers and now provides services from offices in Europe (UK and Switzerland), Asia (Singapore) and the Americas (Cayman Islands and USA – a Florida office is scheduled to open in July).
Peter is the CEO of JP Fund Services and his focus is on trading relationships and fund structuring for HNWI’s, family offices, alternative asset managers and their legal, tax and financial advisors.
Peter is also on the advisory board for www.moneymail.me, and acts as a consultant for other companies and financial portals.
SSL: Many thanks for joining me Peter. How do you think that the Private Capital industry makes a difference to us as individuals now, or in the future?
PK: In general terms the Private Capital industry provides a platform to allow efficient allocation of capital on an international basis. We live in a globalised world and investors and managers need providers such as JP Group to facilitate cross-border investment through the creation of private funds, investment and holding companies and asset protection structures. To do this efficiently the Private Capital Industry makes use of the offshore or international financial centres (such as the Cayman Islands) with the ultimate result that capital is allocated to services and industries that employ staff and generate revenues including tax receipts. In the current populist political climate there is little coverage of the fact that efficient deployment of private capital is essential for the creation of employment and the growth in material prosperity. It is not just the private sector that we cater to. People forget that the offshore industry is also used to the benefit of governments, for example, plenty of the US debt is currently financed from offshore financial centres. The lower costs of many goods and services are directly attributable to the operational and tax efficiencies that can be obtained from appropriate international structuring of the private and personal funds that invest in the underlying businesses.
SSL: How has the Private Capital industry developed in the last 5 to 10 years?
PK: There has been a long standing close link between private equity, hedge funds and family offices, but since the global financial crisis in 2008 there has been a noticeable increase in bespoke private funds and structures that require the full suite of management, governance and support services, but which are not looking for the cost and scale of operations typically available to funds with third party investors. This process is ongoing and is one of the drivers for the expansion of JP Fund Group’s services. Another contributing factor has been the increased regulation and capital requirements for international banks which has led to many established financial institutions withdrawing from large sectors of the wealth management market. The wealth management industry is undergoing significant disruption with changes in the old charging paradigms, the rise of passive investments and of “robo” advisers.
I am not saying that the traditional fund business has gone away by any means it is still a significant part of our business and it continues to grow but the focus has certainly changed to larger investment funds as well as private equity and family funds. Funds are either getting bigger or are becoming more niche and bespoke. One of the reasons I think is that family funds and funds tailored to individuals or a small number of investors are not subject to the compounding effects of stringent compliance requirements that larger open ended funds are where the ongoing due diligence multiplied by the number of investors can be off-putting.
SSL – Yes, they are bringing complexity and killing the speed of processes within an organisation; significantly, Compliance and Legal are not part of any company-wide strategy.
PK – There are possible solutions that can aid the situation for investment managers; outsourcing of certain Compliance and Legal functions can dramatically speed-up the corporate processes, significant stress reduction, time and peace of mind can be achieved by outsourcing to companies that do this kind of work for a living.
From a fund perspective, the cost of compliance and regulation has become significant, and it really means that it affects the net performance of the fund and can have a material impact. Compliance and Legal are essential components of the private capital industry and although they may not be part of any fund or manager’s strategy as such, they are crucial to the successful execution of a manager’s strategy. There are ways of reducing the impact by contracting in services and also by outsourcing a number of the necessary capabilities; for example, within the group, we handle fund and corporate structuring, the establishment of trusts, fund and trust administration and legal project management.
From our company perspective, JP Integra Group has had to make significant investment in staff, IT and operating processes in order to meet our own regulatory obligations so we have empathy with our clients. We have a significant Legal and Compliance capability, which is essential when providing management, fiduciary, administration and trading support to client entities that may face regulation in several jurisdictions. On the positive side, the increase in regulation and information sharing has provided niche players like ourselves with additional service opportunities and income streams.
SSL: So, how do you think the industry will look in the next 5-10 years?
It could be very interesting as we are likely to be going through some very dynamic changes and it would be great to have a crystal ball.
Technology will obviously have a big impact on the investment industry both in terms of how investments are made and what people invest in. I see a streamlining of processes by using technology for verification and identification and I also believe investments into technology will be a big driver in the Private Wealth investment area. Who would have thought 25 years ago that we would have smart phones that are hand held computers, but I believe there is more innovation to come and there is no lack of technology driven entrepreneurs and willing investors.
The developing world will become a major player in our industry. For example, we are seeing significant investment by Private Capital investors in a number of African nations, many of these investments are long term infrastructure projects which will lay the foundations for future growth and help these countries grow and prosper. But interestingly, some of the developing economies are also embracing Fintech and new world banking; in Africa, for example, mobile banking has substituted traditional banking infrastructure – there aren’t corner branches to visit, nor computer systems to allow traditional banking services so a banking subculture based around mobile phone technology has become commonplace well before the developed world has embraced it. Indeed, some of the micro financing facilities in places like Bangladesh which originated from small business loans to women as a way of stimulating the business economy, were in many ways precursors to the popular Western World Crowding Funding trends we see today. These are just a couple of examples of the financial dynamism in the developing world that indicate significant potential investment opportunities in Africa and parts of Asia.
The USA is now, and I think will continue to be most important nation in the investment world over the next decade, they are 5 years ahead of the EU when it comes to regulatory structure, they are more commercially-orientated and have significantly fewer cross-border problems. In addition to the enormous domestic market, the USA attracts a lot of international capital. For private capital Miami will continue to be a leading centre for the raising and management of capital for international family offices and wealth managers, especially for Latin Americans. On a personal level I am relocating to Florida this year so I hope that my evaluation of the development of the business is correct!
In contrast the old world has stagnated in recent times and in the EU in particular it’s hard to see improvement anytime soon. If “Brexit” were to happen and the UK leaves Europe it could have a very direct impact on the fund industry, as for example the UK would no longer be constrained by the well-meaning but overly burdensome regulations of the EU AIFM Directive which would allow the regulators to cherry pick the sensible regulations while discarding others. They could set up a very competitive fund centre, and even negotiate an offshore-style arrangement in London, which could threaten the existence of Ireland and Luxembourg as Private Capital centres. As a result, nearly all of the European fund managers could be outside the EU.
SSL: What is the single most important issue for the industry, from a business point of view?
PK: Obviously transparency, secrecy, tax evasion, hiding criminal activities etcetera are a major focus now and will continue to be in the future. Investors and investment managers realise that avoiding their personal taxation obligations is not an option, but I believe the single most important challenge to the industry is overregulation; there is a risk that it will come to the point where nobody can do anything because of rules and regulations.
SSL: Following compliance is necessary, but is it limiting innovation as the rules are made so strict?
PK: Absolutely. Regulation is critical but it has gone to extremes and needs to find the ‘middle ground’. The regulation that is in place to give structure to the system is often having the effect of stifling investment due to unintended consequences. Many financial institutions (notably brokers and banks) are taking financial de-risking measures coupled with a box-ticking compliance approach that is stifling the launch of new projects. For understandable reasons, principals and their advisors are taking a cautious approach which can result in delays, a lack of cooperation (e.g., due diligence checks are repeated by each service provider) and sometimes the death of a project as opportunities pass by and entrepreneurs lose patience
SSL: We know from experience that is can be more difficult to sell to Legal than to sell to a client!
SSL: What would be your 3 most important Must Win Battles for the industry, and for JP Integra Group?
- PK: The adoption of common reporting standards and tax information sharing amongst the dominant economies and the international financial centres should be a very positive development. The challenge will be to ensure that the process of sharing information is done in a manner that facilitates appropriate fiscal capture rather than becoming an impediment to cross-border activity. The ‘battle’ is not with the regulations but rather with the operation of the international cooperation regime that they create.
- Security will be a key challenge for everyone. Theft of data and money is now largely a digital rather than a physical crime. Prohibiting cyber-attacks is a core responsibility of all participants in financial services as without confidence and trust in the integrity of the guardians of client money and personal data, investment will cease.
- For JP Integra Group, we are excited by the possibilities to provide solutions to those who are engaged in wealth management via international investment projects. We are expanding our service lines and that will involve all the usual challenges of a growing business. However, there are major and diverse political and economic threats that could make the next twelve months a period of seismic change. Adaptability will be key as with threats come opportunities.
SSL: Peter, thank you.