Tried and tested

The human tragedy and economic turmoil of COVID-19 continue to challenge us, with no clear end in sight and a possible second-wave to come as we enter winter in the Northern Hemisphere. Having lived with so much disruption and challenge throughout much of 2020, we can reflect on what we’ve learned from these difficult six months, and what the future holds for our asset management industry.

Globally, asset managers have faced intense market volatility and resulting investor anxiety. Yet, the nature of the assets under administration (AuA) here in the Channel Islands have largely cushioned it from the instability. In contrast to many other centres worldwide, we’ve certainly not seen any significant level of fund redemption requests, and if anything increased allocations to the alternative asset classes which the Islands support.

One of the main reasons why is that the return horizons for CI funds are largely long-term – most are closed-end (typically 7-10 years). As a result, investors can ride out the kind of short-term market fluctuations we’ve seen in the past year, both the highs and the lows. The main focus are “Alternative” assets, especially private equity and real estate. The hard to monetise nature of such assets makes them less susceptible to disruption, as investors seek to generate liquidity by selling more liquid fund positions.

Pressure on investments

Nonetheless, the impact on the underlying investments has been challenging. While the slowdown has affected all sectors, travel, hospitality and entertainment, which are a key focus for many of the Channel Islands’ private equity funds, have been especially hard hit. Fund managers have been working around the clock to help shore up portfolio companies and safeguard the safety and wellbeing of their employees. As oil prices have fallen and only partly recovered, this has also been an especially trying time for funds with significant exposure to the oil industry and services that support it.

In turn, many areas of real estate have come under pressure. This includes the office, retail and hospitality premises that have spent much of 2020 lying virtually empty, and with little confidence in these sectors as to when a corner will be turned. The impact on funds is heightened by the fact that rental income is often linked to the performance of tenants. With many of these occupiers facing severe falls in turnover, renegotiation of tenant agreements can often be the only way to stave off default. Further challenges are evident in recent growth areas such as student housing, which given travel restrictions and lockdown rules, faces significant short-term disruption and questions over the long-term prospects for foreign student numbers.

Lessons from the financial crisis

Yet, if some investments have faced difficulties in the short-term, a key lesson from the financial crisis was that quality assets invariably outperform even if others falter. As a mature centre for alternative investment, the Channel Islands is home to many of Europe’s leading managers, each with great talent, considerable financial resources and excellent investor connections. In a mirror of the 2008-09 Global Financial Crisis, managers of CI funds have been able to draw on these advantages to secure significant capital to support their investments and ensure they are well-placed to capitalise on opportunities as the market turns.

The importance of quality can also be seen in the investments themselves. Private equity portfolios that are weighted towards companies with strong long-term performance and potential will continue to deliver over the long-term. Similarly, quality real estate assets such as commercial developments in prime locations or student housing serving elite universities will continue to sustain strong demand.

The other big lesson from the financial crisis is the importance of robust governance and regulation in attracting and sustaining investment in times of market instability. This is one of the inherent strengths that have attracted funds to Guernsey and Jersey and will be more important than ever in the months and years ahead.

Sustaining continuity

Alongside the investment challenges, Channel Island funds and fund service providers have had to deal with the operational upheaval of the rapid shift to remote working. Again, it’s really good to see how well they’ve taken this in their stride, with activity levels remaining high. The response of the government in each Island has been different but equally effective in supporting this important industry sector and ensured the industry remained “business as usual” throughout a period of significant disruption.

This is a testament to well-established business continuity plans, the adaptability of employees and the strong controls and tech infrastructure needed to support this. One of the particular advantages in a time of travel restriction is that CI Fund boards, asset management operations and service support are all here on their respective island, rather than being stretched out over multiple locations.

Changes ahead, but prospects strong

So, what does the future hold? Well, we’re not out of the woods by any means and the future remains uncertain on many fronts. Globally, economic recovery will take time. In turn, disrupted earnings mean that valuations could remain volatile through the remainder of 2020 and into the future. Public markets may also take some time to fully factor in the current crisis and concerns exist as to whether the “real economy” is fully reflected in current index levels.

Yet, having demonstrated its resilience, Guernsey and Jersey are in a strong position to sustain the long-term growth in alternative AuM. In 2018, we at PwC forecast that AuM would double to reach around $20 trillion globally by 2025¹. There's no indication that this crisis will alter this growth trajectory. If anything, it could heighten the attractions of the returns and diversification of risk which alternatives can provide.

Yet, the world has been changed and investment strategies will need to reflect this. For example, recent experience has accelerated the shift to remote working and online retail. Such trends have clear implications for real estate demand, but also create openings for innovation. The already growing focus on environment, social and governance (ESG) factors is also set to increase. Immediate priorities include supporting the economy and sustaining investment, as businesses and jobs come under threat. In the longer-term, the lessons from the emergency could increase attention on other threats including climate change and its impact on health.

From strength to strength

COVID-19 crisis has been a bruising experience. Yet, it has also underlined the stability, capabilities and adaptability of the fund management industry here in the Channel Islands. We have a tried and tested model that has shown that it can perform well in tough times, as well as good. These firm foundations should give us considerable confidence in the future.

Source

_{(1) https://www.pwc.com/gx/en/industries/financial-services/asset-management/publications/asset-wealth-management-revolution.html}