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We are joined by Daniil Shapiro, Director of Product Development at Cerulli Associates, to discuss their new report commissioned by Guernsey Finance. The report explores the trends in domiciliation decision making amongst U.S. managers and private capital firms, and advises what they should look for in a prospective fund domicile.
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Brandon 0:03
Hello and welcome to the We Are Guernsey podcast where we bring you interviews with leaders from the global finance industry, as well as news and developments from Guernsey's financial services sector. My name is Brandon Ashplant and I am Senior Strategy and Technical Executive here at Guernsey Finance. Guernsey is a leading global finance centre. The success of the industry here is underpinned by economic substance, political stability, and asset security and we are committed to the cause of sustainable finance. To find out more about Guernsey's success in sustainable finance, tune into our sister podcast, the Guernsey Green Finance Podcast. Today though I am delighted to be joined by Daniil Shapiro from Cerulli Associates, a Boston Massachusetts-based research and consulting firm specializing in the asset and wealth management industries. Cerulli was commissioned by We Are Guernsey to write an objective review into how US asset managers looking to raise non-US capital for alternative investment strategies and making domicile decisions with an analysis of how common trends and best practices are playing out. The report will be available in the coming days. Daniil is a CFA charterholder and also holds the Certificate in Investment Performance Measurement, the CIPM. Starting his career at HSBC, he is now Director of Product Development at Cerulli. So without further ado, welcome Daniil.
Daniil 1:27
Brandon, thank you very much for having me on the show. Delighted to be here today to speak to our researcher.
Brandon 1:33
Good stuff. So thanks for joining us. Firstly, just tell me a bit about yourself and your career to date.
Daniil 1:40
I started my career at HSBC working in the US investment bank, I held a number of risk and compliance roles. And then I moved into more of a set of alternatives facing roles. So specifically, I supported an alternative ETF issuer in the US that was focused on liquid alternatives. And right now I am a director that's Cerulli Associates with their product development practice. And I'm really focused on how asset managers are building out their alternative investments platforms.
Brandon 2:14
Brilliant. So you were instrumental in not only conducting the research, but also authored the white paper, which is just about to be published, which explores the trends around funds domiciliation and certainly the trends in the US market. Can you talk me through the research phase and how you actually went about it?
Daniil 2:34
The purpose of the research was for us to gain an understanding of how alternative investment managers were approaching the domicile decision. And the ultimate goal here was, of course, to publish best practices for managers that would help them make these decisions going forward. And as we'll discuss throughout this conversation, this decision is becoming more and more important for them, so there's lots to cover here. We held more than 20 executive interviews with quite a wide variety of professionals representing different functions across a wide range of alternative managers. So these include both some of the absolute largest alternative investment managers, private equity, private credit firms in the world. And at the same time, we also spoke with a number of traditional managers who are also some of the largest in the world, but they are nascent to the alternative investments industries that are trying to build out those alternative investment product lines in real time. So we went at the research by creating a number of hypothesis statements, things that we thought were playing out in the industry, and we tested those hypotheses throughout these conversations.
Brandon 3:38
So did you know much about Guernsey prior to conducting the research and being commissioned to do this project?
Daniil 3:45
I would say that I had very limited geographical knowledge of Guernsey prior to these conversations. And I think that I was less familiar with Guernsey as a fund domicile. I think it's easy to be familiar with fund domiciles when something there goes wrong, and it becomes the centerpiece of a news story, or a Netflix documentary. You're less likely to be the subject of a Netflix documentary, in the event that you are an established domicile, which has a strong regulatory framework, and maybe doesn't come up in the news or an AML issue or similar. So to that degree, Guernsey just flies under the radar a little bit. And that's probably what led to a slight lack of knowledge on my end.
Brandon 4:38
So what you're saying is it's actually a good thing that you hadn't heard of us because it means that there's less scandals and so forth.
Daniil 4:45
Precisely, keep doing your job and you're less likely to end up on Netflix.
Brandon 4:49
Certainly. So just before we discuss the research and some of those key trends that you have identified, just explain why is it so important that those managers and those practitioners and so forth choose the correct domicile, why is it so important?
Daniil 5:06
Well, I think one of the key themes that we've just heard through so many of the conversations that we had is just the growing expenses that are associated with substance regulation. So substance regulation means that you can't just domicile in a particular location, you have to have a business there, you have to have people there, there has to be activity on the ground, you have to use service providers in that location. And the conversations that we had they really indicated that the substance costs were growing, and they were expected to continue to grow. So it's almost like this pressure that's building there, which is making this more and more important. So firms have to make the right decision at the outset. And then it's still possible to redomicile a fund after you've made that selection, and you've set up a business somewhere. But it's still challenging, there's still a lot of costs associated with that. So you have to make the right decisions at the outset and you have to make sure that you have the right process for making those.
Brandon 6:05
Certainly. So jumping straight into things now, I'd like to discuss in greater detail some of those findings from the report. And of course, the focus is on assessing the trends in US Private Capital Firms. What are some of the clear trends or recurring themes that you identified amongst us alternative investment managers looking for a jurisdiction in which to domicile? What jurisdictional qualities do they typically like to see?
Daniil 6:34
I would argue that all the alternative investment managers that are trying to find a domicile, they're all looking for some of the same common factors. They're looking for what they perceive as safe jurisdictions that have well established legal processes and frameworks that are going to meet their clients requirements in terms of funds structuring. So that means the right amount of rights for both themselves as the firm and as well as their clients. They're looking for locations that are going to be predictable from an expense standpoint. They're going to want to avoid any kinds of surprises, they're going to want to be able to work with the regulators in that particular location. So it's a number of different themes that speak to the safety of that domicile. I kind of hinted at AML risk, that's certainly something that they want to avoid, they want to avoid any kind of perception of being domiciled in a location that is labeled as a tax haven. That's particularly critical probably for European investors, they kind of want to avoid anything that maybe has come up in the news a little bit too much.
Brandon 7:45
And what challenges do US managers and those US Private Capital Firms often face from the jurisdictions that they traditionally choose to use?
Daniil 7:55
Well, it really comes down to when we looked at the broad range of these domiciles. And we've evaluated both some of the largest, best known domiciles, so we're going to speak to jurisdictions such as Ireland, Luxembourg, and then you have maybe what we would argue are more flexible jurisdictions such as the Guernseys, the Jersey's, the Cayman Islands, for example. I think when you look across the broad spectrum, what happens is that some of what are labeled as the more sophisticated ones also happen to be more expensive. So to that degree, there is a little bit of a trade off in terms of domiciling in some of those locations versus not only are they more expensive, they also end up being more burdensome from a regulatory perspective. So it means that it's more expensive to meet those regulatory requirements, it may harm the speed to market of a particular fund, being able to raise capital. All these things really come to come into play. And then the asset manager themselves, they have to make that decision in terms of the right set of trade offs. And in terms of selecting what works best for them.
Brandon 9:09
And you identified the cost point there and how some jurisdictions are perceived to be a higher cost. From the report, it certainly seems that Guernsey has an ability to provide smaller managers with that lower cost and that speed to market that some of the domiciles perhaps don't. Would you agree with that assessment?
Daniil 9:33
I think that's absolutely right. So it depends on what the manager is and what their business needs are in the markets they're trying to access. I think I'd almost take a step back here. You have some managers probably ended up in the domiciles where they are because they've already had existing businesses there and this was a legacy decision that was made. But some of the managers that we spoke with are new to this alternative investments ecosystem. So they're at a much earlier stage in the process of figuring out what they can sell and to whom. And from that perspective, it may not make sense for them to go out and establish substance in one of these more expensive jurisdictions. And that takes place because they don't necessarily know which exposures they're going to sell to which clients. So they actually benefit from that more flexible approach that comes from a regime such as Guernsey. I think one of the most interesting conversations we've had, we had a senior executive highlight to us that they ended up domiciling in a very well established domicile, that is a very common domicile for Large Asset Managers such as themselves. But even before they were able to start raising money for a particular fund, they were immediately hit with a very wide range of unexpected fees. And every single time there was one of these requirements that went in, it would cost them let's call it a quarter of a million dollars in legal fees. And this was before they were able to start bringing money into that particular fund. And they were really disappointed with that experience because they just weren't raising that capital there yet. And at some point, it just became a little bit unbearable for them. And maybe they're going to be able to manage this as a Large Asset Manager, they'll be okay. But then the question that comes into play here is how does this impact a range of midsize managers? So these are the managers that are still quite substantial in the assets they're able to raise, but they're not those largest managers in the world. So it's going to be a little bit more difficult for them to both get that regulatory attention in order to kind of smooth out some of the quirks that come up throughout the process. And they're probably going to feel the impact of those fees a little bit more.
Brandon 11:56
Certainly. And then from the cost analysis research that you conducted, it notes in the report that Guernsey is viewed as a lower cost alternative to the likes of Luxembourg and Ireland, and has quicker more responsive regulation, or regulatory processes, with faster speed to market as we touched on there. But then when compared to the likes of Cayman who are, of course, grey-listed by the EU. Guernsey has distribution to the European countries via the National Private Placement Regime. So, given all this, do you think these wide ranging and in many ways, unrivaled factors are well-known amongst those US private client firms and those US managers?
Daniil 12:39
I think there's more awareness that needs to take place amongst a wider variety of managers. And this is exactly what we're calling attention to, by publishing this white paper. We want managers to use a framework for making these decisions. And we want to make it clear throughout this framework that every one of these domiciles has specific costs, and they have specific benefits. So there's a cost benefit analysis that needs to take place. And these domiciles are all on a little bit of a spectrum that we lay out in the white paper, in terms of what you're getting as a result of what you're paying for. So that exact kind of framework is what we want to draw attention to. And we want managers to take a look at this. And we want them to say wait a second, there are these other domiciles we could potentially be using in certain use cases, because those could be most beneficial to us from that cost management perspective.
Brandon 13:37
Certainly. And the report makes mention of the rise of alternatives and in two forms really with both legacy alternative manager firms and traditional managers looking to distribute alternatives. They are looking to offer alternative exposure to both private high net worth investors and institutional investors. The report opens with this, and it kind of sets this wider macroeconomic scene if you like. Can you just talk me through what that details?
Daniil 14:08
Yeah, I would argue that alternative investments right now are far more important than they were before for a wider range of asset managers. So a lot of these asset managers, alternative investment shops have been in this from the beginning. So these are those firms that are traditionally private equity, private credit, private real estate, private infrastructure managers, so they were building these businesses all along. But now you also have traditional managers, which are entering that field as they're looking at their own businesses, and they're seeing maybe passive investments or thinking about index funds. They're now just charging incredibly low fees, and it's all very, very fee constrained. And even though they are sustainable businesses, it just makes it that much harder to make a healthy profit in those businesses. So there are more there are more firms that are looking to offer alternative investments, which means there's going to be this greater fundraising for alternative capital, there's going to be this greater build out of alternative exposures, which all kind of raises that supply of product. But on the other hand, you also have greater demand for alternative investments. So that's where you have a wider range of investors that are interested in purchasing alternatives. So alternatives, heavily are still purchased by institutional investors. But you also increasingly have that high net worth sleeve that's appearing and taking more and more market share for itself. So you have these firms that now are targeting yield alternative managers, which are targeting a wider client base on their own. So this is kind of another complexity that arises there. Because before, when you were looking to raise capital, all you have to know is maybe what a few large institutional investors were looking for. But now you also have to consider the investor preferences of a greater variety of maybe even individual investors, and what they're most comfortable with and their requirements. So this all just adds complexity to this domicile decision, because you have a greater variety of firms with greater variety of products and exposures, looking to serve investors, which have created a variety of needs, and the greater variety of preferences. So all these things are really coming into play here.
Brandon 16:24
And I have to ask, do you think Guernsey is an attractive domicile when it comes to this asset class in the minds of those based in the US?
Daniil 16:33
I think it absolutely is, as we discussed in the white paper, there is absolutely a value proposition for a jurisdiction such as Guernsey. I would argue that familiarity from a wider range of US managers should increase here. And we certainly expect it to. I think one of the key benefits that Guernsey has here is that attractive value proposition in terms of the trade offs when it comes to costs, but also the specialisation that it offers, so init's that existing ecosystem of service providers. We haven't talked that much about service providers in this conversation and that's probably taking place because service providers, they really stand out when something goes wrong. But having access to that quality labour pool, and its ability to support a range of what are pretty sophisticated exposure, that's a very significant differentiator, it's a very significant benefit that Guernsey is able to bring to the table here. So I would argue that's certainly another very important advantage for such a jurisdiction.
Brandon 17:48
And I just like to now turn the focus a little bit to end investor preferences. What did you discover in the research in terms of that? Are there any commonalities between investor type on say, where they're based geographically and so forth?
Daniil 18:05
Yeah, this is an interesting one. And there's probably room for an entirely separate podcast on this in terms of what folks are looking for. But yeah, we've seen examples of both end investors and, let's call them for the purposes of this discussion the end investor is the investor who's making that investment. So let's say if it's a large pension plan in Europe, for example, they may well have very rigid preferences about where their fund is domiciled. So they may well want it to be a fund that's domiciled in their jurisdiction, for example. They may want to become very, very specific with regard to where that particular fund is domiciled. But there may be a greater flexibility amongst a wider range of investors. They probably still want either an EU or a European domicile. They may, as we discussed earlier, want to avoid a jurisdiction like Cayman due to perceived AML risk. Confidentiality plays a really important role. We're thinking about maybe even going beyond European investors, when we're thinking about Asian investors, they may well prefer a domicile that is in Asia, but they're probably very comfortable with a European domicile. And going a step beyond that they're also from our conversations very comfortable with a domicile like Cayman. What they wouldn't want to do, on the other hand, is domicile maybe in a jurisdiction like Delaware, because they may have confidentiality concerns about that being a US jurisdiction. So there are a lot of very, very interesting considerations that come into play here.
Brandon 19:52
Certainly. And you mentioned or you certainly touched on earlier in the conversation, the point regarding economic substance. And the report certainly mentions that domiciliation decisions are being made in an environment in which substance does carry greater heft. Certainly more than ever before, perhaps it's probably fair to say. How do you think Guernsey compares to other jurisdictions on this particular issue?
Daniil 20:20
I would argue this is where that regulatory flexibility really comes into play. If maybe the ability to work with a regulator in order to maybe receive a little bit more support throughout the process, I think that has a lot of benefits to the managers that are domiciled in Guernsey. Guernsey is not known for being the most expensive of the domicile locations. So that's certainly going to be a benefit to a substance conversation. At the same time, I would argue Guernsey has a lot of benefits when it comes to the substance conversation, but the other consideration here is that if substance costs are growing, the downside here is that it could force some managers to play to a winner takes all effect and domicile in a particular location and take that hit. That's probably the opposite of what we're arguing for in this white paper, which is that they need to be really evaluating the comparative advantages of every one of these jurisdictions. There's certainly that element of winner takes all that comes into play here.
Brandon 21:32
Yeah. And just to finish up, one point I found particularly interesting, and the listeners can read this for themselves once the report has been published, of course. And it's the summary conclusion actually, in which the report makes mention that while some asset managers, and private firms might make hasty decisions on perceptions of what they think they know about jurisdictions and often end up choosing jurisdictions that, other than the region, perhaps look to, this can actually end up being a costly process in the long term and actually lead to working with an overly burdensome regulator, possibly. How do you think Guernsey can market itself loudly and clearly to those managers and firms based in the US?
Daniil 22:18
I think what it is is simply maintaining awareness of Guernsey as a jurisdiction for domiciling these funds, and to continue to bring attention to its well-built ecosystem which already supports a wide range of these types of private capital products. And also to continue to speak to its advantages. So for example, something unique that differentiates Guernsey here is the fact that a lot of the publicly listed Private Capital Funds o the London Stock Exchange are domiciled in Guernsey. So that's another competitive advantage. It's something that the jurisdiction has experience in supporting, and that's certainly something that potentially also broadens out the capital base, that investor base, it's another way to differentiate the investor base for some of these Private Capital Managers. So I would argue that from Guernsey's perspective, I think the best things to do here are to continue to ensure the awareness of its competitive advantages as a jurisdiction and to continue to showcase itself on that spectrum, in terms of maybe being a little bit in the middle in terms of costs, but perhaps being able to showcase the high quality of labour and sophistication that it's able to offer.
Brandon 23:51
Excellent. Well, thank you very much for joining us on the podcast today Daniil.
Daniil 23:56
Thank you very much for having me.
Brandon 23:59
Excellent. It was fascinating to understand some of the key trends you discovered whilst conducting the research, but also to understand how Guernsey compares with other jurisdictions, particularly in the minds of US managers and private firms. Thanks also to you for listening. If you enjoyed this discussion, we have a whole backlog of interviews on the We Are Guernsey podcast channel, you can check them out by searching for We Are Guernsey on your preferred podcast platform. We also have links to Daniil and Cerulli Associates in our show notes, so check them out to hear more from them. The report titled Fund Domicile Selection Best Practices Enabling Global Alternative Asset Growth will be available to read on the Cerulli Associates and We Are Guernsey websites respectively in the coming days. To find out more about Guernsey and its specialist financial services sector, head over to our website WeAreGuernsey.com We look forward to welcoming you back on to the podcast but until then, it's goodbye from Guernsey
Transcribed by https://otter.ai