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26 August 2020
In a news cycle that can seem relentlessly gloomy, there are some positive stories to be told and the increased activity in private equity is one of them. This article looks beyond the financial services industry at the wider social and economic benefits of this growth.
Anyone who has even a passing interest in the Jersey financial services sector will have seen positive news and results for the funds industry in general and the private equity sector in particular.
Jersey's private equity industry has seen a 19% year-on-year jump in business according to recent Jersey Funds Association statistics. The Jersey private fund regime goes from strength to strength, with more than 350 having been established in a few years. This makes for a welcome break from the negative news which dominates the headlines and is often oversimplified to have a single, one-word root cause (eg, Brexit or COVID-19). The truth, as ever, is more complex. There are positive stories to be told among the doom and gloom of the 24-hour news feed and, in the business world, this is especially true of private equity and the impact that it has on a range of industries.
For instance, private equity is becoming increasingly active in the medical and healthcare sector. The aging global population and the fact that many jurisdictions have comparatively fewer workers or taxpayers to support these populations is a newsroom staple, as is the need for investment in long-term healthcare propositions. Private equity funds have actively embraced the sector and there is significant private equity investment in research and development into new drugs and medical devices.
This, in turn, has led to a large number of private equity investments in areas such as technology, software and data. Investment by private equity funds into companies when they are still at a growth stage – which is the core of what private equity does – allows for opportunities which established household name listed companies may find too speculative to invest in and which may struggle to get traditional bank finance if they have no track record and insufficient credit history or cash flow to make regular loan payments.
For a jurisdiction such as Jersey – which is renowned for its good regulatory standards, strong legal framework and high standards of service – the increase in private equity demonstrates that the industry is taking these matters seriously and ascribing a commercial value to them.
Environmental, social and governance (ESG) investing is another positive aspect of private equity news. Many investors are demanding that their money be used in a way which is compatible with these values. These principles are being hardwired into fund documentation and many well-known institutional investors will simply not invest in private equity funds that do not subscribe to this ethos.
Private equity has been subject to criticism over the years and has had a one-dimensional reputation based on the popular perception that it is about buying cheap, loading a business up with debt and then cost cutting or asset stripping. What such convenient clichés ignore is that private equity is a mature market with a huge diversity in operating models and investor requirements.
This simplistic view of something as either good or bad fails to account for these nuances. It provides a better and broader picture to see the benefit that can be brought to Jersey and elsewhere by the appropriate use of private equity money to enhance and expand businesses and help them to thrive.
Jersey is already performing well in the private equity arena and is likely to continue to do so with the many advantages that it offers the industry, combined with its commitment to appropriate regulation and ESG standards which align with what investors increasingly require.
An earlier version of this article was published in Connect Magazine, August 2020 edition.
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