While the ancient proverb states that ‘all roads lead to Rome’, when it comes to asset owners and the structuring of their investment holding vehicles, one could say that ‘all roads start in London’.
According to our recent research examining the rise of private capital, London is ranked as the top jurisdiction in Europe and the second most preferred jurisdiction globally behind the US for asset owners to set up their private investment holding structures.
Despite fears that, post-Brexit, the UK would lose its place as the favoured European jurisdiction by asset owners, these concerns have proved to be unfounded. The growing emphasis on ESG and sustainable investments has further supported the City in keeping its crown as the champion of asset owners, with proposed regulation from the UK’s Financial Conduct Authority (FCA) creating an industry-wide standard for sustainable investments.
Asset owners, or investors who own the underlying investment, have a markedly different risk profile and responsibilities than investors who are investing money on behalf of someone else. Under the overarching ‘asset owners’ umbrella, asset owners can be defined as sovereign wealth funds, endowments, pension funds, insurance funds, as well as ultra-high-net-worth individuals. They tend to invest directly or participate in co-investments, rather than via a fund, meaning that they have different requirements when it comes to structuring their private investments and settling on a jurisdiction.
When it comes to choosing a jurisdiction, London has been the preferred choice for asset owners for decades. The reason as to why is straightforward: asset owners globally love to do business with London. There is a certain level of experience and sophistication of financial pedigree in London that asset owners can’t find anywhere else. The FCA is very pro-business and keen to engage closely with institutions to ensure that the UK’s regulatory framework strikes the right balance between protecting asset owners and ensuring ease of investing.
London also provides asset owners with a plethora of options for external providers and advisers. From law firms who provide legal documentation when investing, to intermediaries who facilitate investments, and outsourced providers who support structuring a fund.
Brexit has been a regulatory headache for non-EU alternative investment fund managers (AIFMs), who have had to get to grips with constantly changing regulations in order to continue targeting European investors. But for asset owners, who are either making investments directly or alongside other asset owners and are not setting up a fund, Brexit hasn’t had the same impact. As they aren’t marketing a fund to European investors, asset owners are not required to have passporting abilities and therefore don’t need to adhere to either the National Private Placement Regime (NPPR) or the Alternative Investment Fund Managers Directive (AIFMD), meaning that they have little to no red tape.
For asset owners, investing with ESG principles in mind and making sustainable investment decisions is of increasing importance. According to a recent FTSE Russell survey of asset owners, 90% of UK asset owners and 97% of EMEA asset owners are implementing or evaluating sustainable investment principles, which is in comparison to the 45% of US-based asset owners making sustainable investments.
Undertaking thorough due diligence is critical for asset owners before investing in assets as they have 100% of asset exposure, so need to ensure that all investment decisions are the correct decisions, and London has positioned itself as the capital of the green revolution, with an increasing amount of authority and expertise around ESG and sustainable investments.
Further to this, the UK government has set out new Sustainability Disclosure Requirements (SDR) for asset owners as part of the government’s reforms to create a greener financial system; a move that has been especially welcomed by asset owners who want transparency. The SDR will introduce a system of disclosures and sustainable investment product labels that will create a standardised product classification and labelling system, which will serve to encourage sustainable investing, and discourage greenwashing.
While investment decisions may lead asset owners to invest in companies and sustainable investments that are located in a variety of different countries, when it comes to setting up the investment itself, all roads start in London, which is something that even Brexit won’t impact.
This article was originally published by Funds Europe.