Erin Moffat explains why later living could be the next build-to-rent (BTR) phenomenon, exploring the market dynamics, ESG angles, and the challenges and opportunities that lie ahead.

As the global population ages, the demand for innovative later-living housing solutions is reaching unprecedented levels. While the later living sector is currently undercapitalized, offering immediate investment opportunities, this seems likely to be a temporary condition.

According to Knight Frank, a significant shift is on the horizon, with 67% of investors without capital currently deployed in the sector planning to enter the market by 2028. This means now is an opportune moment for investors looking to position themselves in a sector that may be on the cusp.

This burgeoning interest is not solely driven by the compelling demand-supply imbalance, but also by the sector’s unique Environmental, Social, and Governance (ESG) proposition.

The ‘S’ in ESG is particularly salient. Effective later-living products cannot just be about constructing physical spaces; they need to establish communities to support those making significant lifestyle changes. This is a long-term process that not only fulfills a social imperative but also contributes positively to operational efficiency and EBITDA. Take New Zealand as a case in point, where operators of later living communities such as Oceania Healthcare and MetLife Care are publicly listed companies. This level of maturity in the sector is a strong indicator of its investment viability.

However, the road to capitalizing on this opportunity is fraught with challenges. The planning process is a significant bottleneck, often out of step with modern ESG considerations which is a hurdle for investors, who are increasingly ESG-conscious. Moreover, fire regulations, a topic currently under intense scrutiny, offer another layer of complexity but also an opportunity to innovate for safer and more sustainable communities.

The sector’s challenges extend to public perception and local governance. There’s a clear need to embed specialist later-living housing into local planning guidelines, with a view extending as far as promoting senior living as a solution for housing crises in the Western world. Central to this is the concept of “right- sizing,” which encourages older generations to transition to suitable later living facilities earlier, thereby freeing up family homes for younger occupants. However, this journey to later living can be complicated for participants by confusing processes and terminology, highlighting the key roles of multiple stakeholders, including residents, their relatives, and facility operators.

Addressing the Bisnow conference in September 2023, Martin Earp, CEO of later living specialist Riverstone articulated a vision that captures the evolving dynamics of the sector. They emphasized that today’s generations are not merely aging but ‘actively aging,’ thereby redefining the very concept of retirement from passive to active. While the sector is increasingly incorporating hospitality-inspired elements, Riverstone stressed that the quality of space alone is not enough. The focus must shift towards community building, which is paramount for the well-being of residents.

To broaden this sense of community, Riverstone is also reaching out to the relatives of potential residents.  They are offering a ‘try before you buy’ rental model as a way to alleviate the common apprehensions around making the transition to later living facilities. This approach acknowledges that emotional attachment to family homes remains a significant barrier to entry. It also underscores the need for a comprehensive educational effort to inform potential residents about the manifold benefits of later living communities, beyond just the appearance of the physical environment.

Services in the sector must be customized to meet the unique needs of residents, factoring in location-specific variables. The focus of care should shift towards personal assistance aimed at extending independence, rather than highlighting a loss of it. Advances in technology and medical care are altering residents’ needs, adding complexity but also indispensability to the sector’s amenity offerings.

The sector’s broad reach, potentially spanning up to 40 years of a resident’s life, presents both challenges and opportunities. While this breadth calls for more market players and more diverse models, it also creates a unique dilemma: the rising average age of residents may also operate to deter younger entrants, a situation exacerbated by the current supply-demand imbalance.

For the sector to realize its full potential, stakeholders must navigate a series of challenges, from planning and regulation to public perception and education.

With 2023 marking ten years since the AIFMD was adopted in Europe, our pan-European team, including Cheryl Bai, Andrea Lennon, Tim Ridgway, and Pierfrancesco Rinaldi, reflect on the impact of the regulatory initiative, how different European jurisdictions have adapted, and what the future holds…

Q: What’s been the biggest impact of AIFMD on the alternative landscape over the past ten years?

Cheryl Bai (CB): There’s no doubt the AIFMD has had a significant impact on the alternative funds industry in Europe since its implementation in 2013. In particular, the comprehensive framework introduced by AIFMD for alternative investment managers (AIFMs) has resulted in increased transparency and risk management requirements, which in turn has brought about better investor protection. However, it’s also increased operating costs for Fund Managers due to the additional compliance, reporting, and disclosure requirements.

Pierfrancesco Rinaldi (PR): In some cases, we’ve seen that the Directive has meant that non-EU fund managers wishing to approach European LPs have had to make substantial modifications to their operating models, strategies, and use of vehicles. We’ve certainly seen managers starting to invest more in technology and personnel to meet their regulatory obligations stemming from AIFMD.

Andrea Lennon (AL): Another of the more significant impacts has been on delegation and the use of outsourced providers. The delegated model means that risk management can be retained by the AIFM and investment management can be provided by experts across the globe. The ability of AIFMs to delegate investment management to qualified experts has enabled the broad adoption of the third-party AIFM model.

Q: Has the AIFMD succeeded in its objective to protect investors?

PR: Overall, the evidence is that the AIFMD has succeeded in realizing its objectives. By creating an EU market for alternative funds and requiring AIFMs to act with transparency towards investors, our observation is that investors have become comfortable with the regulatory framework created by the AIFMD and that the supervisory environment it has brought about is considered sufficiently robust to preserve the probity and integrity of the European alternatives market.

Q: How has the private placement route to market evolved – is it still a popular option through Jersey?

Tim Ridgway (TR): We see that for certain alternative investment strategies, Jersey remains a popular choice for fund domiciliation within the context of the AIFMD, offering a number of key attractions, including the cost-effective and user-friendly ‘Jersey Private Fund’ product.

Through Jersey, managers can continue to access European capital, taking advantage of National Private Placement Regimes (NPPRs) to market to professional investors in Member States, while complying with certain conditions. In the ten years since AIFMD’s introduction the private placement approach through Jersey has become ‘tried and tested’ – and in fact, the flexibility it offers has made it an important means for non-EU managers who don’t need full EU-wide coverage to access EU capital.

Q: How have EU locations like Ireland and Luxembourg adapted to life under AIFMD?

PR: Thanks to Luxembourg being quick to implement the AIFMD, the country has earned a reputation as a major EU alternatives hub, with over €1,600bn in assets under management. The AIFMD is now seen as an integral part of Luxembourg’s overall funds toolbox, attracting approximately 300 ManCos/130 SuperMancos, and 260 AIFMs.

AL: Ireland has also embraced AIFMD, with the industry being quick off the mark to roll out enhanced services to support alternative asset managers while also protecting investors. Since the launch of the Qualified Investor Alternative Investment Fund (QIAIF), which replaced the pre-AIFMD QIF (Qualified Investor Fund), Ireland has seen assets in Irish-domiciled alternative products grow to over $800 billion.

The complexity of the AIFs managed under AIFMD has helped in further evolving the already well-established Irish fund services industry which has led to an increase in service providers offering oversight and governance services such as third-party AIFM and Real Assets Depositary. It’s also created new opportunities for the Irish market, for instance in Risk and Compliance and niche training and development in applied alternatives and valuation processes.

Q: What’s the UK response been like, particularly in light of Brexit?

CB: As the largest European center for alternative asset management, the UK played a significant role in the introduction of AIFMD by actively participating in negotiations and contributing expertise that led to its creation.

Following Brexit, however, UK AIFMs were no longer automatically entitled to AIFMD passporting rights. They needed to register their funds in each of the relevant EU Member States, in line with NPPR rules, to obtain approval for marketing their funds in that jurisdiction. Although that initially was a cause of some concern, the UK has since implemented its own version of AIFMD, largely aligned with the original AIFMD but tailored to the UK’s specific needs and objectives. This framework aims to maintain a similar level of investor protection and oversight as the original directive.

Q: So what’s next on the horizon in terms of the AIFMD evolution?

PR: What will be interesting now is to see how AIFMD evolves in line with industry trends – in particular the outcome of the latest review, commonly referred to as AIFMD II. Its purpose has been to review some technical aspects of the regulation rather than a reshaping of the legal framework – and a provisional agreement was reached between the Council of the European Union and EU Parliament in July 2023. That now requires formal approval.

AL: One key area is how National Competent Authorities (NCAs) have interpreted and enforced the legislation. This is particularly significant where an AIF distributes across a number of EU jurisdictions, leading to additional reporting requirements in different EU locations.

CB: As far as the UK is concerned, there is undoubtedly appetite to enhance its appeal as a center for funds work – following a government review last year, for example, the Financial Conduct Authority introduced rules for Long-Term Asset Funds (LTAFs) while the government has introduced a new tax regime for Qualifying Asset Holding Companies (QAHCs). All this shows that the UK is keen to establish a robust and fit-for-purpose environment for the funds industry – and of course, that needs to sit comfortably alongside the evolving European and AIFMD proposition.

TR: Looking forward, the key is going to be collaboration, as the European regulatory landscape continues to evolve. So whether it’s our team in Jersey, the UK, Luxembourg, or Ireland, our focus will be on working in a joined-up way and flexibly, to accommodate the structuring preferences of clients based on the profile and jurisdiction of their target investors

Originally Published in I&PE Real Assets

The real estate sector is witnessing a confluence of trends and challenges that are reshaping its very fabric.

This evolution is significantly influenced by generational changes, affecting everything from workplace design to residential preferences.

What are the implications of these shifts for key players such as stakeholders, investors, and end-users? In what ways are different generations like Baby Boomers, Gen X, Millennials, and Gen Z shaping institutional real estate, and what broader impacts do their preferences and concerns have?

One major shift, driven by aging Boomers, is the growing demand for senior living facilities and healthcare properties. Europe, including the UK, is experiencing a significant demographic shift due to an aging population, driven by low fertility rates and increased life expectancy.

EU statistics indicate that the EU-27’s older population will rise from 90.5 million in 2019 to 129.8 million by 2050, with those aged 85 and over more than doubling to 26.8 million. Similarly, in England, the population over 50 has increased by 47% in the last 40 years, with 18% currently over 65. This trend is expected to continue, with the number of people over 80 set to more than double in the next 40 years, while the under-20 population is projected to decline, according to figures cited by PwC.

Identified as a “megatrend” in their recent “Emerging Trends in Real Estate Europe 2024” report, data points to an expanding market for specialized real estate. There has been a remarkable 650% increase in investment in retirement and assisted living sectors from 2007 to 2022. According to Knight Frank, 67% of investors planning to enter the market by 2028. This means now is an opportune moment for investors looking to position themselves in a sector that may be on the cusp.

However, capitalizing on this opportunity comes with challenges. The planning process, often misaligned with modern ESG considerations, poses a significant barrier for ESG-minded investors. Fire regulations, currently under intense scrutiny, add complexity but also present an opportunity for innovation in creating safer, more sustainable communities.

Challenges also arise from public perception and local governance. Integrating specialist later-living housing into local planning guidelines is essential, with some suggesting it as a solution to housing crises in the Western world. The concept of “right-sizing” is key, encouraging older generations to consider later living facilities earlier, and so freeing up the stock of existing homes.

The quality of the new assets which have been built so far are high. For example, senior residences are being built to be more than just residential spaces; they’re integrated environments offering entertainment, health, wellness, and social services, blending independence with care, operating more as a little village than a traditional “nursing” or “retirement” home, with some managers and operators offering prospective customers a “try before you buy” deal to experience and perhaps acclimatize a little to a new way of living.

The current market, however, is struggling to keep up with the growing demand for these specialized facilities. This gap presents a unique opportunity for investors, asset managers, and their developer partners to expand into this sector. Some see it as “social infrastructure” – crucial in fulfilling societal needs beyond traditional revenue generation. This change signifies a shift in the industry’s role and responsibilities. Accordingly, investment strategies are adapting, focusing on developing senior living facilities and healthcare properties and it is expected that new development will address this gap, according to pension funds taking part in recent surveys.

The need for this social infrastructure coincides with a new generation within the institutional real estate workforce who are gaining seniority and happen to want to build ESG-friendly assets. The diversity of generations in the workforce is reshaping real estate development. This is evident in the increasing popularity of flexible co-working spaces and a heightened preference for eco-friendly amenities. These shifts are reflective of larger societal movements and are influencing the types of assets and funds available within institutional real estate.

Our own research into demographic change within the real estate workforce explores how the presence of Gen Z, working together with Boomers, Gen X, and Millennials under one roof, is redefining what sort of real estate assets will become available for investment in the future.

The report, entitled “From Boomers to Zoomers: How Generational Shifts Are Impacting the Future of Real Estate,” says 80% of asset managers acknowledge the profound impact of this generational shift on the real estate workforce. It’s shaping investment and development strategies, with younger generations’ preferences for ESG and sustainability across all assets. This touches on all facets of real estate but is felt most keenly around the positive social and environmental impact developments are having. No wonder: Gen Z shows a 100% preference for green amenities within assets, the highest of any other generation.

This generational shift, coupled with an aging population, is creating a transformative ripple across the institutional real estate sector. Property development is increasingly focusing on holistic environments that cater to health, wellness, social interaction, and sustainability.

For investors and asset managers, this presents an opportunity to innovate with mixed-use developments, smart technologies, and eco-friendly amenities. After all, the success of the real estate industry hinges on our collective ability to adapt to these changes, integrating sustainability and social impact to meet the diverse needs of evolving demographics.

Originally Published in Private Fund CFO

In the dynamic global financial landscape, North American fund managers in particular are increasingly setting their sights on Europe as a promising source of alternative capital, domiciling new funds there at the fastest rate we’ve seen in recent years.

Data shows that over the last 12 months, North American fund managers who launched a fund in the US also domiciled that fund in Europe 60% of the time. This suggests a growing recognition of the benefits offered by European jurisdictions, such as robust regulatory frameworks and access to European markets. Indeed, many see Europe as an opportunity to diversify their investor base.

In terms of preferred European domiciles, North American managers showed a preference for Luxembourg (50%) and Ireland (50%), followed by the Channel Islands (25%), for those looking to launch a fund over the next 12 months.

For several years now, Ireland has been gradually chipping away at Luxembourg’s market position and the fact that North American fund managers are now just as likely to establish their funds in Ireland as in Luxembourg, is an interesting development in itself. This represents a subtle yet significant shift, suggesting that Ireland has become the default alternative to Luxembourg for North American fund managers.

This shift underscores Ireland’s growing prominence as a hub for alternatives, a trend that’s likely to continue given the country’s transparent and well-regulated funds environment, a proven track record in alternative investments, and a deep talent pool experienced in setting up and running alternative funds. Its position within the EU does make it a compelling alternative to Luxembourg for many and that’s reflected in the conversations we’re having with managers around the world, not least in the US.

Of particular interest to North American alternative fund managers will be the Investment Limited Partnership (ILP) and Qualifying Investor Alternative Investment Fund (QIAIF) fund structures.

The ILP is a common law partnership structure that is particularly suited to private equity, real estate, and other closed-ended alternative investment strategies. It is a regulated vehicle with a flexible framework that allows for contractual freedom to agree on partnership terms while providing a high degree of investor protection. It has been designed in large part to appeal to US-based investors. QIAIF is a regulated fund structure aimed at sophisticated and institutional investors.

It has no investment or borrowing restrictions, making it a flexible choice for alternative investment strategies, including private equity, real estate, private debt, and other types of alternative investment funds. For US fund managers, the QIAIF offers several advantages. First, it can be marketed across the EU via the Alternative Investment Fund Managers Directive (AIFMD) passport. Second, it has a fast-track regulatory approval process, with authorization typically granted by the Central Bank of Ireland within 24 hours of application, provided they have an authorized AIFM. Third, it can avail of Ireland’s extensive network of double taxation treaties, which can provide for reduced rates of withholding tax on income received by the QIAIF.

QIAIFs can be established in various legal forms and can be open-ended, limited liquidity, or closed-ended, offering structural flexibility to cater to diverse investment needs and strategies.

The recent amendments to Ireland’s Alternative Investment Fund (AIF) rulebook, coupled with the enactment of the ILP Act, have boosted the adaptability and allure of Irish fund structures. The allure of Ireland is boosted as Luxembourg has recently been oversubscribed for new fund launches, meaning there have not physically been enough staff on the ground to launch all the funds for managers who would have liked to be there. Ireland has naturally been a net beneficiary of this situation.

Luxembourg is still the largest fund domicile in Europe and one of the most popular worldwide.

According to May 2023 data from the Luxembourg Private Equity Association (LPEA), Luxembourg hosts over €500 billion ($590 billion) in private equity assets, making up 8.6% of its financial center. The LPEA counts 183 private equity and venture capital investors and fund managers among its 450 members. The number of private equity funds domiciled in Luxembourg has grown significantly from 199 in 2017 to 1,789 in 2021, representing about 67% of the total European ETF market. The most common types of funds are Fund of Funds and Buyout funds, primarily originating from the UK, Switzerland – and the US.

The UK, despite Brexit, remains an attractive destination, offering a well-established framework for alternative fund managers. The UK has been proactive in making itself a more appealing location to manage alternative investment funds, with the relatively new Long Term Asset Fund and Qualifying Asset Holding Company regimes serving as examples.

Jersey, while not part of the EU, is another well-regarded domicile for alternative investment funds. The island’s political and economic stability, coupled with a wide range of fund structuring options, make it very attractive for managers and investors alike. The Jersey private fund structure, for instance, offers easy and cost-effective marketing into the EU through National Private Placement Regimes, although it may not provide the full range of benefits associated with an EU passport.

When it comes to investment strategies, North American managers are particularly optimistic about growth capital and buyout strategies, planning to increase their allocations in these areas over the next 12 months. With regulatory compliance weighing heavily on fund managers, the selection of jurisdictions, like Luxembourg, Ireland, and Jersey, which all have clear and established regulatory systems and access to the EU market, is a sensible strategy.

These strategic choices of domicile by North American managers, their focus on growth capital and buyout strategies, and their cognizance of regulatory compliance requirements collectively exhibit dynamic adaptability. These factors are undoubtedly going to influence future trends and directions in global fund management.

What is FATCA / CRS?

Both FATCA/CRS are pivotal regulatory and reporting frameworks designed to combat offshore tax evasion. FATCA and CRS have far-reaching impacts on the investment fund industry, requiring investment funds to enhance onboarding processes, collect additional information on investors, and develop reporting processes and procedures.

In United States law, the Foreign Account Tax Compliance Act (FATCA), which came into effect on July 1, 2014, is intended to reduce the levels of tax avoidance by U.S. citizens and entities through foreign financial institutions (FFIs).

Globally, the Organization for Economic Cooperation and Development created the Common Reporting Standard (CRS) to facilitate the automatic exchange of information.

The overarching goal of both the FATCA and CRS frameworks is to give governments a more transparent view of the financial assets their citizens hold in foreign accounts. Though their goals are similar, the FATCA and CRS frameworks have many important differences.

Who Must File?

FATCA and CRS reporting obligations apply to Financial Institutions, a term which is broadly defined and generally captures entities’ investment management functions, as well as investment funds themselves.

To ensure proper compliance with the FATCA and CRS legislation, it is imperative that investment funds and investment managers are properly classified and duly registered for FATCA purposes with the IRS, the Department for International Tax Cooperation in the Cayman Islands, or in other local jurisdictions.

Compliance with FATCA and CRS requires meticulous record-keeping, form validation, and ongoing monitoring of investment accounts and investor demographic information. Here, we delve into the essential services offered in Gen II Tax compared to other providers in the industry.

Why Choose Gen II Tax Services?

Gen II Tax offers a comprehensive suite of services to ensure FATCA and CRS compliance. They handle everything from initial data collection and form validation to ongoing monitoring and reporting. Other providers may offer similar services but might lack the depth and integration that Gen II Tax provides.

On June 5th, 2024, the US Court of Appeals for the Fifth Circuit ruled regarding the litigation surrounding the Private Fund Advisers Rules. In its decision, the Court has determined that the Securities and Exchange Commission (SEC) exceeded its authority in adopting the Rule in August 2023, resulting in the vacating of said Rule (making it not applicable).

At Gen II, we remain committed to maintaining our position at the forefront of the industry. We will continue to collaborate closely with industry leaders to navigate these developments effectively. As further information becomes available, we will ensure timely and transparent communication to keep you informed of any pertinent updates.

If you have any questions, please feel free to contact us at secrules@gen2fund.com.

Below is the Gen II SEC PFA Rules discussion panel, held on March 26th, 2024.

As Featured in Global Custodian

Our thought leaders have put together some insightful year-ahead outlooks for the major alternative asset classes. This analysis could offer a valuable guide for anyone navigating the fund management landscape in 2024.

Private Equity

In 2023, the private equity sector overcame challenges like valuation criticisms and liquidity concerns, adapting to trends such as decarbonization. Looking to 2024, the sector is set for growth, with fundraising rebounding to pre-pandemic levels and a focus on quality investments in profitable companies. The small and middle market segments are promising, offering steady deals and attractive prices.

Buyouts in private equity are expected to remain robust, driven by the popularity of continuation funds and a long-term investment focus. Opportunities for value creation are particularly high in sectors recovering post-pandemic. Additionally, growth capital will continue to attract investors, especially in resilient sectors and companies with strong digital and sustainable practices.

Venture Capital

Venture capital, despite facing market volatility in 2023, shows potential for dynamic growth in the coming years. Key factors driving this optimism include lower market valuations, an influx of talent from the Great Resignation, and a shift of capital from sectors like crypto to emerging areas such as AI and machine learning technologies. The technology and healthcare sectors are expected to remain hotspots for venture capital investments, buoyed by ever-increasing innovation.

However, there will be increased scrutiny overvaluations, with a possible move to investing in more mature, revenue-generating startups. Additionally, the rise of impact investing, particularly in climate change and sustainability, geographic expansion, and diversification into areas like robotics and health tech, are also notable trends. Furthermore, the potential resurgence of corporate venture investing and the advent of AI-driven investing, automating risk assessment and data analysis, are poised to significantly influence venture capital strategies. This blend of factors indicates a venture capital landscape that is adapting to current challenges while capitalizing on new opportunities.

Private Debt

In 2024, the private debt market, evolving since the pandemic, is expected to further increase. The asset class will attract interest, particularly in stable sectors, as companies look for alternatives to traditional banking given banking stresses and the flexibility private debt offers.

The continued strong performance of private debt and in particular direct lending has attracted significant interest and we expect to see increased diversification from pure equity managers into the credit space. We expect investors to increasingly gravitate to multi-strategy managers that can offer both private equity and private debt allocations.

The focus for 2024 is intensifying on cost reduction amidst a challenging outlook with lower revenue expectations and concerns about increasing costs and limited availability of capital. Asset Managers are increasingly turning to outsourcing to enhance efficiency and technological capabilities.

The real estate investment landscape shows diverging trends: while residential and industrial properties may continue to thrive, commercial and retail spaces, along with office real estate, could struggle without adapting to changing consumer behaviors and the continued shift towards remote work.

Inflationary pressures perpetuate a difficult deals environment characterized by high interest rates, while geopolitical instability continues to impact the real estate industry. Asset refinancing, access to a narrowing definition of prime assets, market price corrections, digital capability, industry expertise and ESG all creates challenges but equally opportunities for asset managers to drive market outperformance in 2024.