Jersey: How Fund Managers Are Currently Establishing Listed And Private Funds In Guernsey
Last Updated: 17 January 2017

This interview first appeared in Hedge Fund Law Report.

Craig Cordle recently joined Ogier's investment funds team as a group partner based in Guernsey. Cordle counsels his clients on all aspect of structuring, restructuring, merger, cross-border marketing and operation of investment funds and other collective investment arrangements.

In connection with his move to Ogier, The Hedge Fund Law Report recently interviewed Cordle during which he shared his views on the current state of the funds market in Guernsey, the complexities and nuances in launching exchange-listed funds and how law firms are meeting the current needs and demands of their fund clientele. Cordle provides valuable insight to any fund manager considering these funds or Guernsey as a jurisdiction, in addition to all fund managers wrestling with fee considerations.

Q:  What drew you to practice law at Ogier in Guernsey?

A:  After working at Herbert Smith Freehills in London for quite some time, I moved to Norton Rose Fulbright. I thought I would stay there for a long time, doing the same sort of work, but the opportunity to join Ogier caught my interest.

Having spent the better part of ten years setting up mostly offshore vehicles, which tended to be based in Guernsey, coming to Ogier looked to be the obvious move and a great opportunity to focus on what I really enjoy doing. Like London, there is a small pool of premier law firms in Guernsey doing this type of work, and Ogier has a corporate and finance practice to complement its investment funds practice.

Q:  As your career has advanced, have the fund products you have worked with grown more complex?

A:  It's possible that some of the underlying investments have grown more complex – for example, listed funds investing into a portfolio of collateralized loan obligations. However, the actual investor-facing structures are not necessarily more complex. It's often important to make sure that there are not too many bells and whistles to these funds as all material information will need to be written down and disclosed to investors. If an investor cannot understand, or the product is overly-complex, they may not invest.

Listed funds may seek a listing in multiple jurisdictions, with the gold standard being the Main Market of the London Stock Exchange (LSE). As they are listed, funds which are overly complex may face problems which it comes to review by the relevant regulator. Generally speaking, listed closed-ended funds will be more complex or nuanced than their open-ended cousins.

In my experience, particularly innovative or specialist products that were not suitable for the Official List of the Main Market ended up being listed on the Specialist Fund Segment of the Main Market of the London Stock Exchange, with various other specialist fund products – such as aircraft and funds with non-voting shares.

Q:  You describe the LSE's Main Market as the gold standard. Do you see others moving to take advantage of it?

A: For a certain period from around 2007 onward, many funds sought to be listed on Euronext Amsterdam, which wasn't (with the benefit of hindsight) necessarily the best platform for them. Most have now moved to the LSE, or are dual-listed on both markets. I must have worked on four or five of these over the past few years.

It's quite a small world in London in terms of listed funds. There are eight, nine or ten investment banks or brokers that we see regularly selling these sort of products. They would act as the sponsor, which is a requirement to get the fund listed on the Official List, maintained by the Financial Conduct Authority (FCA) acting in its capacity as the U.K. Listing Authority.

Q:  In what jurisdictions do the funds you work on tend to be domiciled?

A: Guernsey is where the bulk of the funds I've set up have found a home. Some have been in Jersey, but most have been in Guernsey. Traditionally, real estate funds tend to be organized in Jersey; Guernsey picked up everything else.

In the last couple of years, we've seen U.K. investment trusts also being utilized. It all comes down to the tax structuring for the fund, but the manager's regulatory position is also a significant consideration. Some investors may occasionally mandate that the vehicle has to be onshore as well.

Q:  What are some of Guernsey's other advantages in the funds market?

A:  For a non-E.U. fund (which also has a non-E.U. manager), if you file an Article 42 notification with the FCA and only market the fund under the U.K's private placement regime, you've got the best of both worlds.

If you can keep everything offshore in Guernsey, your costs will be lower too. As soon as you're in the U.K., the operational costs increase. Additional service providers, such as depositaries, will be required and the overheads are naturally higher.

Q:  Do you have any predictions with regard to Guernsey's performance?

A:  I expect Guernsey to continue on an upwards trajectory. Statistics from the Guernsey Financial Services Commission show that the twelve months leading up to June 2016 saw a 12.3% increase in the net asset value of all funds under management and administration to £247.1 billion. As an asset management lawyer, those figures are very encouraging.

Q:  How are clients reacting to developments on the regulatory front?

A:  A manager's fund structure isn't set in stone. With all the current regulatory initiatives – in particular those aimed at tax transparency and prevention of tax avoidance, such as Base Erosion and Profit Shifting (BEPS) sponsored by the Organization for Economic Cooperation and Development – structures need to be flexible.

I'm interested to see how the implementation of BEPS unfolds. Are we going to say that some funds suddenly don't have sufficient substance in a particular jurisdiction? I very much doubt that will be the case. It's been difficult and I think clients have become nervous; in some cases legitimate tax structuring has been muddled in the media as being somehow improper.

Q:  How would you describe the impact of AIFMD?

A:  The Alternative Investment Fund Managers Directive (AIFMD) added an extra layer of complication to structuring funds.

It's widely accepted as well that AIFMD has not achieved what it set out to do. The ideal situation that many managers and brokers are looking for is an offshore investment fund, where the manager is not required to comply with the full panoply of regulations under AIFMD but can still sell the fund into the U.K., which is the primary market for these vehicles. Fortunately, the U.K. has taken a more sensible approach to implementation and interpretation of AIFMD.

Q:  How much does pressure on fees make itself felt in the space you work in?

A:  Since I've been doing this, it has become harder for lawyers to win mandates. These sort of funds are specialized, and fees are certainly higher than with your traditional open-end vehicles, hedge fund-type vehicles and Undertaking for the Collective Investment of Transferable Securities (UCITS). It is simply a function of the amount of regulation that has evolved; AIFMD; the listing rules; disclosure and transparency guidance; and the prospectus rules.

We're seeing a noticeable price squeeze from clients and underlying investors who are trying to reduce fees. When you're working for top tier law firms, making it profitable is very difficult. The pressure on fees is significant for lawyers given the amount of regulation we now have to take into consideration when launching these funds.

Q:  What are the most important priorities for clients in this market with respect to their external counsel?

A:  For a client, in terms of choosing legal counsel, it's about getting a balance between quality and fees. Working at Herbert Smith Freehills and Norton Rose Fulbright, we were trained to leave no stone unturned when structuring these vehicles. For me, it was important to know that Ogier works in the same way too.

Taking this approach, all service providers will have completed significant levels of due diligence on these structures. What we are being pushed to do more frequently is to commoditize that work. In the listed fund space, which is subject to a reasonably substantial level of regulation, this is difficult to do.

Outside of the listed fund space, new Guernsey products – such as the manager led product and, more recently, the private investment fund – are very positive announcements, which may help streamline the set-up of these vehicles, whilst also keeping costs down and investor protection and regulation at levels commensurate with the level of risk involved.

Q:  How have clients' needs and expectations changed?

A:  In terms of how clients' needs have changed, the burden on investment managers for compliance is pretty high. Consequently, there can be quite a bit of handholding when setting up these vehicles, which we are obviously happy to do.

At the moment, most investors are looking for yield. With investment funds in London, ideally you want 5% net yield; that gets it onto the radar of the institutional investors. Otherwise, you're fighting an uphill struggle, even with some very interesting propositions.

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