Originally published in the HFM Week Guernsey Special Report, June 2011.
Peter Niven, Chief Executive of Guernsey Finance, points to a series of positive factors at play which give rise to optimism for the future of the Island's funds industry.
"I am not afraid of tomorrow, for I have seen yesterday and I love today." So said William Allen White, the American journalist renowned for his liberal Republicanism as leader of the Progressive Movement which came to embody middle America during the first quarter of the twentieth century. He did not live to see the end of the Second World War and neither did he have a direct connection to financial services but his remarks seem to aptly encapsulate the optimistic feeling within Guernsey's funds industry at the moment. There are still a number of challenges ahead but we are confident of being able to take all necessary steps to ensure the Island remains a leading funds domicile.
Latest figures show that the total value of funds under management and administration in Guernsey reached a new record high of £263.6bn at the end of March 2011. This represents growth of 2.4% during the first quarter of this year and a rise of 33.6% compared to the end of March 2010. It was always going to be difficult to sustain the rates of increase experienced last year but the fact that we have maintained the upward trend and now recorded seven consecutive quarters of growth shows the strong way in which our funds industry has bounced back from the financial crisis.
In addition, from within the data to the end of March 2011, we can see that:
- Guernsey domiciled open-ended funds reached £57.6bn – down 0.6% during the quarter but an increase of 2.7% year on year;
- The Guernsey closed-end sector was valued at £114.8bn – rising 4.8% during the first three months of 2011 and up 24.4% compared to twelve months earlier;
- Non-Guernsey schemes, where some aspect of management, administration or custody is carried out in the Island, reached £91.2bn – increasing 1.3% during the quarter and 86.1% higher than the value at the end of March 2010.
It is very positive to see all three categories standing up well on the tail of the significant increases in 2010. . The figures for the non-Guernsey schemes increased most markedly during the second quarter of 2010 when a significant number of funds entered into service level agreements with local licensees. Our Guernsey closed-ended funds also continue to attract a lot of interest, especially from promoters in alternative and niche asset classes and where there may also be a demand to raise money through capital markets by listing on a stock exchange.
Alternative and Listed
Private equity, property and hedge funds/funds of hedge funds (FoHFs) now account for comfortably more than half the total value of the Island's funds business. The second largest component of this figure is the non-Guernsey hedge funds/FoHFs, which reached in excess of £56bn at the end of March 2011. These figures were notably boosted by BlueCrest Capital Management, one of Europe's largest hedge fund managers, relocating its headquarters and fund servicing to Guernsey.
The private equity and venture capital sector – principally Guernsey domiciled closed-end schemes – has seen especially strong growth during the last year, reaching more than £70bn at the end of March 2011. The Island's reputation for excellence in this asset class has been reaffirmed by a Private Equity News / State Street survey where more than three-fifths (61%) of CFOs said that Guernsey was their preferred destination for private equity outsourcing.
Jon Moulton, Chairman of private equity firm Better Capital, gave a ringing endorsement of the Island's funds industry when speaking to more than 300 delegates at the Guernsey Funds Forum in London this May. Jon, who has a house in the Island and whose Guernsey-domiciled investment company is listed on the main market of the London Stock Exchange (LSE), said: "Guernsey has a very good reputation; it works very well....Guernsey needs to carry on doing what it's doing into the future and it will prosper."
Another significant figure in the private equity industry is Guy Hands, Chairman of Terra Firma. As well as the private equity firm joining the likes of Permira by establishing an operation in Guernsey, Guy has also decided to buy a property and live in the Island. This reflects the fact that Guernsey is not just an ideal jurisdiction for locating management companies but it is also attractive as a residence for the managers themselves.
This is no doubt helped by the fact that Guernsey has a zero rate of corporate tax as standard, there is still no withholding tax on dividends paid, no capital gains tax, no inheritance tax and no value added or general sales tax and personal income tax remains levied at a maximum of 20%, with a cap of up to £100,000 on non-Guernsey source income or £200,000 on all income (the two caps are mutually exclusive).
However, our standing regarding private equity does not mean that we are in anyway just a one-trick pony. During the last year we have seen new investment structures launching across a range of niche asset classes, such as aircraft, classic cars, dispute resolution and films which add to the existing mix including fine wine, timber and renewable energy.
One of the Island's great strengths is the ability for Guernsey vehicles to list on the local Channel Islands Stock Exchange (CISX), Euronext Amsterdam or the LSE. Data direct from the LSE to the end of December 2010, shows that there are more Guernsey-incorporated companies and securities listed on its markets than there are entities from any other competitor jurisdiction. In addition, the Hong Kong Stock Exchange (HKEx) has formally approved Guernsey as an acceptable overseas jurisdiction for the purpose of companies incorporated in the Island seeking to list on the exchange.
The International Stage
Receiving approval for Guernsey companies to list on HKEx is a very positive development for our finance industry in terms of doing business in Asia. It builds on the fact that last year we signed a Memorandum of Understanding (MoU) with the Shanghai Financial Services Office and a Tax Information Exchange Agreement (TIEA) with the Chinese central government tax authorities. Hong Kong is well-recognised as an important gateway for inward and outward flows of capital to China and other financial centres in Asia.
We have also been exploring opportunities in other 'emerging' markets. Our first official delegation to India visited Delhi and Mumbai in October last year and a team has also just returned from a week visiting Moscow in what is our initial coordinated activity in Russia. In both cases, there are already a number of examples of investment business in Guernsey but we are looking at ways in which this might be expanded yet further in the future.
There are business opportunities across the globe, however the EU remains our principal source of new business and that is why it was so important that we engaged in the discussions regarding the Directive on Alternative Investment Fund Managers (AIFM). We have worked extremely hard to inform and educate the community in Brussels about our finance industry and in particular the funds sector. The resulting framework agreement not only provides some certainty but also places Guernsey in a good position going forward. There is still much work to do but we are confident that the outcome will be positive for the future of our funds industry.
Certainly our position has been reinforced by two reports published at the start of this year: The IMF commended Guernsey's high standards of financial regulation, supervision and stability along with our robust criminal justice framework to the extent that the Island scored the highest of any jurisdiction so far assessed; and the OECD built on its white listing of Guernsey at the earliest opportunity by endorsing the Island's commitment to tax transparency and exchange of information – we have now signed TIEAs with 23 other jurisdictions.
As you can see, there are a number of positives at play. There are many challenges ahead but we will take the necessary steps to ensure the ongoing success of our funds sector. For example, the 'Zero-10' corporate tax regimes of the Crown Dependencies have come under scrutiny and we are undertaking a review, yet it is clear that any future system must retain the fund industry's exempt status. There are also set to be some notable legislative enhancements, including a series of amendments to our Guernsey Limited Partnership (LP) law and introducing the Guernsey Limited Liability Partnership (LLP). Combined with changes to partnership regulations in the UK, there are a number of positive implications for Guernsey's funds industry which will provide the focus of a seminar to a London audience later in 2011.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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