Originally published in Corp INTL, July 2011.
Stephen Cuddihee, Managing Director of Praxis Fund Services, looks at why Guernsey is an attractive jurisdiction for establishing property and private equity funds.
While the global recession continues to create uncertainty in international markets Guernsey has been working hard to maintain its position as a leading offshore jurisdiction for private equity and property funds. If the results of two recent surveys are anything to go by this strategy seems to be working. Data from the London Stock Exchange shows that there are more Guernsey companies and securities listed on its markets than from any other competing jurisdiction and many of these companies are property focused. In addition a recent survey from Private Equity News / State Street showed that 61% of Chief Financial Officers of private equity firms prefer Guernsey as their destination of choice for private equity.
This success is based on a number of key factors; on the property side the Guernsey regulator, the Guernsey Financial Services Commission (GFSC), and various service providers have been involved in property funds since the early 1980s when they were in their infancy. In fact it is widely recognised that Guernsey has played an active role in the evolution of offshore property funds. This is both reassuring and a strong credential for fund promoters looking for a jurisdiction in which to establish a property fund.
The growth of the private equity funds industry in Guernsey has evolved more recently and in part was driven by the adoption, in Guernsey, of a modern limited partnership law, which came into force in 1995.
In addition the 2005 changes to the audit requirements for closed-ended limited partnerships meant it was no longer a requirement for a Guernsey limited partnership to be formally audited, provided the limited partnership agreement requires information on the state and prospects of the assets of the partnership to be provided to the limited partners in each financial year. As a result Guernsey limited partnerships are no longer required to provide financial statements that show a true and fair view in line with accounting standards, such as IFRS, which has caused serious business issues particularly in relation to the consolidation of portfolio companies. The removal of the need for audited accounts has meant that the general partners of limited partnerships are at liberty to agree the format and the content of the financial reporting with the limited partners.
The other areas that have made Guernsey an attractive jurisdiction for property and private equity fund promoters are;
- the pragmatic approach taken by the GFSC in dealing with inquiries and applications,
- a fast track approval capability under the Qualifying Investor Fund regime as well as the streamlined consent process for Registered Funds,
- a competitive tax environment means that property and private equity funds can be structured so that no liability to tax arises in Guernsey,
- a pool of experienced fund administrators, auditors and lawyers.
However as international financial markets continue to develop complacency remains Guernsey's biggest threat. Despite this the Island's finance industry continually strives to identify new opportunties and trends that will strengthen its reputation as an innovative offshore fund jurisdiction.
One such opportunity is the proposed amendments to the UK's Partnership (Accounts) Regulations 2008 which is currently expected to come into force for accounting periods commencing on or after October 2011 or February 2012, following pressure from the European Union to introduce accounting directive 90/605/EEC.
The proposed changes will require all limited partnerships, whether established in England or Scotland, whose general partner is a limited liability company, to:
* Prepare financial statements under the full statutory UK GAAP rules, i.e. to follow the same rules as for a normal UK company; and
* File the financial statements with Companies House.
The need for English or Scottish limited partnerships to prepare financial statements under the full UK GAAP rules will involve significant additional public disclosures which could even result in a mandatory switch over to IFRS when existing UK Accounting Standards are replaced. In addition the filing requirement at Companies House would also result in the financial statements of the limited partnership becoming publically available.
Fund managers are likely to be uncomfortable with the filing requirement and so may wish to consider restructuring their funds by redomiciling in Guernsey where the UK's audit requirements would not apply.
In addition, avoiding the proposed accounting changes by using a Guernsey limited partnership (together with a Guernsey general partner), rather than an English limited partnership, in a fund structure has the additional advantage of preventing any irrecoverable UK VAT arising in respect of the management fee. The use of a Guernsey limited partnership (together with a Guernsey general partner) also enables foreign-domiciled UK resident executives of a fund management company to reinvest the proceeds from management activities into the fund without running the risk of making a remittance of those proceeds into the UK.
Information on Praxis
Praxis Fund Services Limited is licensed by the GFSC and provides assistance on fund structuring and fund administration services to a wide range of international clients. Established in Guernsey in April 2005 we administer over 50 investment funds, having also acquired two fund administration businesses and opened offices in both Malta and Luxembourg. Collectively our offices specialize in administering a wide range of funds, both open and closed-ended but particularly property and private equity.
Praxis Fund Services Limited is also a Category 2 Listing Member of the Channel Islands Stock Exchange and sponsors applications for the listing of investment funds.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.