Originally published in ICFA, August 2011
Andrew Tjaardstra, Editor of International Custody and Fund Administration (ICFA), finds out how the funds industry, local custody and fund administration market is shaping up in Guernsey, one of the two largest of the Channel Islands.
With its own bank notes, stamps and tax laws, Guernsey has an
unusual relationship with the United Kingdom. As a British Crown
dependency in the English Channel, it is the responsibility of the
United Kingdom to defend, but it is not part of the UK, even though
its currency is linked directly to the United Kingdom. Some 6,000
years ago or so, Guernsey was attached to France before rising sea
levels cut it off from the mass of continental Europe. More
confusingly it is not part of the European Union. And, through hard
work and ingenuity the small island has a AAA credit rating
– superior to that of the US – and its very own
exchange, the Channel Islands Stock Exchange.
Its tax status, attractive local features and being only 45 minutes flight from Gatwick airport, near London, has attracted the likes of private equity heavyweights Guy Hands (now notorious for his firm Terra Firma buying EMI) and Jon Moulton to live here.
What is definitely not confusing is that a huge amount of money is based on the island. At the end of March, Guernsey saw growth in assets under management hit a record of £236.6 billion. Fiona Le Poidevin, deputy chief executive and technical director of Guernsey Finance, explains Guernsey is now third behind Luxembourg and Malta in the financial stability index.
Patricia White, managing director at Legis Fund Services, who was part of a management buyout of the firm in March, says: "We are seeing opportunities in private equity, property and alternative investment funds, particularly in clean technology funds with investment strategies such as wind farms, timber and waste disposal." Legis has doubled its number of employees to 64 in the last three years, and moved to new offices on New Street in the capital St Peter Port.
Tamara Menteshvili is founding director and chief executive of the Channel Islands Stock Exchange. She says: "There is an increasing demand for the listing of private equity and venture capital funds. Also, it would appear that there is strong investor appetite for tangible assets, particularly in relation to natural resources such as biofuel, energy, precious metals and forestry."
As for service partners, there is a degree of flexibility on the island, with custodians, for example, often having the backup of a larger partner 'onshore'. Sadie Podmore, head of custody services at Butterfield Bank (Guernsey), comments: "[Another feature of the market] is the continuing openness on the part of fund managers to move between service providers, whereas historically clients kept all their eggs in one basket. Nowadays, there's a tendency towards spreading risk and looking for best of breed within the market for each service provider, whether administrator, custodian or auditor."
There are concerns for growth though. Patrick Firth, chairman of
the Guernsey Investment Fund Association, the industry's
representative body, says: "The biggest concern is regulatory
uncertainty." He is referring to the alternative investment
fund managers directive (for which the group has set up a technical
sub-committee) Fatca and Dodd-Frank (see. pp.48-49). Guernsey is
confident it is well positioned for the regulation when it is
finally formalised, and for example, the island can gain EU
Finding your way to invest in the economic future is especially hard with so much uncertainty. Speaking at the Guernsey Fund Forum in London in May, Jon Moulton, founder of Better Capital, a private equity company that specialises in turnarounds and is based in Guernsey, said: "The [financial] crisis hasn't been as bad as I thought. The low interest rates have helped considerably. There are still enormous amounts of refinancing to come before we are fully through the crisis." He added: "Although it is impossible to predict where is best to invest over the next 10 years, geography may matter more than [asset] class."
Better Capital's fund administrator is locally based Heritage Fund Administration. Mark Huntley, managing director of Heritage, which has around $50 billion of assets under administration, says his company avoids open-ended funds, side-pockets or assets with emotions attached such as cars, wine and art. He says that private equity and investments in clean technology are growing sources of business.
Michel Davy, managing director of Ipes, Guernsey, an
administrator for private equity companies, also sees energy and
infrastructure as a growing trend. Davy says the lead time to raise
funds is longer than before the crisis, and that investors have
"more choice" and are "more fussy". The company
has strong links with funds in Germany and Russia, and is expecting
to see growth in Russia as infrastructure funds increase in the
lead-up to the 2018 football World Cup.
A small delegation led by Guernsey Finance this year visited Moscow to establish more ties, as the country seeks to attract foreign investment; outward investment is difficult due to restrictions. Despite Le Poidevin describing the pensions and insurance markets as "immature", she says there could be great potential in the future, especially with the large amount of private wealth across Russia. A similar delegation visited China, including Shanghai and Beijing in August, with another trip planned to Singapore and Hong Kong in November.
In a further boon to the island, Guernsey, along with Jersey, has just been removed from the US Senator Levin's blacklist which listed the islands as "offshore secrecy jurisdictions", in his attempt to clamp down tax evasion in his 'Stop Tax Haven Abuse Act' (see www.icfamagazine.com/2094379). Guernsey's chief minister Lyndon Trott met Senator Levin's chief investigator and Counsel Bob Roach to emphasise Guernsey's well-regulated financial sector, its lack of bank secrecy laws and its co-operative stance on tax information sharing.
Although it will not be immune from the growing global economic turbulence, Guernsey it is well placed, especially for differentiated assets, and there are plenty of fund administrators, lawyers and custodians on the island to negotiate with, offering a diverse and personal service.
Useful organisations on Guernsey
The Guernsey Investment Fund Association
The trade association was established in 1989 to represent the
island's investment management industry. Its members include
mutual fund managers and trustees, stockbrokers, custodians, fund
administrators, private client asset managers, life assurance
companies, investment banks, and professional firms such as lawyers
and accountants who are closely involved in the work of the
investment business industry.
Guernsey Finance is a joint industry and Government initiative
to defend and promote the long term reputation, stability and
development of Guernsey as an international centre of excellence
for financial services.
Guernsey Financial Services Commission
The Guernsey Financial Services Commission is the regulatory
body for the finance sector in the Bailiwick of Guernsey. The
Commission's primary objective is to regulate and supervise
financial services in Guernsey and to uphold the international
reputation of Guernsey as a finance centre.
Channel Islands Stock Exchange
The exchange, founded in 1998, services Guernsey and Jersey. It
is approaching 4000 listings with over 25 countries represented. It
has in excess of $50 billion of funds listed with a mix of funds
and specialised debt. Share prices are available on Reuters.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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