Originally published in Corporate INTL, July 2009
Using several offshore jurisdictions has long been part of the fund structuring model for promoters, particularly with regard to alternative funds structures such as hedge funds or fund of hedge funds. Competition in this area can be fierce with jurisdictions battling for an advantage over their neighbours. Recent innovations in Guernsey such as its listing on the OECD White List and new fund regimes have put it at the forefront of fund promoters' minds. Christopher Anderson is a partner with law firm Bedell Cristin in Guernsey. He has a specialism in structuring funds, particularly private equity.
He says the recent changes to the registered fund regime, plus the advent of the qualifying investor fund (QIF), (part of the authorised regime), continue to attract alternative investment fund promoters to Guernsey.
He said: "We now have two regimes where funds can obtain fast track approval, the Authorised and Registered regimes. The Commission will say that the Authorised regime is subject to greater ongoing supervision, but that's only really true in relation to open ended funds, with closed ended funds, once you look at the detail of the rules, you couldn't say there was a significantly greater level in authorised than registered."
He added: "We generally explain both regimes to promoters and offer them the option of which they go for. We can achieve the same timing in both, because you can have a QIF under the authorised regime in three days just as you can have a registered fund. Most of the funds we look at would qualify for a QIF, certainly on the private equity side, as the minimum subscriptions are usually way in excess of the US$100,000 required by the QIF."
Has the economy affected fund launches?
General figures from Guernsey Finance suggest that fund numbers and assets under management grew overall in 2008, despite a fall in the first quarter of 2009.
Guernsey open-ended funds stood at £63.56 billion at the end of December 2008. Guernsey closed-ended funds increased by 6.5% to December 2008, to reach a new high of £91.4 billion.
A total of 197 QIFs received consent or approval from the GFSC between its inception in 2005 to the end of 2008.
Christopher Anderson says that this trend is borne out in his recent experience, with a number of promoters seeking to launch a Guernsey fund in the last six weeks.
He said: "During the last month to six weeks, a number of promoters have instructed us on open ended hedge fund structures. I have noticed that a number of those are offering weekly dealing in the shares rather than on a monthly or quarterly basis. This may be a reaction to market sentiment. If you are offering weekly dealing, investors may feel there is greater liquidity."
He added: "We have also seen the traditional structure involving a Guernsey feeder hedge fund into a Cayman master hedge fund resurrected recently and there has also been some alternative asset classes, such as art, litigation funding and mezzanine/distressed debt. This is what you would expect in a downturn when equities are not performing well."
The changing dynamic of private equity
Private equity funds are still numerous, but the structuring of those funds is taking longer, partly because of the difficulties in obtaining funding and partly because deals tend to be more heavily negotiated than ever, as limited partners (LPs) gain more bargaining power in their relationship with the general partners (GPs).
Mr Anderson says he is seeing the LP-GP dynamic changing.
He said: "LP bargaining power in private equity funds is enormous compared to what it was a year or two ago. That is causing changes to documentation, even, in one case, tailoring documentation for one large LP, through the issue of side letters derogating from some aspects of the partnership agreement, sometimes to quite a significant extent."
He added: "Certainly putting structures in place is taking longer as the partnership agreements are becoming more tailored to particular investor requirements. Previously the promoter would say 'this is the LPA, this is what we are going to do, take it or leave it because we have other investors who want to come in'. Now they are sitting down and discussing issue at length with LPs. Previous agreements are changing in light of changes in the economic environment; they are required to re-think agreements."
Mr Anderson believes Guernsey's recent OECD White Listing could pay dividends, particularly as jurisdictions such as Bermuda and Cayman haven't made it and are grey listed.
He said: "We got involved in a deal where the investor was uncomfortable with a private equity fund because one of the GPs was Bermuda based. As a result of the LP's unhappiness, the GP is migrating to Guernsey because it is on the White List and the investor is happier. I have seen information that suggests there is significant concern among private equity funds, regarding the distinction that will be drawn between the white and grey lists by investors."
Mr Anderson believes jurisdictions such as Mauritius, which is on the White List, will become more popular with fund promoters and begin to rival other better known jurisdictions.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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