Originally published in HFM Week, Guernsey Special Report, May 2012
Kevin Gilligan of Louvre explains why Guernsey is an attractive choice as a centre for funds investing in world markets.
It is difficult enough to choose the right investment field in these uncertain times, but it is just as difficult to choose where to base a fund and what structure to use. Some centres offer lowcost solutions, but at the expense of very limited legal protection; other traditional centres offer a strong regulatory framework, but only at a prohibitive cost. Key developments in recent years have highlighted the more serious international finance centres, which offer an excellent balance between cost and regulation, while also being at the forefront of innovation in the fund world.
We have noticed in recent years that regulation can actually be seen as an attraction for fund promoters. The 'regulation-lite' funds in some centres have learned to their cost that flexible investment rules can mean unbalanced portfolios, that limited controls are often accompanied by limited powers to deal with fraud or malpractice and that investors are beginning to realise the merits of good regulation as a pre-requisite.
In a climate where raising new money is as difficult as it has ever been, security is winning out over expediency.
Regulation and innovation?
You might think that regulation and innovation are incompatible creatures. Surely regulators are only interested in stifling creativity, since it appears to be the enemy of investment security? But most regulators have realised that what is required is to offer a range that covers tightly controlled products aimed at a mass market audience at one end, and lightly regulated products aimed exclusively at the professional investor, at the other.
The first key step to making this work is to adopt high standards at all levels, enforced through the service providers under the regulator's direct control. The second is to offer flexible corporate structures within this framework, using structures such as protected cell companies and limited partnerships.
Guernsey, base for the Louvre Group, is an excellent example of this approach. Guernsey is an independent jurisdiction, with its own tax laws and regulatory regime under the authority of the widely respected Guernsey Financial Services Commission (GFSC).
While the regulator's primary concern is investor protection, the industry is keen to develop new products and to avoid an excessive burden of regulation. This seeming conflict has been well resolved by routine consultation, ensuring that regulation is pragmatic, and by joint working parties on the development of legislation.
While there has been a steady tightening up of compliance (examples include: new conduct of business rules, new capital adequacy rules and new corporate governance guidelines), there have also been a number of modernising laws including a completely overhauled companies law and investor protection law, as well as the development of new regulatory approaches such as the registered fund (a fast-track approval process). This adds to Guernsey's impressive record of innovation, which includes the use of a protected cell company for umbrella funds, limited partnership law with limited liability law on the way, and law on intellectual property.
None of this is to deny the popularity of other fund centres such as the Cayman Islands and the British Virgin Islands. However, Guernsey still has a key role to play. While the relative lack of regulation in these centres is attractive in many ways, there are real practical problems in administering a fund in these locations, a problem exacerbated by time zone differences.
For many, providing administration in Guernsey is one way to solve these problems, with a practical time zone and the benefit of higher regulatory standards with so-called 'non-Guernsey schemes' still requiring GFSC approval.
Our own experience at Louvre is that many clients are now actively seeking to re-domicile Cayman and BVI funds to the island. This is surely an endorsement that regulation in Guernsey is as much a benefit as a burden. Coupling this with a realistic pricing structure, it is clear why Guernsey is proving very competitive as a fund provider.
EU funds and the AIFM Directive
Offshore investors have typically avoided the EU as a fund jurisdiction. The merits of tighter regulation within an Undertakings for Collective Investment in Transferable Securities (Ucits) fund have tended to be outweighed by other factors. The key negative is that Ucits have limited investment powers. The end result has been the growth of non-authorised funds, which might conveniently be described as hedge funds, and can only be made available to a limited pool of investors.
Following the financial crisis of 2008, the EU set itself the task of regulating hedge funds. This appeared to be driven by a conviction that such funds were responsible for the crisis although there is little evidence that such funds did more than bring the crisis to a head. There followed much debate around the proposed Alternative Investment Fund Managers (AIFM) Directive in the EU. The end result reflects extensive industry consultation and is likely to result in a common EU passport for AIFMs and, more significantly, a passport for non-EU funds which measure up to the same standards. Guernsey is already familiar with these issues, having for some years had UK recognised fund status for its 'Class A' funds.
As you might expect, the taxation of funds in Guernsey is straightforward. Currently the standard rate of company tax in Guernsey is zero but, as an added insurance, most funds can claim tax-exempt status for a nominal annual fee. Partnerships are the only exception, where in essence the arrangement is transparent with the tax burden falling on the investor as if he had a direct stake in the investment. This means that investors can mitigate tax and enjoy a degree of flexibility in approach.
Finally, of course, the investor has to choose the field of investment. The range now offered is huge. At Louvre we administer funds investing in equities, fixed interest, commodities, derivatives, currencies, property (including forestry) and trade finance. These may include hedge funds, private equity funds, limited partnerships and fund of funds. In addition, we offer Shariah-compliant funds, with our office in Dubai acting as an essential link.
A dependable choice
For fund promoters, Guernsey is an attractive choice as a centre for funds investing in world markets. The range of funds which have been attracted is notable, with private equity and hedge funds a particular success story. So attractive has Guernsey proved that several household names in the industry such as Terra Firma and BlueCrest have relocated their main offices to the island. A key factor here is Guernsey's closeness to the City of London, while the level of local technical expertise is first class.
The key word for the investor is choice. Choice of place of incorporation, choice of regulatory framework, choice of fund style, choice of investment policy, choice of geographical focus. In my experience, Guernsey has a very strong claim on investors seeking to invest internationally: high standards, flexible legislation and professional expertise are key factors, in tandem with real personal service, prompt response times and a commercial can-do attitude.
Kevin Gilligan is managing director, Louvre Fund Management Limited. He specialises in the structuring and ongoing management of open- and closed-ended alternative investment funds. Kevin currently sits on a number of investment management and fund company boards across a wide range of asset classes and jurisdictions.
The Louvre Group was founded in Guernsey in 1976 and now has a presence in Guernsey, BVI, Cayman Islands, Dubai, Geneva, Hong Kong, Liechtenstein, London, and Singapore. It specialises in fund establishment and administration, and fiduciary services.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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