Advocate Andrew Walters, Director at Albany Trustee Company in Guernsey, believes the island's family office sector is quietly making hay.
Guernsey has enjoyed well publicised growth in its fund administration, captive insurance and investment management industries over the past decade.
But it is in the more private and discreet family office sector that the jurisdiction is quietly making hay. This particular sector of Guernsey's financial services economy has been in operation for many years. However, global financial and political events of the past decade, coupled with recent legal and regulatory innovations in Guernsey, have led to an increasing interest in the Island's family office and investment vehicle offerings.
The Island's success in other financial sectors is measurable and demonstrable; local service providers are required to complete and submit quarterly or annual statistical returns detailing assets under management and administration. However, it is more difficult to measure the precise extent of Guernsey's family office industry given that the activities of the typical family office are predominantly inward-focused, unadvertised and largely unregulated. It does not, therefore, provide a distinct and measurable category of statistic.
Nonetheless, service providers have seen a considerable increase in the number of family offices being established in Guernsey, both in the form of independent units with their own physical presence and those accommodated within existing licensed fiduciaries. Interest has arisen from principals based in a variety of locations including Russia, mainland Europe, Africa and South America. Guernsey also appears to be attracting attention from high-net worth families based in other competitive tax jurisdictions that seek a greater level of discretion by having their wealth managed outside of the Island or jurisdiction in which they ordinarily reside.
The Island's increasing popularity within the family office sector appears to have been driven by a unique combination of factors. Naturally, the Island's competitive tax regime has played an important role and its tax neutral vehicles continue to attract asset holding and investment structures alike. However, with a standard personal income tax rate of 20%, and the ability to cap tax liabilities for non-Guernsey source income at GBP110,000, the Island has attracted not only family offices but their underlying principals as well.
The Island has its own elected parliament and a stable system of government. It also boasts a mature and sophisticated legal system that, through a combination of statute and common law, provides certainty and predictability in terms of the ownership and operation of its investment vehicles. This is an increasingly important consideration for wealth generators operating in jurisdictions where their personal assets may be at risk of politically motivated confiscations, levies or expropriation.
Increasingly globalised family interests have created the need for an accessible central hub co-ordinating, structuring and managing family assets and affairs. Guernsey's 40 minute flight time to London, coupled with its convenient time zone and English-speaking community ensures that principals have convenient access to their offices.
The complexity of many family structures requires first class service providers. As an international finance centre for over 40 years the Island now plays host to a wide range of qualified professionals. The world's largest offshore law firms all have operations within the Channel Islands, as do the big four accountancy firms. Furthermore, many of the UK's largest banking institutions are represented on the Island. The Bailiwick enjoys a remarkable constitutional position insofar as it is a British Crown dependency but is not part of the United Kingdom. Nor is it part of the European Union, although it has a special relationship and is treated as part of it for the purposes of free trade. Its constitutional position has provided the Island's lawmakers and regulator with an enviable degree of legislative and regulatory flexibility in designing a framework in which family offices and their Guernsey investment tools can operate.
Regulatory treatment of family offices in Guernsey
To the extent that the investment activities of a Guernsey-based family office are limited to managing its own assets, or those belonging to other entities forming part of the same group of companies, it is unlikely that those activities will fall to be regulated under the provisions of the Island's Protection of Investors legislation.
However, the office's precise activities should be examined carefully and professional advice sought to ensure that it does not stray into regulated territory. In instances where the family office is seeking to provide services to third parties, and/or it is seeking to charge a fee for the provision of its services, its activities may well fall into the regulated category in which case it will be necessary to apply for an appropriate license.
Innovations in family office structures
There has been a growing trend amongst high-net-worth individuals seeking trustee services to establish private trust companies (PTCs). A PTC is a privately owned company incorporated specifically to act as trustee of one or more family trusts. In this manner, the principals can, with the assistance of their service providers, establish their own trust company.
A Guernsey PTC can be incorporated within a day of submitting the relevant documents to the Guernsey Registry and, assuming it does not act as trustee "by way of business", is unlikely to be seen as conducting a regulated activity. However, this position is predicated on the PTC not offering trustee services to a broader audience. To do so, or to charge fees for the provision of trustee services, could cause its activities to fall within the regulated field.
PTCs have become particularly popular in recent years as wealth creators seek to establish increasingly portable structures for their assets. To the extent that a client is dissatisfied with its service providers, management of the PTC can be moved elsewhere without the need for the retirement of existing trustees and the appointment of new ones in respect of each trust it manages.
In 2008, the concept of the purpose trust was introduced into Guernsey law. This further enhanced the Island's offering by permitting the creation of a trust to fulfil a specific purpose other than simply benefiting the beneficiaries. In fact, a purpose trust does not require any beneficiaries. Examples of possible purposes include the furtherance of a particular cause or the holding of shares in a particular vehicle. It is perhaps unsurprising therefore that purpose trusts have been used for the specific purpose of owning shares in PTCs thereby effecting a separation of ownership between the PTC and the family it is formed to benefit.
Investment structures for family offices
The legal structure housing the operations of a family office will often be distinct from the vehicles accommodating the underlying investments made by the office. Whilst family offices based in Guernsey are free to conduct their investment operations through vehicles established in other jurisdictions, the range and sophistication of available Guernsey structures makes them an ideal starting point. Guernsey law offers, amongst other things, companies (cellular and non-cellular), limited partnerships (with or without legal personality), general partnerships and trusts.
The recent introduction of the Guernsey foundation has attracted further interest from those families seeking a civil law alternative to the trust. Since approving the concept back in 2006, The States of Guernsey has spent six years planning and constructing Guernsey's new foundation legislation. This lengthy exercise involved a detailed consideration of other foundation offerings around the world and the subsequent development of a best-of-breed model. The protected cell company (PCC) has become increasingly popular as vehicle for holding family assets.
Although equivalent structures are available in a range of jurisdictions including the Cayman Islands, the British Virgin Islands, Mauritius and Jersey, the PCC was pioneered in Guernsey and is now used in a broad range of contexts including investment fund platforms, captive insurance vehicles and structured products. However, one of the most innovative applications of this tool has been in the field of family wealth planning. The PCC allows for the creation of any number of individual cells within a single corporate entity, each of which are statutorily ring fenced from the core of the PCC and its other cells. Guernsey company law provides that the assets of one cell cannot be used to meet the liabilities of another cell. It therefore provides a cost effective means of isolating investments without the need for separate holding companies. The structure can be applied for the purpose of allocating assets, via separate cells, amongst different members of the same family without risking liabilities incurred on behalf of one contaminating the assets of another. Furthermore, the PCC operates with a single Board of Directors thereby allowing a principal family member to exercise a degree of control over the assets allocated across the family.
The PCC's single corporate identity can deliver considerable savings in terms of directors' fees, administration and audit costs and statutory expenses over and above the traditional non-cellular structures historically employed in the family office world. Guernsey's PCC offering was further enhanced in 2006 by the introduction of the incorporated cell company (ICC). The ICC provides a further layer of flexibility in that individual cells can be detached from the overarching family ICC structure so as to become independent companies in their own right. This provides a convenient means of disposing of family assets without the need to de-envelop the asset itself from its existing corporate home.
Family office investment trends
Whilst trustees, council members and directors running the vehicles through which family assets are held are subject to obligations that can affect investment decisions, the underlying aims of a family office are typically driven by the objectives, values and backgrounds of the principals behind them.
This is no better illustrated than in family offices run for the benefit of Muslim families. In this context the role of the family office can be of even greater significance if it is responsible for overseeing the smooth succession of family assets in accordance with Sharia principles. Such offices will often be restricted to Sharia compliant investing, a factor that has helped fuel the growth in number of new Sharia compliant investment funds. However, Islamic investors have traditionally found it difficult to access the same investment opportunities as non-Islamic investors and a lack of high-quality Sharia compliant products means that there is an increasingly strong demand for those that do perform.
One of the most significant trends within the family office sector has been an increasing appetite for clean-tech investments. There are a number of reasons for this. The first is that, unlike traditional institutional investors, family offices do not necessarily need to seek returns at the expense of non-financial considerations and ethics. The family office can seek investments that are aligned to the values of the family it is seeking to benefit. Another factor affecting family office demand for clean-tech assets has been the lack of traditional funding available to the sector and the resulting increased returns for private investors.
Finally, and like other investors, family offices are aware that clean-tech assets often carry longer investment maturity profiles thereby suiting the longer-term growth objectives of family offices seeking to provide for future generations.
As an aside, it is interesting to note that Guernsey is enjoying considerable success in attracting collective investment vehicles focusing on this sector. In 2013 alone The Renewables Infrastructure Group Limited, Bluefield Solar Income Fund Limited and Resonance British Wind Energy Income Limited have all been successfully launched as Guernsey-registered closed-ended investment funds. Falling stock market values have forced family offices to search for greater returns and have thereby generated further appetite for private equity focused investments. Private equity funds are generally illiquid investments designed to mature over the long term.
Consequently, and in common with the clean-tech theme already mentioned, they fit the longer-term investment objectives often favoured by family offices. Furthermore, whilst institutional investors may be restricted by fixed investment guidelines, private investment vehicles tend to have a greater degree of flexibility in the investments they can make and the timeframes in which they can make them. Consequently, they can invest in circumstances where an institutional investor may be unable. Overall, the more cautious approach adopted by institutional investors has led to an increase in the value of family office private equity holdings as they fill the resulting funding gap.
Originally published in Offshore Investment, October 2013.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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