Some US private equity fund managers are currently avoiding marketing into Europe due to onerous EU regulation but the fund domicile and service centre of Guernsey offers a commercially aware and pragmatic solution, says Fiona Le Poidevin, Chief Executive of Guernsey Finance.
This year was the third in a row that Guernsey Finance has sent a team to an investment funds conference in Boston. Attending SuperReturn in June, I was struck by the number of private equity houses who are now concentrating on investing solely into the US market and, in many cases, avoiding Europe.
Albeit the domestic US market is currently outperforming many others, the financial crisis in the Eurozone means that there are investments in Europe offering upside and US managers will still pursue those niche opportunities where there is a clear case for strong returns..
Feedback from the managers at the conference was that there is simply too much regulation in Europe with some citing it as 'fortress Europe'. This includes specific concerns that marketing funds into Europe has become much more challenging by the European Union's Alternative Investment Fund Managers Directive (AIFMD). The amount of scope that individual national regulators have in the application of the directive is adding complexity and compliance is adding another layer of administration which is driving up costs which may have to be passed to investors.
However, rather than being part of the problem, Guernsey is part of the solution because while the Island is in Europe geographically, it is not in the EU and therefore, is not required to implement AIFMD. A large part of our business relates to the EU but we also have a substantial amount of funds business which does not touch the EU at all.
As such, Guernsey has introduced a dual regulatory regime whereby it is possible to continue to distribute Guernsey funds into both EU and non-EU countries: the existing regime remains for those investors and managers not requiring an AIFMD fund, including those using EU National Private Placement (NPP) regimes and those marketing to non-EU investors; as well as a new opt-in regime which is fully AIFMD compliant for those who require it.
The Guernsey model
The approach means managers and funds with no connection to Europe can continue to use Guernsey's existing regulatory rules which are completely free from the requirements and costs associated with AIFMD.
For managers wishing to market into Europe, Guernsey provides a European platform but one which is not actually in the EU. Indeed, the NPP route is being favoured by many as it means little or no change to how things were done before AIFMD.
For those managers with elements of EU and non-EU business, parallel structures can be utilised. It will be possible to place non-EU business in a parallel or feeder structure for which AIFMD compliance would neither be required nor necessary.
The point is that Guernsey's dual regulatory regime provides optionality that allows clients to be serviced in the manner most appropriate to their specific circumstances.
The post-crisis environment, including AIFMD, has brought about greater scrutiny of structuring arrangements and in particular, issues of substance. Unlike some competitor jurisdictions, Guernsey has the advantage of significant substance already being present within many existing structures. Corporate governance is enhanced by having a significant pool of experienced non-executive directors.
Global private equity houses Apax, Apollo, BC Partners, Coller Capital, HarbourVest, Pantheon and Permira have their funds domiciled and serviced in Guernsey (with a number also having offices and staff present).
Guernsey has administrators ranging from major international names such as Northern Trust, State Street and Citco to specialist independent private equity administrators. Major global custodians are based in Guernsey and they are now being supplemented by specialist administrators who are establishing Guernsey-based depositaries to service private equity and real estate funds which have not previously had the requirement for a depositary but who can take advantage of a depositary-lite regime for non-financial assets under AIFMD.
Guernsey's funds industry now manages and administers more than 1,000 funds valued at nearly half a trillion US dollars, with the net asset value of private equity funds increasing 6.2% over the year. Guernsey domiciled investment funds are distributed to all corners of the globe.
Quality of service in Guernsey is evidenced by the fact that our providers now service $150 billion worth of open-ended funds which are domiciled in other jurisdictions, typically the Cayman Islands or Delaware, where there may be local substance challenges. Certain promoters have also decided to re-domicile funds to Guernsey which is facilitated by flexible migration rules.
Guernsey's strong ethos of corporate governance is also demonstrated through its position as a centre for listed vehicles; the two largely go hand-in-hand as companies are subject to and adhere to the rules applicable to the various international stock exchanges on which they list.
In 2006, KKR Private Equity Investors LP raised more than US$5 billion on Euronext Amsterdam utilising a Guernsey incorporated fund. The award-winning listing helped to raise awareness among US managers of Guernsey's capacity to act as a gateway to list vehicles on Euronext and other stock exchanges including the local Channel Islands Securities Exchange (CISE) and the London Stock Exchange (LSE). LSE figures show that there are more Guernsey entities listed on its markets than from any other jurisdiction globally (ex-UK); there are currently 125 Guernsey investment funds and trading companies on the LSE with a combined market capitalisation of £34 billion.
US managers are of the view that regulation is making it especially difficult to market funds into the EU. The extent of the experience which has been built up by fund administrators, the legal profession and the wider financial services community in the private equity funds sector in Guernsey is unrivalled at present. Guernsey offers a solution based in a European time zone with access to the EU market but without the administrative and cost burden of AIFMD and from a jurisdiction which has significant substance, high standards and a global reach.
An original version of this article was published in Private Equity Analyst, July 2014.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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