Guernsey is the global open-ended funds centre of today and tomorrow, says Fiona Le Poidevin, Chief Executive of Guernsey Finance.
The asset management community is undergoing significant change. Stuart Lawson, head of regulatory change and market development at Northern Trust in Guernsey, recently wrote an article highlighting the way in which the ongoing drive to de-risk banks, enhanced reporting triggered by the US Foreign Account Tax Compliance Act (Fatca) and the implementation of the EU Alternative Investment Fund Managers (AIFM) directive all provide fund administrators and custodians with process and technology challenges.
Given this environment and the prospect of further change in the years to come, investment houses will be glad to know that Guernsey is a jurisdiction that not only has a strong heritage in domiciling and servicing funds but it is also able to offer innovative solutions, including for open-ended platforms, to meet the challenges of today and tomorrow.
Global client base
Guernsey has more than 50 years' experience as a funds centre and today the island manages and administers more than 1,000 funds valued at nearly half a trillion US dollars. Guernsey domiciled investment funds are distributed to all corners of the globe.
Guernsey's open-ended funds sector includes approximately $140bn of hedge funds and funds of hedge funds business as well as more traditional equity, bond and money market products.
The popular Guernsey open-ended B scheme is well understood by the investment community for being distributed into many countries around the world including Australia, Hong Kong, Ireland, the Netherlands, South Africa, Sweden and Switzerland. There is a truly global client base, with promoters such as Ashmore, BlueCrest, Citadel, Credit Suisse, FF&P, Investec, Man Group, Marlborough, M&G, Schroders and Unigestion utilising Guernsey open-ended investment platforms.
The first Chinese currency-focused bond fund, the Renminbi Bond Fund, was established in Guernsey in 2007 as an open-ended fund in a protected cell company (PCC) structure. It was established by UK investment manager Stratton Street Capital, and has delivered five-year returns in excess of 90%. It is listed on the Irish Stock Exchange. Credit Suisse has established a range of single-manager hedge fund products using a Guernsey open-ended PCC which provide investors with opportunities to invest in broadly diversified, actively managed portfolios of insurance linked and other strategies. Since launch in 2007, the vehicle has grown to its current size of over $3.5bn.
The environment in Guernsey is particularly conducive for establishing and servicing open-ended funds:
- Close proximity to both the UK and Europe but outside of the EU.
- Political and economic stability with no external debt.
- An OECD white list jurisdiction that has signed up to US and UK Fatca and the OECD's Common Reporting Standard.
- Experienced managers, administrators, custodians and support services.
- Flexible company law.
- Access to major stock exchanges.
- A competitive tax regime.
- High standards of corporate governance.
Guernsey has a regulatory regime that provides a modern statutory structure for appropriate investor protection. Rules are relatively non-prescriptive – for example, flexible investment or leverage parameters – and instead rely on disclosure, with lighter-touch regulation for experienced investors. A fast-track approval process is available, the regulator is open to applications from new promoters and prime brokers can be located either in Guernsey or elsewhere.
Guernsey is in Europe geographically but it is not in the EU and therefore is not required to implement the AIFM directive. A large part of our business relates to the EU but we also have a substantial amount of funds business that 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 AIFM 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 AIFM directive compliant for those who require it.
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 the AIFM directive.
For managers wishing to market into Europe, Guernsey provides a European platform but one that 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 the AIFM directive. 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 AIFM directive 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 the AIFM directive, 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. There is a range of professionals with in-depth expertise in structuring, administering and advising on complex vehicles as well as experience in portfolio and risk management.
Corporate governance is enhanced by having a significant pool of experienced non-executive directors. They are held in high esteem by the investment community with regard to the expertise, knowledge and skills which they take to the boards on which they sit. Global asset managers such as Apax, Apollo, Ashmore, BC Partners, BlueCrest, Coller Capital, HarbourVest, Investec, Pantheon, Permira, Schroders and Unigestion 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 the AIFM directive. There is also a network of professional support services, including multi-jurisdictional law firms and global accountancy practices.
Quality of service in Guernsey is evidenced by the fact that providers service $150bn of open-ended funds that are domiciled in other jurisdictions, typically Cayman or Delaware, where there may be local substance challenges.
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 raised more than $5bn 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 and the London Stock Exchange. LSE figures show there are more Guernsey entities listed on its markets than from any other jurisdiction globally (ex-UK). There are currently 121 Guernsey investment funds and trading companies on the LSE with a combined market capitalisation of $56bn.
Guernsey has more than 50 years' experience in global cross-border fund structuring and distribution and that experience is now helping it provide a fresh solution for promoters of open-ended funds who are facing up to the challenges of today and tomorrow.
An original version of this article was first published by Global Investor, October 2014.