Originally published in the HFM Week, Guernsey Report, June 2008
Chris Gambrell talks to HFMWeek about the importance of being able to list a fund on the London Stock Exchange and how Praxis Fund Services offers its clients the full package
A new generation of permanent capital hedge fund vehicles has taken hold in Guernsey. Following the influx of interest over the past two years, the potential for listed investment funds structured on the closed-ended registered fund framework, whether listed on the London Stock Exchange (LSX), AIM or Euronext, looks set to maintain its footing.
According to Chris Gambrell, managing director, Praxis Fund Services, the continuing interest in permanent capital has stemmed from understandable concerns about managing redemptions coming from investment managers and investment advisors across all types of asset strategies. "Managers are always going to have to worry about liquidity for redemptions," explains Gambrell.
The closed-ended permanent capital structure takes away that concern. "Redemptions essentially don't take place," says Gambrell. If an investor wants to leave the fund they can sell shares in the secondary market because those funds are listed on a recognised exchange.
In Guernsey, Praxis is one of a handful of administrators that is experienced in the permanent capital field. In 1994, the first permanent capital hedge fund in Guernsey was launched. "Several of the team here at Praxis, including myself, were involved with that fund," says Gambrell.
A Winning Combination
In the subsequent years, Gambrell and his team have continued working with permanent capital vehicles, resulting in the establishment of Praxis Fund Services three years ago. In his view, a combination of experience and loyal staff has set Praxis apart. "Being a privately-owned administrator, we can focus on providing clients the best possible premium service and make business decisions very rapidly," says Gambrell.
In his view, there has been a noticeable increase in the number of fund of hedge funds and single manager hedge funds that are using these structures and thereby Guernsey as a domicile. "Guernsey has a well-established track record. As a result, we are now seeing an increase in the volume of permanent capital vehicles as it is more widely talked about throughout the hedge fund community," says Gambrell.
Guernsey's proximity to the LSX has also proved to be a distinct advantage for managers looking to use permanent capital in Guernsey. "Managers simply like having the vehicle listed in London because it is so well-established," explains Gambrell. He believes there is credibility attached to a LSX or AIM listing from a worldwide perspective. "Many in the hedge fund industry view London as the centre of the financial industry," he explains.
In Guernsey, the interest in permanent capital is largely coming from US managers. US-based managers are looking to the permanent capital vehicles because they like the basic product for liquidity management and because it also comes with a London listing. "They are looking to widen their investor network and potentially source more of a European investor community," says Gambrell. "It is not practical to administer a majority European investor database from the US East Coast or the Caribbean because of the time difference. Therefore a Guernsey permanent capital vehicle is ideal from their perspective," he adds.
With a clear majority of advantages, Gambrell acknowledges that there are certain disadvantages in choosing the closed-ended fund structure. For example, if the listed share price moves at a discount of the Net Asset Value (NAV) there can be a problem. "Investors can become discontent because they can't exit the fund at the NAV. They have to exit in the secondary market at a discounted price. Clearly that is a disadvantage," says Gambrell. It is up to the board of the fund, in conjunction with the investment manager, to try to manage discounts, to ensure they do not get out of hand. "For fund managers that are dealing with a relatively liquid asset perhaps they should go with a traditional open-ended structure. But when you are dealing with an illiquid asset the strong advantages associated with using a permanent capital structure outweigh this disadvantage," says Gambrell.
When it comes to servicing clients, the team at Praxis has experience using the professionals in London, the lawyers and the brokers that need to be accessed. Gambrell and his team aim to put their client in touch with the relevant services as quickly as possible. "We're very much able to assist and coordinate in the launch. Once the launch has successfully taken place, we move onto the more standard administrator role of accounting, NAV calculation, taking care of a company's secretarial and board meetings, annual filings, statutory filings which are more traditionally associated with administration," says Gambrell.
Alongside premium service and the world-renowned London listing, Gambrell believes that Guernsey brings its own advantages to the table. In recent years there has been the registered fund framework in Guernsey that allows the administrator to certify the material parties to the fund, and make the application to the regulator in Guernsey. In turn, the regulator guarantees a three working day turnaround in authorising the fund. This gives the client a high degree of certainty in their fund launch timetable and process.
According to Gambrell, the take-up of closed-ended funds since the streamlined authorisation process was introduced has been tremendous. "Closed-ended funds were already coming to Guernsey in quite significant volumes. That accelerated markedly in 2007, although this has slowed down in the earlier part of 2008," says Gambrell. He acknowledges that Guernsey, and therefore Praxis, can never be devoid of being correlated to the world's economic situation, but explains that in general, clients have been showing an increased interest in the three-day turnaround at the end of the launch process.
Guernsey has already gone through the majority of regulatory changes that need to be put in place in order to make it an attractive jurisdiction for permanent capital vehicles and funds generally. Currently, there are changes happening to the company's law, with the aim of putting the legislative at the forefront of international standards. But in Gambrell's view, "the registered fund process is much more significant. Company law, whilst helpful, is not the ultimate attraction for business".
With many years of hedge fund experience attributed to the island of Guernsey, professionals agree it is in a favourable position. "It is very well set-up and regulated," says Gambrell. The regulator is controlling administrators closely through the registered fund regime. It is the administrators who are now sponsoring the majority of fund launches in Guernsey.
With a look to the future, Gambrell foresees continued interest in permanent capital worldwide including growing curiosity coming from Asia. He concludes: "In Asia, there is a strong perception that a London listing has a very high profile and we will see Asian managers tapping into the services that Guernsey has to offer."
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.