Originally published in Asia Fund Manager, December 2011
Fiona Le Poidevin, Deputy Chief Executive of Guernsey Finance, explores Guernsey's position as a leading domicile for private equity funds and the reasons behind its success.
As the promotional agency for the Island's finance industry, we have just returned from exhibiting at the AVCJ Forum in Hong Kong. This is the second year in a row we have attended as it is a very good opportunity to advertise Guernsey's credentials in the private equity arena among some 1,000 delegates, many of which are Asian private equity managers or their advisers.
What we can see is that there is growing awareness of what Guernsey can offer in terms of being a leading European private equity centre. This is no doubt helped by the fact that Guernsey-based firms have been establishing offices in the Asia region and several of these joined us at the conference – administrators International Administration Group (IAG) and Trident and law firms Mourant Ozannes, Ogier and Collas Crill.
Having these offices in addition to our own representative office in Shanghai is a major boost to Guernsey's profile in the region but also demonstrates the way in which an increasing number of professionals see the potential for Guernsey to offer fund services to the Asia market.
Private equity funds in Guernsey
Guernsey has an investment fund industry with a heritage that stretches back half a century. During the past two decades, the sector has seen a gradual yet sustained shift where the balance of business has moved from being largely retail, equity-traded/cash-based schemes to predominantly institutional and alternative funds. This experience means that the Island has built a wealth of expertise and first class infrastructure for the structuring, management, administration and custody of not just traditional funds but also alternatives, in particular private equity.
Today, total funds business in the Island stands at just over £274 billion (US$ 428 billion) at the end of June 2011 – up 4% in the quarter and 22.5% year on year. The private equity and venture capital sector has seen especially strong growth, reaching a total net asset value of more than £75 billion (US$ 117 billion) at the end of June 2011. The Island's reputation for excellence in this asset class has been reaffirmed by a Private Equity News / State Street survey where 61% of Chief Financial Officers (CFOs) responding said that Guernsey was their preferred destination for private equity outsourcing.
Jon Moulton, Chairman of private equity firm Better Capital, gave a ringing endorsement of the Island's funds industry when speaking in front of more than 300 delegates at the Guernsey Funds Forum in London this May. Jon, who has a house in the Island and whose Guernsey-domiciled investment company is listed on the main market of the London Stock Exchange (LSE), said: "Guernsey has a very good reputation; it works very well....Guernsey needs to carry on doing what it's doing into the future and it will prosper."
Another significant figure in the private equity industry is Guy Hands, Chairman of Terra Firma. As well as the private equity firm joining the likes of Permira, EQT and Apax by establishing an operation in Guernsey, Guy has also decided to buy a property and live in the Island. This reflects the fact that Guernsey is not just an ideal location for management companies but is also attractive as a residence for the managers themselves.
This is no doubt helped by the fact that Guernsey has an exempt regime for collective investment schemes, a zero rate of corporate tax, no withholding tax on dividends paid, no capital gains tax, no inheritance tax and no indirect sales taxes, and personal income tax remains levied at a maximum of 20%, with a cap of up to £100,000 on non-Guernsey source income or £200,000 on all income.
Infrastructure and expertise
However, our standing in the private equity space does not mean that we are in anyway a "one-trick pony". In fact, during the last year we have seen new investment structures launching across a range of niche asset classes, such as aircraft, classic cars, dispute resolution and films which all add to the existing mix, which includes art, fine wine, timber and renewable energy.
Our administrators and custodians also provide services to non-Guernsey funds but a large proportion of their business relates to Guernsey open and closed-ended funds, which are now promoted and sponsored by leading institutions in more than 55 financial centres globally. These can be established through a range of flexible investment vehicles such as companies, unit trusts, the Guernsey-pioneered Protected Cell Companies (PCCs), Incorporated Cell Companies (ICCs) and limited partnerships.
There is a broad range of administrators and custodian in the Island, many with specific expertise and bespoke IT solutions for alternative assets. Guernsey's fund industry can also draw on the services provided by its banking, wealth management and risk management sectors. In addition, it is supported by a comprehensive network of investment, legal, tax, audit, accounting and actuarial advisers, including multi-jurisdictional law firms and the 'big four' accountancy firms where there is specialist expertise in alternatives.
The Island's financial services regulator, the Guernsey Financial Services Commission (GFSC), has grown a reputation for its robust yet pragmatic approach to regulation – for example, all Guernsey schemes remain regulated but 'fast track' routes have been introduced which allow for the speedy launch of funds where appropriate. In addition, Guernsey's skilled workforce has access to the GTA University Centre, which works with the Institute of Directors (IoD) to ensure that the Island has a pool of experienced and well qualified non-executive directors maintaining high standards of corporate governance.
One of the Island's great strengths is the ability for Guernsey vehicles to list on the LSE, the Hong Kong Stock Exchange (HKEx), Euronext Amsterdam, stock exchanges in Toronto, Australia and Frankfurt and the Channel Islands Stock Exchange (CISX) (which has nearly 4,500 securities listed), amongst others.
The listing of the US$5bn Guernsey limited partnership KKR Private Equity Investors LP on Euronext has been a major contributor to the Island's success in this asset class. Data direct from the LSE to the end of December 2010, shows that there are more Guernsey-incorporated companies and securities listed on its markets than there are entities from any other competitor jurisdiction. In addition, Guernsey companies received approval in May this year to list on HKEx.
The international stage
Receiving approval for Guernsey companies to list on HKEx is a very positive development for our finance industry in terms of doing business in Asia. One of our key messages to this audience is that Guernsey is well regulated and transparent international finance centre. This reputation has been enhanced by the publication of three sets of reports during 2011.
In January, the IMF commended Guernsey's high standards of financial regulation, supervision and stability along with our robust criminal justice framework. Later that same month, the OECD's Global Forum built on its 'white listing' of Guernsey by endorsing the Island's ongoing commitment to tax transparency and exchange of information. In addition, this November the Financial Stability Board (FSB) presented a report to the G20 meeting in Cannes which placed Guernsey within the top tier of jurisdictions adhering to international standards and thereby helping to protect global financial stability.
Indeed, Guernsey has now signed Tax Information Exchange Agreements (TIEAs) with 29 jurisdictions, including China. The Guernsey Government has also signed a Memorandum of Understanding (MoU) with the Shanghai Financial Services Office and the GFSC has signed a statement of cooperation with the China Banking Regulatory Commission (CBRC), which we hope will be followed by something similar with the China Securities Regulatory Commission (CSRC) in the coming months. These are in addition to the range of existing MoU's, including those with Hong Kong and Mauritius.
We are not blind to the fact that there are many challenges ahead. For example, the 'Zero-10' corporate tax systems of the Crown Dependencies have come under European scrutiny. We are undertaking a review but our politicians have been clear from the outset that any future regime must be both compliant and also competitive, i.e. there will be continued tax neutrality for financial services products. Indeed, the fund industry's exempt status is not under threat and in fact has been extended.
The waters ahead are unlikely to make for plain sailing but we will take the necessary steps to ensure that the conditions remain in place for Guernsey to continue as a leading private equity centre into the future.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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