Originally published in HFM Week, Guernsey Special Report, May 2012
Fiona Le Poidevin, Deputy Chief Executive of Guernsey Finance, explores why conditions are right to consider redomiciling funds in Guernsey.
The global financial crisis initially came to a head in 2008, yet some four years later and the wave of repercussions continues, particularly in the eurozone but also through the ongoing global economic downturn.
As a leading international finance centre, Guernsey cannot be completely immune from these worldwide issues however the key indicators are suggesting that the island, led by its funds sector, is proving extremely resilient.
The financial crisis and its aftermath have also brought a renewed focus on improved standards. Guernsey continues to be consistently placed within the very top tier of fund domiciles and this is proving particularly attractive to investors and promoters seeking out quality.
As a corollary, there has also been a rft of regulatory proposals, including AIFMD. At present, it seems as though Guernsey's position outside the EU will enable it to over a less prescriptive regime for funds not touching this market and yet, access to the continent will be retained both in the medium and long term, thereby allowing the island to continue servicing structures with a connection to Europe. It is within this context that it is worth considering redomiciling funds in Guernsey.
The most significant development within the funds industry during the immediate post-crisis environment has been the drive for improved standards. The Madoff scandal was the high-profile example of the worst practices within the sector but it was by no means alone and as such, there is now a demand from investors and promoters for quality service provision, strong corporate governance and robust regulation. It is precisely these factors which are Guernsey's greatest assets as a funds domicile.
Quality service provision
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 shi_ where the balance of business has moved from being largely retail, equity-traded/cash-based schemes to predominantly institutional, alternative and niche funds.
The period included significant growth, particularly of esoteric asset classes through the middle of the last decade. This experience means that the island has built a wealth of expertise and first-class infrastructure for the structuring, management, administration and custody of the widest range of funds.
The island plays host to a broad selection of administrators, ranging from independent, boutique providers to large, multinational organisations, many with bespoke IT solutions. Guernsey's fund industry can also draw on the services provided by the island's 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 global accountancy firms where there is specialist expertise.
This expertise and infrastructure means that often Guernsey providers are asked to service schemes domiciled in another jurisdiction, such as the Cayman Islands. Statistics from the Guernsey Financial Services Commission (GFSC) show that during 2011, the island's service providers entered into 43 new contracts to provide either management, administration or custody services to non-Guernsey schemes. Many Cayman funds are currently administered in Dublin and so the advent of AIFM may see increasing numbers of promoters considering a jurisdiction, such as Guernsey, which is likely to be able to offer an alternative regime.
Indeed, it is not unheard of for promoters to be so satisfied with their experience of the island through the 'non-Guernsey' route that they decide to redomicile their funds to Guernsey. Certainly, this provides more weight and substance from a tax perspective as the majority of services are provided from the jurisdiction in which the fund is domiciled.
There are many ways in which funds can be redomiciled but very often this involves establishing a new structure in the new jurisdiction of choice and transferring the assets and winding up the existing fund, which is a process that can be both time consuming and inefficient from a tax planning perspective.
However, Guernsey has migration provisions in its company law which, if the fund is a corporate from a jurisdiction with reciprocal legislation, for example Cayman, BVI, Malta and Ireland will allow the legal seat of the fund to be migrated without the need to establish a new vehicle in the island.
A notable development during 2011 was the migration from Jersey to Guernsey of the Cubic Property Fund Limited. It has been authorised as an open-ended, Class B scheme by the GFSC and has maintained its listing on the Channel Islands Stock Exchange (CISX). Subsequent to the migration, shareholders voted in favour of a P Share issue which raised an additional £25.5m.
Guernsey funds 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 (LPs). During 2012, Guernsey is expected to make changes to its laws so that LPs can be migrated in to and out of the island. Also in 2012, Guernsey is set to introduce Limited Liability Partnerships (LLPs) with legislation that will allow for the inbound and outbound migration of LLPs.
Guernsey open and closed-ended funds are now promoted and sponsored by leading institutions in more than 55 financial centres globally. Statistics from the GFSC show that a total of 94 new open and closed-ended funds were licensed in the island during 2011. One of the major advantages of using Guernsey entities is that they can be listed on the London Stock Exchange (LSE), Euronext Amsterdam, the local CISX – which now has more than 4,300 listings – and the Hong Kong Stock Exchange (HKEx), among others.
Figures from the LSE to the end of December 2011 show that there are more non-UK incorporated entities listed on its markets from Guernsey than any other jurisdiction globally.
Robust yet pragmatic regulation
A major attraction of re-domiciling funds to Guernsey within this post-crisis environment is that the GFSC has established a reputation for its robust yet pragmatic approach to regulation. For example, 'fast track' routes have been introduced which allow for the speedy launch of funds targeted at professional investors and yet, those investors also have the security of knowing that all Guernsey funds are regulated.
In addition, the GFSC ensures that funds follow the appropriate local or international codes of corporate governance and the fact that the island has a pool of experienced and well-qualified non executive directors reassures investors and promoters that Guernsey service providers are working to the highest standards.
Indeed, Guernsey's position as a well regulated, cooperative and transparent jurisdiction has been reinforced by the fact that external agencies such as the UK Government, the IMF, OECD and Financial Stability Board (FSB) continue to place Guernsey within the very top tier of leading international finance centres globally. The attractiveness of the Guernsey environment within the post-crisis world is illustrated by some of the latest developments. For example, the results of an independent survey published earlier this year by www.FundDomiciles.com show Guernsey to be the most popular fund domicile among a sample of UK-based alternative investment fund managers.
In addition, while the net asset value of investment funds under management and administration in the island fell in the second half of 2011, there has been growth from £200.4bn at the end of December 2008 to reach £261bn (US$417bn) at the end of December 2011, including an increase of 1.6% during last year.
In particular, the island continues to grow its reputation for excellence in alternative and niche funds, especially private equity. _is 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 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, May 2011. Jon, who has a house in the island and whose Guernsey-domiciled investment company is listed on the main market of the 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 arm establishing an operation in Guernsey, Guy has also decided to buy a property and live on the island.
This reflects the fact that Guernsey is not just an ideal location for locating management companies but it is also attractive as a residence for the managers themselves. _is is no doubt helped by the fact that Guernsey has a zero rate of corporate tax as standard, 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 £110,000 on non-Guernsey source income or £220,000 on all income.
In addition, Guernsey is able to provide an attractive fiscal regime for funds. The island is undertaking a review of its 'Zero-10' corporate tax regime but the politicians have already made it clear that the zero product and tax neutrality for Guernsey's international client base will remain, irrespective of the outcome of the review.
The exempt regime for the funds industry is not affected by the review. For example, collective investment schemes remain exempt from Guernsey taxation. Indeed, the exempt regime is in the process of being modernised so that from later in 2012, exempt status will apply to any body forming part of the structure under which the scheme as a whole operates.
The changes to the exempt tax regime illustrate Guernsey's commitment to continually providing an attractive environment for funds. In a similar vein, the island's authorities are fully engaged in the discussions regarding AIFMD to ensure that Guernsey is appropriately represented through the process and thereby best-placed going forward in terms of having access to our closest markets.
At present, it seems as though Guernsey's access to the continent will be retained both in the medium and long term thereby allowing it to continue servicing structures with a connection to Europe, while the island's position outside the EU will enable it to over a less prescriptive regime for funds not touching this market.
Indeed, there have been articles in the Financial Times highlighting how hedge funds and private equity funds in particular are already moving 'onshore' in anticipation of the introduction of AIFM and its potential for significantly increasing the regulatory burden and compliance costs of Ucits funds. In particular, some promoters are starting to co-domicile their funds, offering both 'onshore' and 'onshore' products in order to meet the demands of their particular investors.
In the post-crisis environment, fund managers should look to make sure that they are in the right place at the right time. Guernsey's long standing expertise and infrastructure, combined with its robust regulation, strong corporate governance, tax neutrality and an AIFM alternative means that it is ideally placed for the redomiciliation of funds.
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.