The Right Balance
Originally published in EMFM Global Domiciles Report, June 2012
Guernsey, as a fund domicile, has three main strengths, and in some ways the first is a consequence of the second two:
1. Guernsey has an excellent reputation; 2. Guernsey is a pragmatic jurisdiction both in terms of regulation and otherwise; and 3. Guernsey is a domicile of quality both in terms of service providers and the type of managers doing business here.
In terms of reputation, this can be translated into maintaining just the right balance between those less regulated jurisdictions and a jurisdiction that has a far higher regulatory burden, such as Luxembourg. The consequence of this is that Guernsey is often seen as the model which is a compromise between two ends of the scale. Often, European investors, particularly institutional investors, want a regulated environment and managers are looking for an environment that is well regulated but flexible. This is where Guernsey fits the needs of both investors and managers.
Another attraction for fund managers is that it is the premium destination for listed funds. There are more Guernsey-domiciled investment vehicles listed on the various markets of the London Stock Exchange than from any other jurisdiction.
The Guernsey offering
Guernsey has limited partnership structures which are mostly used by private equity, venture capital and infrastructure funds. It has protected cell and incorporated cell companies and was in fact the first jurisdiction to legislate for protected cell companies, so it's certainly the leader in that respect. Cell companies are usually used to run different types of open-ended strategies in different cells.
Risks as between cells are segregated but, it is a cost-effective and efficient way of setting up a multi-fund platform. Unit trusts can also be used for this purpose, but they are most commonly used as part of a property structure in the well known Guernsey Property Unit Trust (GPUT). The majority of listed funds are Guernsey limited liability companies.
Over the coming year, we don't anticipate any domestic changes which could be regarded as concerning from a fund perspective. However, the impact of Solvency II will be significant in terms of the assets available for allocation in the alternatives sector. European regulatory changes are influencing the choices of insurance and pension managers in respect of asset allocation who may be forced to move, at least in part, away from alternatives. However, given the returns available (not to mention the risk) in respect of government bonds and equity markets, alternative assets will continue to have an important role to play. It is identifying how that will play out which will be interesting.
For example, Guernsey already has a protected cell managed account platform. Appleby is present in all the major funds jurisdictions offshore, but one of the unique things is that we regard ourselves as agnostic in determining which jurisdiction is the best fit for a client. This allows us to carry out an independent analysis as to which jurisdiction suits the needs of a particular client based on their target investors, their asset class, track record and other commercial drivers. Another positive of Appleby's global presence is that because we see what happens across the whole offshore funds sector, we have access to trends and developments in each jurisdiction which can then be brought across to the others. This allows us to identify and implement initiatives across all our jurisdictions as soon as they are seen offshore. We have seen that, in particular or with some of the more interesting insurance linked structures as well as in private equity and venture capital.
Guernsey is known for quality and is a centre of excellence in terms of fund servicing. The jurisdiction has a global name in providing investment management, custody, administration, accounting and legal services to the funds sector. Managers looking to domicile an onshore or offshore structure in Guernsey are able to gain access to best-in-class service providers.
For example, if a manager is looking at an investment trust domiciled in the UK, it could also consider a Guernsey-incorporated but UK-domiciled investment trust, which gives the same tax benefits, but offers greater flexibility from a corporate perspective.
In terms of domestic regulation thereis nothing substantial on the horizonlikely to impact the jurisdiction. Weare updating our Class B rules whichare for open-ended funds, and obviouslywe are watching closely whatis happening with the AlternativeInvestment Fund Managers (AIFM)Directive. We have delegates representingus in Brussels who are puttingacross an offshore perspective. It maybe that when the AIFM Directive isintroduced, Guernsey will need to introducean AIFM Directive-compliantregime but, again, to the extent that isrequired, Guernsey is already a well-regulatedjurisdiction and the adjustmentsrequired to put in place a parallelAIFM Directive-compliant regimewould be minimal.
The fund industry has seen positive changes in Guernsey in the past five years. This trend, which began 10 or 15 years ago but which has accelerated over the past five years, has seen global investment managers and small boutique investment managers choosing to domicile not just their funds, but also management structures, in Guernsey.
For example, BlueCrest, BC Partners, Permira, Cinven, Partners Group and Terra Firma have all set up offices in Guernsey to run their funds. This obviously increases the expertise available in Guernsey in that there are some really high-level individuals who have moved to the island, who are carrying out fund management activities here and are actively involved in the Guernsey fund industry, adding value that can only strengthen the jurisdiction.
The most obvious participants within the Guernsey funds industry are those who have a high profile such as Jon Moulton and Guy Hands. However, there are a number of very clever people who have moved to the island more recently who operate under the radar but are no less effective.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.