Guernsey Finance is the promotional agency for the Island's finance industry and as its Chief Executive, Fiona Le Poidevin, is constantly extolling the virtues of Guernsey as an International Finance Centre (IFC), including as a jurisdiction for domiciling, managing and administering investment funds.
I genuinely believe that Guernsey offers many advantages over our competitors and if anything, this has been accentuated during the current challenging conditions to the extent that the Island offers a unique solution for investment houses from all around the globe who are seeking to launch funds.
The global financial crisis and the subsequent worldwide economic downturn have brought about much more challenging conditions for asset managers. Firstly, investors are now more cautious and as such, managers are finding fundraising more difficult but in Guernsey, our experience is that there are positive signs coming into view. The value of funds under management and administration in the Island grew by £10 billion in the first six months of the year to take the total to £286 billion at the end of June 2013. This includes more than £87 billion of private equity funds, which is an asset class where Guernsey has become the jurisdiction of choice.
Global private equity houses Apax, BC Partners, Coller Capital, HabourVest and Permira have all successfully raised multi billion dollar Guernsey domiciled funds in the last couple of years. Investors will have been comforted by their strong track records yet, in Guernsey, we are also seeing less well known groups successfully launching funds where there is a convincing investment proposition and in particular, we are seeing growing interest in niche asset classes, such as renewable energy and Insurance Linked securities (ILS).
Standard and Poor's defines ILS as instruments through which insurance risk is transferred in a capital markets contract. For investors, this represents a unique asset class which is uncorrelated with the general financial markets. The Guernsey domiciled DCG Iris Fund has been established as a closed-ended feeder fund into the Low Volatility Plus Fund managed by Credit Suisse Asset Management's ILS team.
Dexion Capital has raised over £60 million for the fund which has been listed on the Main Market of the London Stock Exchange (LSE). Guernsey is also home to two of the most significant developments in renewable energy investment in the UK: The Guernsey domiciled Bluefield Solar Income Fund raised an initial £130 million when listing on the LSE and is the first solar energy infrastructure fund of its kind in the UK; and The Renewables Infrastructure Group (TRIG), which invests in wind and solar energy generation assets, raised £300 million when listing on the LSE in what Bloomberg has described as the UK's biggest initial public offering of a clean-power company.
These examples also reflect Guernsey's reputation as a centre of excellence for listed funds. The Island is able to offer access to global capital markets, including not just the LSE but also Euronext, Dublin, Frankfurt, Toronto, Australia and Hong Kong, as well as the Channel Islands Stock Exchange (CISX), which is based in Guernsey. The Island's pre-eminence in this space is reflected by the fact that it is home to more non-UK entities listed on the LSE than anywhere else.
We can see that while fundraising remains a challenge, in Guernsey, at least, there are signs of improvement. Asset managers are being assisted by a 'fast track' regulatory regime and also in particular, the innovative use of the Guernsey-pioneered cell company legislation. By taking the cell of an existing Protected or Incorporated Cell Company run by a well established local Guernsey administrator, less established managers have an 'incubator' vehicle that is quicker and more cost effective to set up but can be spun off to standalone when assets under management grow. This is an important development at a time when margins are being squeezed, not just through investor pressures but also due to the growing regulatory burden.
The most significant regulatory challenge for the European orientated asset management community has been the EU's Alternative Investment Fund Managers Directive (AIFMD).
Although Guernsey is in the European time zone, the Island is not in the EU and therefore, it is not required to implement AIFMD. However, with Europe still one of our biggest markets, a large proportion of business relates to the EU in some form. Yet, we also have a substantial amount of funds business which originates outside of Europe and does not touch the EU at all.
Therefore, Guernsey has evolved its regime to ensure that we can continue to service both EU and non-EU business in the most effective way.
Managers and funds with no connection to the EU continue to be able to use the existing regulatory regime which is completely free from the requirements associated with AIFMD, which has significant operational and cost benefits. Secondly, Guernsey's position as a third country means that we have not had to introduce a fully equivalent AIFMD regime immediately to maintain access to EU markets.
The Guernsey Financial Services Commission (GFSC) has signed bilateral cooperation agreements with 27 securities regulators from the EU and EEA, including the UK, Germany and France. The agreements mean
Guernsey funds continue to be able to market to appropriately qualified investors in these European countries through their National Private Placement (NPP) regimes, subject to completion of the notification procedure of the relevant national securities supervisor. NPP regimes are expected to remain in place until 2018.
However, it is anticipated that a full passporting regime for non-EU managers will be implemented from July
2015. Guernsey intends to ensure that managers will be ideally placed to take advantage of being able to market alternative investment funds (AIFs) on a pan-European basis with a single authorisation, as passporting is currently envisaged to operate. Indeed, the GFSC has issued a domestic consultation on a full
AIFMD equivalent opt-in regime, which is expected to be fully operational from 1 January 2014 and certainly well in time for the passporting regime for third countries in July 2015.
Guernsey's position as a domicile which is based in the European time zone but outside the EU means that it is able to offer true optionality for asset managers from all around the world who are seeking to launch funds. However, asset managers wishing to place their funds 'offshore' to put them outside the scope need to make sure that there is sufficient substance in the jurisdiction to demonstrate that not just the fund but also the manager can be genuinely considered to be based outside the EU. For example, one option might be for a non-EU AIF to opt to be self-managed and therefore a non-EU alternative investment fund manager (AIFM) but this will be subject to proving sufficient substance to the arrangements.
Guernsey has a huge advantage as a fund domicile in the existing standards regarding oversight and due to the substance already present in existing Guernsey domiciled structures. Guernsey already plays host to major managers, such as Apax, BC Partners, Bluecrest, Man Group, Mid Europa, Permira and Terra Firma which all have offices and staff in the Island.
There are also fund administrators, ranging from major international names to boutique, independent operations, coupled with a significant pool of qualified non executive directors who not only provide supportto in-house teams but also third-party services. Quality of service is evidenced by the fact that Guernsey providers now manager or administer nearly £100 billion worth of assets from open-ended funds which are domiciled in other jurisdictions.
In addition, unlike many competitor jurisdictions, Guernsey already has well-established custody providers, which can help meet the new depositary requirements under AIFMD. They provide dealing and settlement and also offer services over and above traditional custody services to encompass robust support for corporate governance, often performing a fiduciary role.
It should be emphasised that any arrangements need to have sufficient substance to work not just from a regulatory perspective but also in terms of tax, for example corporate residence and implications for VAT and transfer-pricing.
Meeting these requirements is important because AIFMD is not the only regulatory or legislative initiative which will impact the fund management community in the coming years and the dye is cast in terms what the authorities are seeking from arrangements. Indeed, the US's Foreign Account Tax Compliance Act (FATCA) has proved something of a game changer and while there does appear some potentially positive news regarding listed entities, there is no doubt that it will add yet another layer of compliance burden. Guernsey has agreed in principle and is already well down the path to signing a Model I agreement with the US, which would follow on from the equivalent Inter-Government Agreement the Island signed with the UK at the end of October. Adopting these high standards means that Guernsey is ideally placed to help asset managers deliver what is expected of them not just now but also in the future.
An original version of this article was published in Lawyer Monthly, November 2013.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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