Guernsey: Darwinian Evolution And The Guernsey Investment Fund Industry

Last Updated: 3 December 2013
Article by Joe Truelove

How did we get here?

Guernsey's investment industry began in the 1960s providing services to predominantly open ended unit trusts which were sold mainly in the UK to retail investors and were unconstrained by prescriptive regulation or codified corporate governance.

Today the Guernsey investment fund industry is dominated by closed ended structures, which are all subject to regulation and attract predominantly institutional investors and high net worth individuals. We have become experts in complying with the very highest standards of regulation and corporate governance.

Recent evolution

Funds under management in Guernsey increased by £8 billion or 4.45% in the 12 months to 30 June 2013 from £179 billion to £187 billion.

Closed ended schemes, which at £137 billion comprise 74% of the total, grew in value by £11 billion from £126 billion. Meanwhile open ended fund values in Guernsey have fallen in the same period by £3 billion from £53 billion to £50 billion.

Of the 830 Guernsey domiciled funds: 324 invest in private equity, 153 in equities, 145 in property, 81 in debt and 72 are funds of hedge funds and 55 others. Over the last 12 months private equity, equities and debt funds have risen in number.

Survival of the fittest

Closed ended funds, especially private equity funds, are Guernsey's key strength. Guernsey is home to funds managed by some of the best known names in private equity including Terra Firma, Apollo, Cinven, Pantheon, Permira, HarbourVest and Apax.

Also falling within the closed ended sector but with a different investor profile and a wide variety of both liquid and illiquid asset classes are the closed ended listed funds. Guernsey has more investment funds listed on the London stock exchange than any other jurisdiction outside the UK. Already in 2013 there has been a number of high profile investment companies listed on the LSE, typically investing in income generating strategies including debt and infrastructure.

Facing extinction or genetic drift?

Open ended funds comprise only 26% of funds under management in Guernsey and the numbers and values of these schemes have been in gradual decline since the credit crisis. This is an area where we need to work harder to attract new structures to enable Guernsey's open ended sector to adapt and flourish. For instance there are only 28 hedge funds incorporated in Guernsey so this represents an asset class where improvement is potentially achievable.

Evidence of Guernsey's capability to adapt is provided by the growth by £7 billion or 7.8% in value over the last twelve months in the values of Non Guernsey schemes where some element of administration, custody or management is provided from Guernsey. There are actually 263 Non-Guernsey open ended schemes with £99 billion of funds under management (including 130 Cayman and 37 BVI schemes).

Adaptation to the changing environment

For the moment Guernsey funds can be marketed in much of the EU via national private placement rules and given that most fund promoters in Guernsey have funds which are privately placed to institutional asset managers this is nothing new to them.

Guernsey has created a dual regime to accommodate EU AIFMD thus enabling promoters to have the choice of forming EU AIFMD compliant and equivalent structures (once third country provisions come into force) and/ or non-compliant structures.

Some managers wish to remain outside of the EU and this presents opportunities to Guernsey for managers who wish to relocate here or for those who wish to employ teams in Guernsey to provide either portfolio management or risk management on island.

While the EU is a large market, it is not the only market for Guernsey and efforts continue to promote Guernsey funds internationally, which are managed outside the EU, to non-European institutional investors who prefer lighter regulation.

Natural selection

How has a small jurisdiction like Guernsey surrounded by much larger competitors survived so long and developed such a strong niche position in the ecosystem? Because like a family of meerkats in the Kalahari desert Guernsey survives as a funds domicile through team work, responding quickly to threats, working exceptionally hard and nurturing the next generation of business.

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.

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Joe Truelove
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