Fiona Le Poidevin, Chief Executive of Guernsey Finance, explores the virtues of Guernsey for private equity.
During the last decade Guernsey has built a strong reputation as a leading jurisdiction for domiciling and servicing investment funds, especially private equity.
Figures to the end of December 2013 show that the value of funds under management and administration in Guernsey reached nearly half a trillion US dollars, with the net asset value of private equity funds reaching more than $146 billion – a rise of 6.2% over the year.
Indeed, global private equity houses Apax, Apollo, BC Partners, Cinven, Coller Capital, Mid Europa, Pantheon, Permira and Terra Firma have all either successfully raised multibillion dollar Guernsey-domiciled funds in the last couple of years or established Guernsey operations. Guernsey's M&A scene has also been buoyant, with Appleby's Offshore-i report to the end of last year showing that there was an increase in Guernsey companies acting as acquirers in Q4 and a total of 49 deals involving Guernsey targets in 2013's final quarter worth $2.7 billion.
From a US perspective, one of the most notable developments came in 2006 when Kohlberg Kravis Roberts & Co. (KKR) chose Guernsey as the domicile for its KKR Private Equity Investors LP listing on Euronext Amsterdam. The award-winning listing raised more than $5 billion at the time and helped to raise awareness among US managers of Guernsey's capacity to act as a gateway to list vehicles on Euronext and international stock exchanges including the London Stock Exchange (LSE), those in Australia, Toronto, Frankfurt, Hong Kong and the local Channel Islands Securities Exchange (CISE). Indeed, LSE figures to the end of December 2013 show that there are more Guernsey entities, 115, listed on its markets than from any other jurisdiction globally (ex-UK).
HabourVest Partners is a more recent example of a US private equity house utilising Guernsey with three investment funds currently domiciled in Guernsey. For example, its closed-ended investment fund HarbourVest Structured Solutions II L.P in late 2012 acquired an investment portfolio comprising private equity fund interests and direct co-investments from Conversus Capital L.P., a Guernsey investment fund listed on NYSE Euronext in Amsterdam, for $1.4 billion.
One of Guernsey's biggest advantages is its infrastructure, including fund administrators ranging from major international names to boutique, independent operations that can not only provide support to in-house teams but also provide third-party services. Quality of service is evidenced by the fact that Guernsey providers now not only administer or manage assets of Guernsey open and closed ended funds but also nearly $155 billion worth of assets from open-ended funds which are domiciled in other jurisdictions, typically the Cayman Islands and BVI, where there are local substance challenges.
It is also not unheard of for promoters to be so satisfied with their experience through the 'non-Guernsey scheme' route that they decide to re-domicile funds to Guernsey. This certainly provides more weight and substance from a tax and regulatory perspective.
Issues surrounding oversight and substance have become of heightened importance in recent times, particularly with the advent of funds legislation such as the European Union's Alternative Investment Fund Managers Directive (AIFMD) which aims to create a comprehensive and effective regulatory and supervisory framework for investments in hedge, private equity and property funds.
Guernsey is not in the EU and therefore, is not required to implement AIFMD. However, while a large part of our business relates to the EU, we also have a substantial amount of funds business which originates outside and does not touch the EU at all.
As such, Guernsey has introduced a dual regulatory regime such that it is possible to continue to distribute Guernsey funds into both EU and non-EU countries: the existing regime remains for those investors and managers not requiring an AIFMD fund, including those using EU National Private Placement regimes and those marketing to non-EU investors; as well as a new opt-in regime which is fully AIFMD compliant.
For those managers with elements of EU and non-EU business, the potentially onerous administration burden and costly compliance with AIFMD will mean that parallel structures are likely to be given serious consideration. It will be possible to break the non-EU business away into a parallel or feeder structure for which AIFMD compliance would neither be required nor necessary.
Unlike many competitor jurisdictions, Guernsey also already has well-established custody businesses. They provide dealing and settlement and services over and above traditional custody services to encompass robust support for corporate governance, often performing a fiduciary role.
Yet, much of Guernsey's core business of closed-ended private equity and real estate funds will be able to access AIFMD's lighter touch regime for non-financial assets that permits a wider range of entities, such as lawyers and registrars, to carry out custody functions, thus benefitting from cost and operational advantages of not requiring a formal custodian.
What this demonstrates in a post-crisis environment where investors, promoters and managers are demanding higher standards is that Guernsey's long standing expertise and infrastructure, combined with its robust yet pragmatic regulation and strong corporate governance, mean it is ideally placed as a global fund domicile of choice.
Fiona Le Poidevin is the Chief Executive of Guernsey Finance – the promotional agency for the Island's finance industry.
An original version of this article appeared in the Buyouts 2014, June 2014.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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