Fiona Le Poidevin of Guernsey Finance explains why Guernsey is a great place for funds in light of the implementation of AIFMD.
Latest figures from Guernsey's financial services regulator, the Guernsey Financial Services Commission (GFSC), show that it approved 30 new investment funds during the fourth quarter of last year, amid a total of 103 additions during 2013.
However, while asset values have proved sluggish, largely due to external factors at play during 2013, the GFSC has been kept busy with new fund applications. The 103 new funds launched are investing across a wide range of asset classes and markets and include two notable listed renewable energy funds, Bluefield Solar Income Fund and The Renewables Infrastructure Group, with city sources quoting the latter as the largest IPO of a clean energy firm in London, with an initial raising of £300m in July 2013.
There were also a number of notable infrastructure funds, for example, John Laing Infrastructure Fund which raised £242m as well as debt funds, for example NB Global Floating Rate Income which raised £363m. Indeed one of the final deals of the year saw the launch of the JP Morgan Senior Secured Loan Fund. Earlier in the year, in June, JP Morgan had launched a similar Guernsey offering called the JP Morgan Global Convertibles Income Fund which raised £136m (and has a market capitalisation of £173m at the time of writing).
Notably in relation to non-Guernsey funds, we see this as a growth area for the future. Many of the funds are Cayman incorporated but are opting to have some element of management or administration (or both) undertaken in Guernsey. This is a testament to the quality infrastructure available and is increasingly setting us apart from other competitor territories. In fact, the NAV of non-Guernsey domiciled funds having some element of servicing provided in Guernsey is in excess of £88bn.
More recent new funds launched from Guernsey include commercial property investment company Summit Germany and Nimrod Sea Assets Limited, both of which have listed on the London Stock Exchange (LSE) in early 2014.
Guernsey's closed-ended funds sector increased in value by £5.1bn (3.9%) year on year to reach £136.1bn at the end of December. The experience and expertise Guernsey has in investment funds, particularly in private equity, is proving attractive to family offices and other private investors who are seeking not just asset protection but investment returns for their private wealth. These investors and their advisers are turning to Guernsey investment structures to achieve returns and enhance wealth.
We are also seeing greater allocations by fund managers into insurance-linked securities (ILS). Guernsey has seen growth in ILS transactions due to the fact that the island has a strong heritage in providing both investment and insurance services; fund managers and promoters with capital to deploy are brought together with transformation managers who understand insurance risk. For example, 2013 saw the launch of DCG Iris Fund as a feeder fund into the Low Volatility Plus Fund managed by Credit Suisse Asset Management's ILS team. Dexion Capital Guernsey raised over £60m for the fund which has been listed on the Main Market of the LSE.
Figures from the LSE show that there are 115 Guernsey-incorporated entities listed on its markets, which is more than any other jurisdiction except the UK itself. 17 Guernsey-incorporated entities joined the LSE markets during 2013, which again is more than any other jurisdiction globally aside from the UK. Th e fact that Guernsey entities can be listed on not just the LSE but also a number of exchanges around the world, including Euronext Amsterdam, Frankfurt, Ireland, Toronto, Johannesburg, Hong Kong and Australia, as well as the local Channel Islands Securities Exchange (CISE), means that the island is viewed as an ideal location for establishing vehicles to access global capital markets.
Taken together, these developments provide a major vote of confidence in Guernsey's approach to the Alternative Investment Fund Managers Directive (AIFMD).
DUAL REGULATORY REGIME
Guernsey is not in the EU or wider EEA (although it is in the European time zone) and therefore, is not required to implement the AIFMD. Although Europe remains one of our biggest markets, we also have a substantial and increasing amount of funds business which originates outside of Europe.
As such, Guernsey has introduced a dual regulatory regime so that it is possible to continue to distribute Guernsey funds into both EU and non-EU countries: the existing regime remains for those not requiring an AIFMD fund, including those using national private placement (NPP) regimes and those marketing to non-EU investors; and there is an opt-in regime which is fully AIFMD-compliant. The first thing to note is that this means 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 the AIFMD and as such, will have significant operational and cost benefits. In order to obtain authorisation under the AIFMD, a manager will need to comply with various organisational, operational and transparency obligations, which may create significant additional compliance costs, some of which will likely be passed to investors in the fund.
Second, Guernsey's position as a third country means our managers and funds who want to access Europe continue to be able to use NPP regimes, which are expected to remain in place until at least 2018. Guernsey's regulator has signed bilateral co-operation agreements with 27 regulators from the EU and the EEA, including the UK, Germany and France (see box). Having these agreements in place means that Guernsey funds continue to be able to market to appropriately qualified investors in these European countries through their NPP regimes.
Third, it is expected that a full passporting regime for non-EU AIFMs will be implemented from July 2015.
Guernsey intends to ensure that our AIFMs will be ideally placed to take advantage of being able to market AIFs on a pan-European basis with a single authorisation, as passporting is currently envisaged to operate. Indeed, Guernsey introduced an opt-in AIFMD equivalent regime with effect from 2 January this year ahead of when, as a third country, it was required to do so.
The attraction of Guernsey for fund managers wishing to market into Europe is that it can provide a European platform but one which is not actually in the EU and therefore can offer optionality.
For those marketing into Europe, the NPP route will likely be favoured by many. Indeed, it is expected that full-blown AIFMD compliance will only be sought if there are particular commercial reasons to do so. For example, it makes commercial sense for a fund manager marketing almost exclusively to Europe to have a fully AIFMD compliant platform. However, this does not have to be based in a mainland European domicile and indeed, it could be a Guernsey platform given that there is a fully equivalent, opt-in AIFMD route to market in place.
Managers should review whether the pan-European marketing model is relevant to their investor base. Many managers have increasingly geographically diverse investors and, therefore, it is essential to have a platform which suits all. European directives – such as the AIFMD but also the Undertakings for Collective Investment
in Transferable Securities (Ucits) Directive – cater for European investors; as such, if you don't need Ucits/
AIFMD or only need limited access to them for certain investors, then it is advisable (and possible) to structure in a way that will greatly reduce the obligations and costs that come with those regimes.
For those managers with elements of EU and non-EU business, 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.
The potentially onerous administration burden and costly compliance with the AIFMD will mean that parallel structures are likely to be given serious consideration. Conversely, if a manager has a platform in a mainland
European domicile then it will have to comply fully with the AIFMD even if there were a large proportion of non-EU investors. European mainland platforms do not offer the ability to separate the reporting obligations away from non-EU investors, as with a Guernsey platform.
One important factor is that AIFMs should ensure that they do not fall foul of the letter box entity provisions, i.e. sufficient substance is needed to demonstrate that the management entity is established outside the EU, if that's what it is aiming to achieve for AIFMD purposes.
Therefore, investment houses must ensure they have enough substance in the domicile of their fund if they opt for it to be self-managed, for example. Guernsey has an advantage over a number of other third countries as there is already significant substance to our fund structures. For example, large hedge fund managers such as BlueCrest and Unigestion and private equity houses such as Apax, BC Partners, Mid Europa, and Permira have Guernsey-domiciled funds as well as offices and staff based here.
There are also administrators ranging from major international names such as Northern Trust and State
Street to specialist independent administrators as well as a significant pool of experienced non-executive directors. There are also a number of global custodians based in Guernsey and they are soon to be supplemented by those specialist administrators who are applying to establish Guernsey-based depositaries. These are being particularly established to service private equity and real estate funds which have not previously had the requirement for a depositary but who can take advantage of a depositary-lite regime for non-financial assets. Quality of service is evidenced by the fact that Guernsey providers now service open-ended funds that are domiciled in other jurisdictions, typically the Cayman Islands, where there may be local substance challenges.
Until recently, awareness among fund managers of the requirements imposed by the AIFMD was extremely mixed, with some on top of the situation and others more uncertain. Ironically, this 'wait and see' attitude has been perpetuated by the fact that several jurisdictions, such as the UK, have had a transitory year for implementation.
However, this is now coming to an end and so managers need to know what they are doing by the end of July. That said, manager attitudes have been driven by where they stand in the fundraising process and so those with funds that have already closed or are below the minimum threshold to be caught by the AIFMD have been less engaged than those who are currently fundraising. It is important for managers to realise that an EU AIFMD compliant platform is not the only answer and that in particular, Guernsey offers a dual regulatory regime for the continued distribution of funds into both EU and non-EU countries. Guernsey offers optionality which allows clients to be serviced in the manner most appropriate to their specific circumstances.
These remain early days but the initial indications are positive, with Guernsey's funds industry busy domiciling, re-domiciling and servicing more new funds in 2014.
* At the time of writing, Guernsey has signed 27 co-operation agreements with the securities regulators from the following EU/ EEA countries: Austria; Belgium; Bulgaria; Cyprus; Czech Republic; Denmark; Estonia; France; Finland; Germany; Greece; Hungary; Iceland; Ireland; Latvia; Liechtenstein; Lithuania; Luxembourg;
Malta; Norway; Poland; Portugal; Romania; Slovak Republic; Sweden; The Netherlands; and United Kingdom.
An original version of this article appeared in the HFMWeek Guernsey Report 2014, May 2014.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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