In a time of unprecedented change, Guernsey offers a strong heritage in fund servicing as well as innovative solutions, according to Fiona Le Poidevin of Guernsey Finance.
Stuart Lawson, head of regulatory change and market development at Northern Trust in Guernsey, recently wrote an article highlighting the significant changes impacting the asset servicing market. He pointed to the ongoing drive to de-risk banks, enhanced reporting triggered by the US' Foreign Account Tax Compliance Act (FATCA) and the implementation of the European Union's Alternative Investment Fund Managers Directive (AIFMD) as providing fund administrators and custodians with new process and technology challenges.
In this time of unprecedented change, asset managers will be glad to know that Guernsey is a jurisdiction that not only has a strong heritage in domiciling and servicing funds but also is able to offer innovative solutions in a changed landscape, especially for private equity real estate platforms. Drivers of Guernsey's success as a leading domicile for property investment platforms include a streamlined regulatory process together with flexible company law, in particular with regard to distributions, which is based on a straightforward solvency test. Furthermore, Guernsey incorporated property structures can be used to speedily access many international stock exchanges, notably the London Stock Exchange (LSE).
In recent times, Guernsey has seen investment fund structures being utilized for financing and refinancing arrangements connected with property and distressed debt on real estate. For example, Starwood Capital Group established Starwood European Real Estate Finance, a Guernsey-domiciled closed-ended investment fund, with the aim to originate, execute and service a diversified portfolio of commercial real estate debt investments in liquid markets in the UK and Continental
A unique approach
AIFMD has been a particularly controversial piece of legislation. It has contributed to a feeling among non-EU fund managers that there is simply too much regulation in Europe, with some even referring to the new regime as 'fortress Europe'. This has increased as we have approached and passed the July 22 deadline, which marked the end of the transitional period for EU countries to implement AIFMD. Many managers have specific concerns that marketing funds into Europe has been made more challenging by AIFMD due to the scope that individual national regulators have in the application of the rules. Additional complexity and compliance is adding another layer of administration, which is driving up costs that may be passed on to investors.
Rather than being part of the problem, however, Guernsey is part of the solution. While the island is in Europe geographically, it is not in the EU and therefore is not required to implement AIFMD. Although a large part of the domicile's business relates to the EU, it also handles a substantial amount of funds business that does not touch the EU at all. As such, Guernsey has introduced a dual regulatory regime, whereby 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 (NPP) regimes and those marketing to non-EU investors, and there is a new opt-in regime, which is fully AIFMD compliant for those who require it.
This approach means managers and funds with no connection to Europe can continue to use Guernsey's existing regulatory rules, which are completely free from the requirements and costs associated with AIFMD. Meanwhile, for managers wishing to market into Europe, Guernsey provides a European platform that is not actually in the EU. As such, there is an opt-in regime that is fully AIFMD compliant should this be required, although the NPP route is being favored by many as it means little or no change to how things were done previously.
For those managers with elements of EU and non-EU business, parallel structures can be utilized. It will be possible to place non-EU business in a parallel or feeder structure for which AIFMD compliance would be neither required nor necessary – a scenario that should present significant cost-saving opportunities.
The point is that Guernsey's dual regulatory regime provides optionality that allows clients to be serviced in the manner most appropriate to their specific commercial circumstances. Given that Guernsey fund structures do not need to apply to EU regulations and directives, they will provide a more cost effective option for marketing into non-EU jurisdictions, including the important markets of the US, Asia, the Middle East, Latin America and other emerging markets, which European jurisdictions such as Luxembourg and Dublin will not be able to provide.
A matter of substance
Meanwhile, the post-crisis environment has brought about greater scrutiny of structuring arrangements and, in particular, issues of substance. Unlike some competitor jurisdictions, Guernsey has the advantage of significant substance already being present within many existing structures, with corporate governance enhanced by having a significant pool of experienced non-executive directors. Guernsey has administrators ranging from major international names, such as Northern Trust, State Street and Citco, to specialist independent private equity and real estate administrators. Major global custodians are based in Guernsey and are being supplemented by specialist administrators that are establishing Guernsey-based depositories to service private equity and real estate funds, which previously have not had the requirement for a depository but can take advantage of a 'depository-lite' regime for non-financial assets under AIFMD.
The quality of fund servicing in Guernsey is evidenced by the fact that providers now administer nearly $150 billion of open-ended funds domiciled in other jurisdictions, typically the Cayman Islands or Delaware, where there may be local substance challenges. Some sponsors also have decided to re-domicile funds to Guernsey, which is facilitated by flexible migration rules.
Accessing the capital markets
Furthermore, Guernsey has carved out a niche as the domicile of choice for establishing structures to access global capital markets. Entities incorporated in Guernsey can list on a number of international exchanges, including those in Dublin, Frankfurt, Toronto, Johannesburg and Hong Kong, as well as NASDAQ, Euronext, the local Channel Islands Securities Exchange and the LSE.
In fact, LSE figures show that there are more Guernsey entities listed on its markets than from any other jurisdiction globally, excluding the UK itself. There currently are 122 Guernsey investment funds and trading companies on the LSE with a combined market capitalization of $60 billion. This includes listed private equity, infrastructure, cleantech and real estate funds, such as the Japan Residential Investment Company, the European Real Estate Investment Trust and F&C Commercial Property Trust. Guernsey's position as a center for listed vehicles also reaffirms its strong commitment to corporate governance.
Indeed, the two largely go hand-in-hand as companies are subject to and adhere to the rules applicable to the various international stock exchanges on which they list.
The asset servicing sector is undergoing significant change, but Guernsey is a well-established and thriving fund domicile and service center that is able to help address these new challenges. The experience and expertise that has been built up by fund administrators, custodians and the supporting infrastructure of multi-jurisdictional law and global accountancy firms within the private equity and real estate sector is unrivalled.
In addition, Guernsey offers a solution from a domicile with significant substance, high standards and a global reach and which is based in a European time zone with access to the EU market but without the administrative and cost burden of AIFMD and other European regulations. It is against this background that asset managers should consider whether it would be remiss of them not to consider establishing and servicing their private equity real estate funds from Guernsey.
An original version of this article was by published in PERE's 2014 Private Real Estate Fund Service Guide, August 2014.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.