Fiona Le Poidevin, the former Chief Executive of Guernsey Finance, explains why issues of substance are driving up interest among fund managers in the potential upside of relocating to Guernsey.
During the last year we have seen increased interest among fund managers in the potential upside of relocating operations to Guernsey. A contributing catalyst has been the introduction of the Alternative Investment Fund Managers Directive (AIFMD), including the end of the transitional provisions in jurisdictions such as the UK.
AIFMD has introduced some potentially onerous requirements but managers can put themselves out of scope by establishing their funds in non-EU jurisdictions, such as Guernsey. Guernsey has evolved its regulatory regime so that business which does not touch the EU can avail of a non-AIFMD route, while EU markets can be accessed through National Private Placement (NPP) regimes or the Island's opt-in AIFMD equivalent regime. This means that Guernsey is almost uniquely positioned to provide a variety of options for servicing both EU and non-EU business in the most effective manner from a European time zone.
However, there are some conditions that need fulfilling if a firm is to be truly out of scope; there must be 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. So called 'letter box' entities cannot claim to be managers and mind and management will be required in the place where a manager is claiming to be domiciled. This is encouraging investment houses to strengthen their presence within third countries like Guernsey and some of the principals have also decided to relocate to the Island.
Guernsey's close proximity to London is a major attraction but it also has an advantage over many of its competitor jurisdictions in that there is already significant substance to many of the existing arrangements which investment houses have in the Island. For example, leading global private equity firms Apax, BC Partners, Mid Europa, Permira and Terra Firma not only have Guernsey domiciled funds but they also have offices and staff in the Island.
Terra Firma is not only headquartered in Guernsey but its Chairman, Guy Hands, also lives on the Island. He has been joined by another well-known figure in that sector, Jon Moulton, Chairman of Better Capital and who, since moving to the Island, has also become Chairman of the Channel Islands Securities Exchange (CISE). The CISE is part of the wider infrastructure and expertise which has been built up during the last 50 years and is on hand to support fund promoters no matter their level of presence in Guernsey.
Today, more than 1,000 funds with a value of nearly half a trillion US dollars are serviced by more than 50 fund administrators and custodians in Guernsey. Administrators range from major international names such as Northern Trust, State Street and Citco to independent specialists focusing on particular asset classes such as real estate and private equity. There are also major global custodians and they are now being supplemented by the specialist administrators who are establishing Guernsey-based depositaries 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 under AIFMD. They are supported by multi-jurisdictional law firms, global accountancy practices and independent investment advisers.
The quality of fund servicing in Guernsey is evidenced by the fact that our providers now administer nearly US$140 billion worth of open-ended funds which are domiciled in other jurisdictions, typically the Cayman Islands, where there may be local substance challenges. Some promoters have also decided to re-domicile funds to Guernsey, which is facilitated by flexible migration rules. Choosing Guernsey offers the advantage of having funds domiciled in a jurisdiction where there are 'fast track' routes to market, access to global capital markets, flexible cell company legislation that provides for 'incubator' vehicles and a corporate tax regime which means that the effective rate for both funds and principal managers is 0%. In addition, the Island has a strong pool of qualified non-executive directors to provide enhanced corporate governance and there are robust regulatory and tax transparency standards, which are increasingly important considerations for investors in the post-crisis environment.
The requirements of cornerstone investors, such as the large pension funds and insurance companies, are increasingly important for fund managers. They will be keen to maximise returns and not see the performance of the fund dragged down by costs associated with AIFMD, especially when these are unnecessary given that a jurisdiction such as Guernsey provides optionality.
However, to ensure that they are truly out of scope of AIFMD, investment houses do need to ensure they have sufficient substance in the domicile where the fund is managed. This is driving up interest in the potential upside of fund management firms and their principals of relocating to Guernsey.
Indeed, such has been the interest that the Guernsey government has just revamped its website providing businesses and individuals with more information about relocating to the Island so please take a look at www.businessguernsey.gg.
An original version of this article was first published in Global Fund Media's 2014 Guide to Relocation, November 2014.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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