Guernsey: Guernsey – The #1 Alternative Choice For The London Stock Exchange

Last Updated: 15 May 2017
Article by Stephanie Coxon

Most Read Contributor in Guernsey, September 2018

As investors continue to seek enhanced yield from investments in illiquid assets and also look to achieve liquidity, the London listed closed-ended investment fund continues to remain a favourable fund structure, writes Stephanie Coxon of PwC, on behalf of the Guernsey Investment Fund Association.



Why closed-ended listed funds?

The primary advantage of forming a closed-ended investment fund is that it is a pool of permanent capital. Investors have no redemption rights and new share issuances are at the discretion of the fund's directors. Closed-ended investment funds do not face the mismatch that traditional open-ended funds face between the desire to hold illiquid assets, such as debt, infrastructure and real estate, for the long term and the typical investor requirement for shorter term liquidity.

Listing a closed-ended investment fund on the London Stock Exchange (LSE) offers the investment fund access to deep pools of capital, whilst providing investors with liquidity.

Investment funds listing on the premium segment of the LSE comply with the UK's highest standards of regulation and corporate governance. This attracts a broader range of investors through greater transparency and additional protection.

As explained by Darko Hajdukovic, Head of Investment Funds at the London Stock Exchange, the closed-ended structure offers investors access to diverse strategies, including many innovative asset classes.

"Funds with a London listing benefit from a robust and transparent regulatory framework alongside a choice of markets that offer flexibility when it comes to structuring transactions. The combination of this and a knowledgeable group of investors and advisers ensures that a London listing is competitive," says Hajdukovic.

Using Guernsey as a jurisdiction to incorporate a London listed investment fund is a well-trodden path with local service providers having built significant experience and expertise in this sector. As such, Guernsey has paved the way for being the number one jurisdiction for London listed investment funds outside of the UK.

Total listings by jurisdictions outside the UK

Current market trends

The asset management sector is now shouldering a heavier burden to assist with the demographic pensions time bomb and we have seen pension funds and insurance companies seeking to increase their exposure to alternative assets over the past five years in their hunt for higher yields. The majority of London listed funds investing in alternative assets have been set up through Guernsey, given its tax neutral and flexible legal and regulatory regime.

Since Brexit, UK investors' appetite for regular yield has continued, however, the source of this yield has shifted away from the, potentially, higher risk alternative assets (CLOs, P2P platforms etc) to real assets (real estate, infrastructure, renewables), whether they are directly investing or originating debt secured by real assets.

This is also true for UK retail investors who are investing greater amounts in closed-end funds, mainly to get access to illiquid assets. Research completed by Cerulli Associates revealed the value of closed-ended funds in the UK has risen by an average of 16% over the past four years, suggesting that investors are increasingly using these vehicles to invest in physical projects.

"The London listed funds sector remains active, with infrastructure and other yield producing asset classes remaining attractive in the current low (or no) interest rate environment. In our experience, Guernsey remains the non-UK domicile of choice for such London listed funds," says Darren Bacon, Partner at Mourant Ozannes.

Given the uncertainty in the market prior to and following the Brexit vote, there were only five closed-ended fund IPOs in 2016, two of which were domiciled in Guernsey. However, established investment funds investing in real assets out performed other asset sectors by successfully raising further capital during 2016.

2016 capital raising on the LSE

Of the total capital raised, 37% was raised through a Guernsey structure, a few examples are detailed below:

 Sapna Shah of the Investment Companies Team at Cenkos Securities believes the flexibility and benefits offered by the closed-ended fund structure has recently enabled a number of specialist fund managers to raise money for new and interesting asset classes, such as social housing, asset backed lending, aircraft leasing and royalty income. 

"Key themes from recent new fund launches include strategies that deliver attractive income levels for investors and a large underlying market opportunity, enabling funds to come back to market, raise more capital and grow over time. Investor focus in 2017 is likely to continue with the same themes and investors backing existing funds such that secondary fund raising exceeds primary fund raising," explains Shah.

Nigel Farr, Partner at Herbert Smith Freehills, adds: "It is only in the fairly recent past that structuring for novel alternative assets with particular US tax issues (Healthcare Royalty Trust and BioPharma Credit were both examples of this) has led us to select the UK investment trust for anything other than a straightforward equities portfolio or an entity requiring UK REIT status. Absent such factors, we would continue to follow the long-standing trend of using Guernsey as the domicile of choice for listed closed-ended funds investing in alternative assets.

"One cannot overstate the attractions of a jurisdiction with extensive experience of dealing with this sort of fund to complement the advantages of favourable tax and regulatory conditions and a more flexible corporate law regime than the UK."

The UK equivalent investment fund regime offers a potentially tax neutral structure provided certain onerous conditions are met but the simplicity and certainty offered by a Guernsey incorporation is a huge consideration for many. Ultimately there are still a number of advantages to incorporating a London listed closed-ended investment fund in Guernsey, as mentioned below.

Advantages for listed funds to be incorporated in Guernsey 

  • Depending on the investor base, it could be more tax efficient to incorporate an income generating closed-ended investment fund offshore;
  • High standards of regulation, noting that in 2016 MONEYVAL reported Guernsey as being compliant or largely compliant with 48 out of 49 of the Financial Action Task Force (FATF) recommendations; the highest of any jurisdiction so far assessed;
  • No stamp duty payable on the transfer of shares in a Guernsey company;  
  • The corporate law regime in Guernsey is similar to the equivalent UK legal regime but also brings extra flexibility, for example: 
    • there is no ongoing requirement to meet the onerous conditions of the UK Investment Trust regime. For instance, only a simple solvency test needs to be met before a dividend is declared which can be paid from any account or source;
    • the ability for the Company to redeem shares and give investors capital treatment for UK tax purposes and also for the Company to make buybacks directly and not through a market maker; and
    • unlike the UK Companies Act 2006, there is no requirement under Guernsey law to pay a dividend by reference to a set of audited or interim accounts. This has proven to be challenging for UK Investment Trusts targeting an income yield in the first year of operation.  
  • Being outside of the EU helps as UK equivalent funds have experienced long AIFM approval times by the FCA which has held up a number of new funds looking to launch. The national private placement regime is working well and is still the favoured option for marketing into certain jurisdictions amongst UK advisers. Setting up offshore typically means lower ongoing costs compared to the UK, where overheads are naturally higher and additional service providers, such as depositaries, would be required;
  • The Guernsey regulator is robust yet pragmatic and is renowned for being approachable and accessible and encourages face-to-face meetings to discuss new ideas;
  • Guernsey is politically stable, its government does not have political parties which means the island is not prone to pendulum swings in regime or policy; and
  • Guernsey is home to globally recognised administrators, the Big Four accountancy firms have large offices on the island and all of the principal local law firms have specialists with expertise in the London listed investment fund sector;

"Guernsey administrators have considerable expertise in the closed-ended listed fund sector from servicing a diverse range of LSE funds," adds Mariana Enevoldsen, Director of Heritage International Fund Managers.

"These structures continue to be particularly attractive to those wishing to raise a permanent pool of capital for investment in alternative or illiquid asset classes. The market has seen strong demand for secondary listings from investment funds with existing track records and numerous funds have experienced considerable growth over a relatively short period of time by following this route."

The International Stock Exchange (formerly the Channel Islands Securities Exchange) is also headquartered in Guernsey and provides a flexible, quick and cost effective alternative to a full LSE listing, especially where the liquidity of the share trading is less of an issue. Also, The International Stock Exchange helps investment funds where compliance with the close company rules can pose difficulties if the investment fund is not traded on the main market and instead trades on the Specialist Fund Segment of the LSE. Recently there has been an increased demand for real estate investment trusts looking to list on The International Stock Exchange.

With investors looking for exposure to illiquid alternative assets whilst also retaining liquidity, a Guernsey closed ended fund listed on the LSE is definitely a structure to consider.

For more information about Guernsey's finance industry please visit www.guernseyfinance.com.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
GuernseyFinance
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
GuernseyFinance
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions