Originally published in Corporate INTL, July 2009
Guernsey has become known as a major destination for domiciling and administrating investment funds, in particular alternative investment funds such as private equity, hedge funds and property funds.
The Island has a good combination of the right expertise, regulation and tax structures to make it a destination of choice for fund sponsors or promoters across the world.
Figures from Guernsey Finance show that funds under management and administration in Guernsey were at more than £200 billion at the end of December 2008, rising by more than 12.5% year on year, despite the fact that funds fell by £1 billion during the final quarter.
Around £150 billion of those monies are held within funds domiciled in Guernsey, with £45 billion administered, but not domiciled, in the Island.
The number of actual funds under management or administration rose by 8% year-on-year to reach 1,216 by the end of December 2008, with 919 of those domiciled in the Island.
One of the sources of Guernsey's growing success is the introduction of new legislation designed to add transparency to the process of setting up an alternative investment fund targeted at experienced investors.
Peter Niven, chief executive of Guernsey Finance, says the registered funds regime, was introduced to reflect what administrators have been doing for 12-18 months before that.
He said: "We moved to the registered fund regime, which is very much quicker because of the three day turn around. It is a very popular way of working, particularly for those who have an idea and want to get it to market very quickly."
He adds: "They can provide all the due diligence to the administrator, which is then looked at retrospectively by the Guernsey Financial Services Commission on visits to the administrator. The regulation seals the whole thing together, historically the closed ended fund had not been covered by a piece of legislation, but now it is part of the Protection of Investors Law and is more easily visible to potential promoters and introducers than before. Off-island lawyers looking in can now see exactly what the procedures are, before the legislation it was not so easy to fully understand how these types of funds were regulated."
The introduction of the self certification Qualifying Investor Fund (QIF) was extremely useful in the buoyant economy before the economic downturn, when new funds were springing up regularly and many investments were being made. Guernsey Finance figures show that the number of QIF funds has risen from just 2 in 2005 to 197 by the end of 2008.
Mr Niven says it is still proving popular in the downturn, as distressed property and private equity funds need to move quickly to take advantage of market conditions.
He said: "We are not seeing anywhere near as many structures put in place, there are still good ideas out there, catching the imagination of investors, but it's the investors that are not there. There is no lack of opportunities in all kinds of different asset classes."
He added: "There is still this impression on the part of some investors that we have not yet hit the bottom of the market in any asset class. People are still not calling the bottom of the market, but I would suggest that if you get in now, it may go down slightly but on a 3-7 year time horizon you are going to be fine."
Part of Guernsey's appeal lies in its "menu" of options, according to Mr Niven. He highlights the depth of experience within the professional community in the Island, including law firms, administrators, custodians, accountancy and audit and secretarial services.
This expertise is demonstrated, according to Mr Niven, in the fact that Guernsey was the first jurisdiction to introduce the innovative protected cell company (PCC) structure, now widely used across the world.
He said: "We innovated PCCs in 1997 for use in the captive insurance market, but other local service providers have taken them and used them for things like private equity and family wealth. The umbrella structure and ring fencing makes them ideal for separating currencies or asset classes. I know of late we have seen funds going to continuation votes, with maybe sterling denominated assets getting through, but not US dollar ones. It is a fairly easy mechanism to collapse the cell, give assets back and carry on with the others."
He added: "Some people still have a nagging doubt about the integrity of a PCC, but we now have the ICC (incorporated cell structure) that gives even greater ring fencing with a full corporate shield around each cell."
The existence of the Channel Islands Stock Exchange (CISX) and good links with European exchanges (i.e. Euronext Amsterdam) has meant that Guernsey has become an attractive location for alternative funds looking for access to European investors via a listing.
Mr Niven said: "The CISX adds an extra seal of approval to our
jurisdiction. It has the strength in depth of 3,000 separate
listings and is well recognised by all the major exchanges around
the world. It gives Guernsey an extra recognition and an
international dimension that says to people that Guernsey is a top
flight international finance centre."
He added: "The original agreement with Euronext Amsterdam was why private equity firms KKR and Apollo came to Guernsey, because they wanted access to European markets. We were the first, but others have followed. It's great to be first because you are then known as the ones who have the longevity and understanding more than those who came afterwards."
The Island has further increased its attractiveness by securing a position on the OECD White List of offshore jurisdictions looked upon favourably as well regulated and tax transparent.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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