There have been a number of high profile listings of Guernsey funds over the course of the last two years.
The number of listed funds established in Guernsey has considerably enhanced Guernsey’s position as an established jurisdiction for domiciling investment funds.
Current trends - the proliferation of Guernsey listed closed-ended funds has included the listing of: funds of hedge funds, structured credit funds which invest in instruments such as mortgage bank securities, CDOs and CLOs, examples of which include Queen’s Walk Investment Limited, Caliber Global Investment Limited and Eurocastle Investment Limited; private equity and infrastructure funds, which include Kohlberg Kravis Roberts (KKR), which raised US$5bn earlier this year; and a number of main London listed property investment trusts, a large proportion of which funds this firm acted for.
Main London listing reform - the number of main London listings is likely to increase with the proposed reform this year of the listing rules which will see the five separate listing regimes consolidated into one single set of principles. The changes are likely to open up the listing regime for a wider range of investment entities. The principal reforms relevant to Guernsey domiciled fund listings relate to diversification of risk and exercising control of the underlying investments, which are referred to below:
Diversification - One of the principal benefits of the reforms will be that there will be no specific provisions on diversification, which, incidentally is already true for Channel Islands Stock Exchange listings. Instead the new rules impose a general requirement to spread risk without specifying how this is to be achieved.
This particular change will facilitate listed entities to invest not only in traditional investments, such as equities and debts, but other investments.
Furthermore, existing listed entities will be able to diversify their current investment strategies.
It is extremely likely that Guernsey will be one of the principal beneficiaries of the change because of the strength of its infrastructure and its regulatory reputation, but also because of the specific diversification and other restrictions applicable to investment trusts arising under Section 842 of The Income and Corporation Taxes Act, 1998.
Control of underlying investments for private equity funds - One of the other key proposals which is relevant specifically to private equity funds is the removal of the requirement that a listed fund has to be a "passive investor".
Unfortunately, the current proposed wording of the rule which replaces the "passive investor" requirement probably does not go far enough for private equity fund managers. The current wording requires that the investment entity should "not control or seek to control or be in the day-to-day management of the company… in which it has invested funds".
It is hoped that the consultation process may result in this rule being relaxed. Whatever the result, the proposed new regime for main London listings is likely to pave the way for a number of Guernsey incorporated funds to list on London’s main market, as fund managers are attracted to the prospects of a listing as an alternative source of capital.
Euronext - London’s inflexibility prior to the above proposed reforms has significantly contributed to the popularity of its Amsterdam based rival, Euronext. Guernsey has been one of the chief beneficiaries of the surge in Euronext listings, particularly for structured credit funds and private equity funds. The private equity model is one which follows the KKR float earlier this year of a private equity feeder fund on Euronext. The principal reason for the domiciliation of Euronext listed funds in Guernsey is Guernsey’s recognition by the Dutch financial authority (the "Dutch AFM").
Under the relevant Dutch law, it is an offence to solicit or obtain monies or other assets for participations in an investment institution in or from the Netherlands unless the investment institution is managed by a manager that has obtained a licence or an exemption or exception applies.
Pursuant to the Dutch "Act of the Supervision of Investment Institutions", foreign investment institutions are excluded from the obligation to obtain a licence if the relevant institution is subject to actual supervision in its home jurisdiction. Guernsey is one of the three jurisdictions, which includes Luxembourg and USA, which has been deemed to have adequate supervision by the Dutch AFM. Guernsey’s recognition by Euronext gives it the edge over other offshore jurisdictions.
Consequently the future is extremely bright for listed funds domiciled in Guernsey. Guernsey is gearing up for the influx of new business by introducing a number of far-reaching reforms over the course of the next year, which, inter alia, are designed to reinforce Guernsey’s position as the preferred offshore jurisdiction for listed funds by expediting the Guernsey Financial Services Commission regulatory process.
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