Answer ... Private equity, venture capital, debt and real estate (as well as open-ended hedge funds) are the main asset classes popular in Guernsey funds; however, Guernsey is also home to a wide range of esoteric investment funds investing in many different asset classes. ‘Green’ investments of all kinds are a particular strategic focus of the jurisdiction at present, following the introduction of the globally unique ‘Guernsey Green Fund’ certification.
Answer ... Investment funds in Guernsey are typically structured as either companies or limited partnerships. It is possible to structure funds as unit trusts, but this has become relatively rare in recent years. Limited partnerships tend to be favoured in the private equity space and companies for real estate, debt and hedge funds. Under the ‘company’ sub-heading, it is possible to create – in addition to a ‘standard’ company limited by shares – a protected cell company (PCC) or an incorporated cell company (ICC), discussed further in question 2.3.
Answer ... Advantages: The advantages of these different structures are as follows:
- Limited partnership: Much like the structures of the same or similar name in other jurisdictions, a limited partnership can provide investors with the ability to provide undrawn commitments, delivering funds only when they are actually needed for deployment. They are also tax transparent.
- Company: Shareholder liability is limited to the paid-up share capital.
- PCC: PCCs can create and maintain segregated ‘cells’, in which assets and liabilities can be held separate from assets and liabilities of other cells. These are by far the most popular company structure, particularly due to their ability to easily create and launch new sub-funds through such cells.
- ICC: This is similar to a protected cell company, save that each cell is ‘incorporated’ and therefore has separate legal identity. This can be useful for setting up investment platforms where this clear distinction of legal personality may be important.
Disadvantages: The disadvantages are as follows:
- Limited partnership: The liability of limited partners is to ‘uncalled commitments’ – that is, what has been committed to be invested. It is also possible for a limited partner to ‘lose’ its limited liability by committing certain acts. Additionally, the limited partnership is not a separate legal entity in its own right – all acts are undertaken by the general partner.
- PCC: While this is a popular and well-regarded structure, some jurisdictions have not yet formally recognised the legal segregation of assets and liabilities provided by a PCC. Most jurisdictions which do recognise the PCC have not had the concept tested in their courts, so there is little jurisprudence on the matter. While legal risk is considered minimal, this can make investors unfamiliar with the concept wary.
- ICC: As each incorporated cell is a separate legal entity, they can be quite expensive to maintain – each incorporated cell must have a board (though it must match the ICC’s board), will likely be administered separately and must make annual returns to the Guernsey Registry separate from the ICC and its fellow incorporated cells.
Answer ... The PCC and limited partnership are probably the most popular structures for Guernsey funds – the limited partnership for its structure, which is so familiar to private equity managers; and the PCC for its flexibility and ability to launch new sub-funds quickly and with relatively little cost.
Answer ... Limited partnerships are favoured by private equity and venture capital funds and PCCs by some real estate and hedge fund sectors.
Answer ... All Guernsey alternative investment funds must have a Guernsey-based administrator. However, Guernsey administrators are permitted to delegate certain functions to providers outside of Guernsey, provided that this is appropriately disclosed.
Answer ... Open-ended funds governed by the Protection of Investors (Bailiwick of Guernsey) Law (POI Law) and the relevant rules (save for private investment funds (PIFs)) must generally have a Guernsey-based custodian, unless the fund receives a specific derogation from this requirement from the Guernsey Financial Services Commission (GFSC). These derogations are provided only in exceptional circumstances and where the GFSC can be satisfied that the Guernsey fund’s assets are appropriately custodised notwithstanding no Guernsey custodian being appointed.
Closed-ended funds and PIFs are not required to appoint a custodian, though for PIFs the fund must appoint a ‘designated custodian’ for the purposes of compliance with the POI Law. Such a designated custodian may be the administrator.
Answer ... Limited partnerships cannot currently migrate into or out of Guernsey.
All types of company may, if permitted by the laws of the jurisdiction they are migrating from, permitted to migrate to Guernsey. Where the company is regulated (eg, an investment fund), it will need to involve the GFSC as part of the redomiciliation process. The investment application to the GFSC will be treated as if the company migrating to the jurisdiction is a newly incorporated entity, though evidence of its existing regulatory authorisation in the jurisdiction it is exiting will assist with the authorisation process.