Christopher Jehan, Chairman of the Guernsey Investment Fund Association's Technical Committee, looks at how different fund jurisdictions compare in a Q&A with Clear Path Analysis' Noel Hillmann.
Noel Hillmann: What is your role and what recent experience do you have in selecting a domicile for a new or existing fund?
Christopher Jehan: I chair the technical committee of the Guernsey Investment Fund Association. I am also an Executive Director within the Guernsey office of an international fund management company. My role is twofold, one for industry as I am constantly looking for reasons to find and bring new business into a jurisdiction like Guernsey and secondly I form part of my organisations global decision making on where to situate funds, particularly when it comes to questions around governance issues and regulations such as the Alternative Investment Fund Managers Directive ("AIFMD").
Noel: Is it reasonable to compare two fund domiciles as investor base, political opinion, local infrastructure and so forth, are remarkably between two different locations?
Christopher: Using those traditional measures is not a reasonable way to compare two fund domiciles. However, what one needs to do is look at the reasons one wants to set up a fund, the target market, the structuring of the fund and use these as a basis to then select between various domiciles using those particular criteria.
The politics of two domiciles will be completely different but if I want a retail fund that I can sell into the European Union then I will want to put that into a European Union domicile as an Undertakings for Collective Investment Trusts ("UCITS") fund. The politics is irrelevant. What the decision comes down to is the regulations the fund will be governed by; the distribution footprint; does a fund readily sit within a UCITS structure or not and do you want to sell it purely into countries like Hong Kong, Macau or South Africa? In which case, why put it in the E.U.? Why not put it somewhere like Cayman, Jersey or Guernsey?
Noel: Considering that there are often comparisons made between different jurisdictions for private equity or real estate, is it reasonable for people to look at them in the same way, if you were to take say Guernsey versus Jersey?
Christopher: Sometimes it comes down to splitting hairs as the two islands are broadly similar politically. Jersey is geographically slightly larger, with a higher population and so more employable people. Both have very well established private equity fund industries, specifically, so realistically at this level it will come down to personal preference or the experience of speaking to people who have established similar funds and try to find out where they have located them. When it comes down to the question of which jurisdictions, quite often there are very few differentiators.
Noel: Do emerging markets pose a growing threat to the established and 'traditional' Western domicile locations?
Christopher: We don't see a vast upsurge in the number of funds locating to emerging market domiciles. We still see the majority of funds in traditional domiciles, whether they be E.U. with Luxembourg and Dublin, the near offshore choices of Guernsey, Jersey and the Isle of Man, the Cayman and British Virgin Islands. We do also see funds in Mauritius, if one is investing into Africa then you only have to look at the number of double taxation agreements between Mauritius and African nations, but this has been true for the last 30 years. Similarly investing in India has been done via Mauritius to make use of the Mauritian – Indian double taxation agreement.
In a situation such as this, the fund might be based in Africa but it is certainly not an emerging market from a fund point of view because it has been established for a number of years now.
We don't see a lot of new markets coming along, we see a lot of business going between the various existing jurisdictions and whilst a newcomer jurisdiction may take a few funds it is not that noticeable when you look at the number of fund registrations globally.
Noel: Do you feel that there is still a long way to go for places like Singapore or Hong Kong to attract substantial business?
Christopher: We talk about Hong Kong as an emerging offshore jurisdiction but they use another offshore jurisdiction when they talk 'offshore funds'! Singapore is making head way but whilst they remain in one of the Asian passporting structures, they have chosen to leave another and have left themselves at a slight disadvantage. Hong Kong has its own selling point which is the Hong Kong/China mutual recognition which is making it a good offshore centre, but this is predominantly for China at the moment.
Noel: So, what are the main differentiators between the 'major' offshore domicile centres in your view?
Christopher: The first key is whether the domicile is in the E.U. or not. If it is in the E.U. and does have the UCITS and AIFMD passport then a fund looking to be sold predominantly into Europe would be well placed to use one of those E.U. jurisdictions. If one is instead looking to sell a fund partially to the E.U but not too much I would look to a jurisdiction that has a lot of countries available for private placement, particularly if you are looking to the rest of the world. You don't want to have to pay to comply with the whole of the AIFMD directive as just the reporting part is sufficient enough.
To be honest if people are looking to launch funds that are pointing to other parts of the world then specifically look to a fund structure that is not based in the European Union and avoid all of that AIFMD and UCITS directives altogether.
Noel: What benchmarks do you rank a given domicile against to make an informed decision?
Christopher: If you look at the 'quality' of a jurisdiction, then I would look to their compliance in relation to the financial crime requirements. If we look at the UK's Financial Action Task Force ("FATF") recommendations, compliance with the 40+9 Recommendations, then I would also look at the latest report to see how well that jurisdiction meets those requirements. I would also look at the Organisation for Economic Co-operation and Development ("OECD") reports or table on tax transparency to find out how compliant the jurisdiction is.
In this day and age hiding from the tax man is never an option with FATCA, the (now nearly defunct) E.U savings directive and on a much wider basis, the Common Reporting Standard. We have moved from a situation where in the past the reason for putting a fund offshore was to hide from the tax man whereas now you just want a jurisdiction that is tax neutral. What will the taxation effect be in that jurisdiction, i.e. is it like Luxembourg where you pay 0.01% tax or one like Guernsey that has 0% taxation. There are all sorts of benchmarks to look at such as the intrinsic taxation being charged, the tax transparency, the compliance with global anti money laundering recommendations, etc. In this age people are essentially looking more for a quality jurisdiction rather than somewhere to hide their money.
Noel: What about some of the secondary considerations like the political environment, relationships between jurisdictions and some of the major economies? Is this factored in significantly?
Christopher: I live in Guernsey where there is a no political party system so we have people who stand on their own merits and have no party politics whatsoever. We do have a very stable political system and it has been so by and large since 1945.
In general, change to a particular party will not result in changes that will automatically drive business away from a particular jurisdiction. Even within certain jurisdictions, like the U.K where if the Labour party came into power in a few years' time you would expect it to become an unattractive environment to domicile a fund, you could always move that fund if that became the case.
Political stability is generally there in most of the countries that we would look at to domicile a fund.
Noel: Is the fact similar funds are located in a given jurisdiction always a good factor?
Christopher: A lot of the offshore jurisdictions we have discussed are relatively small ones as they are islands. Realistically, if you have an island with a fairly limited workforce then specialisation in one or more particular types of funds is a good thing. That way you can exclude looking at the 50 other types of funds and have a targeted workforce.
This doesn't mean that one jurisdiction specialises in only one fund to the exclusion of all others but there are certain fund types that will be specialised in within a jurisdiction. Specialisation is a good thing as between different companies and within industries as people move from one firm to another we share knowledge on that specific fund type. As a result, we only strengthen ourselves.
Noel: What about the counter argument to this considering that there is a greater push towards diversification in fund management houses? Are there any risks in having such a concentrated approach?
Christopher: Fund management companies no longer choose just one offshore domicile as they typically choose 2 or 3. One of which will be a UCITS domicile like Dublin or Luxembourg and will then typically look to place the other alternative fund structures in other jurisdictions. I don't feel that we run any risk by having jurisdictions that specialise in a restricted number of fund types. We offer a specialisation that will draw business of that particular type to that specific jurisdiction even if that fund management company already has established funds elsewhere.
An original version of this article was published in Clear Path Analysis' Fund Formation, Domiciling & Distribution 2016 Report, March 2016.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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