Kate Clouston, Deputy Chief Executive at Guernsey Finance, explains the unique advantages that make Guernsey an appealing base from which to do business, and a respite from Brexit-related uncertainty.
Periods of global volatility – political and economic – offer both challenges and opportunities for fund managers. While the current political climate leaves much to be desired, the show must go on, even – or indeed, especially – amid a major crisis, such as Brexit.
This has undoubtedly driven some US managers and investment fund specialists to examine their options for diversification – both of investments and investors. Last year Bain & Co's Global Private Equity Report quoted private equity firms as facing a "shifting and perilously uncertain landscape," and it would be difficult to argue that the intervening period has provided any stability whatsoever. So where and how should the discerning manager source new opportunities?
Those in the private equity space have already made a wise choice, as the asset class outperformed public markets, averaging a 6 percent internal rate of return (using the modified public market equivalent, or mPME) compared with 4 percent S&P returns, according to Bain & Co Global PE Report 2017.
In Guernsey, the funds sector overall experienced its biggest leap in four years during the first quarter of this year, topping off seven consecutive quarters of growth. The value of private equity funds alone surpassed £100 billion ($125.9 billion; €109.1 billion) at the end of 2016 thanks to big ticket promoters including Permira, Apax Partners, Cinven, Macquarie, Partners Group and Inflexion.
Part of the reason for this sustained growth is Guernsey's reputation as an independent, stable, nimble and highly evolved international finance center. In the face of Brexit, stability is more important than ever – and Guernsey can offer some degree of certainty at a time when it is virtually impossible to find. Independent, self-governing, self-funding, with its own access to European capital markets – there is much to appreciate about Guernsey, and its dual regulatory regime for investment funds is particularly appealing in an environment where reaching European investors can be tricky.
Navigating the Alternative Investment Fund Managers Directive can be challenging in the best of times and Guernsey's national private placement regime offers a straightforward route to market. Not only is NPPR more cost and time-efficient, the experts in industry and our regulator can turn around a registered fund in three days.
It will often be the case that the target market is a small number of specific countries within the EU, as opposed to a scattergun approach for every EU member. It is for these managers in particular that Guernsey's NPPR would be most effective, cutting down significantly on unnecessary bureaucratic burdens and lost time. With a record high amount of dry powder sitting in reserve, speed to market is paramount.
Europe is back on the radar this year – in part due to geopolitical concerns in the US, and in part due to more attractive valuations in European equities. As Bain & Co highlighted, "historically, PE investments in developed Europe have performed as well as or better than those in the US." A key component of successful launches in Europe is the network, and Guernsey provides a significant infrastructure of well-versed and well-connected funds specialists.
Periods of uncertainty provide opportunities for savvy investors – whether it is investing in so-called 'recession proof' industries such as big pharma, or moving toward a thematic investing model. Thematic investing, which focuses on sector and country exposure as building blocks as opposed to asset classes, continues to grow, according to Vincent Bérubé, Sacha Ghai and Jonathan Tétrault of McKinsey.
While it may be a sector or country expertise, thematic investing could mean specializing in areas as diverse as 'impact' or fintech. Impact investing cuts across many sectors and refers to investments made into companies, organizations and investment funds with the intention of generating a measurable, beneficial social or environmental impact alongside a financial return.
Impact investing is on the rise in part because the current and future investing habits of millennials are under so much scrutiny. Thanks to leaders like Bill Gates and Mark Zuckerberg dedicating much of their substantial fortunes to making the world a better place – by aiming to eradicate malaria, for example – it is more common for new investors to rate the net effect of an investment as a significant factor in their decision-making process.
While there are still many for whom chasing returns is the priority, the importance of doing good at the same time is becoming more relevant. There are significant opportunities in this space, as impact investors are proving that a financial return does not have to be sacrificed in order to achieve a beneficial impact. By 2025, more than $2 trillion in assets under management will be in impact funds.
Partners Group created PG Impact Investments in 2015, which is a closed-ended collective investment scheme investing via impact fund managers as well as directly into social enterprises. Obtala Limited, established in Guernsey with a view to listing on the London Stock Exchange, is an AIM and Social Stock Exchange listed agriculture and forestry company, with a mission to become one of East Africa's largest sustainable food and timber producers.
This is a well-known path to listing, and indeed there are more listings on the LSE from Guernsey than from any other jurisdiction outside the UK. Guernsey is also home to a variety of cleantech funds such as Catalyst Investment Management, targeting investments in clean energy in the MENA region.
Significant developments in the fintech space are also underway. Northern Trust's Guernsey team and IBM recently pioneered the use of blockchain technology in private equity. Northern Trust launched the first commercial deployment of blockchain for administration of Unigestion's PE fund, harnessing distributed ledger technology to allow for greater transparency for all parties involved, including the fund manager, custodian, investors, regulators and government.
This type of world-leading innovation will contribute to Guernsey's already high standards of service and ability to effectively administrate many different types of funds. Guernsey's funds structuring options and sophisticated infrastructure allow for a huge variety of investments to be deployed worldwide. The recently launched Private Investment Fund, for example, has already seen eight schemes launch this year, including boutique asset manager Pearl Diver Capital launching the $350million CLO equity fund PDC Opportunities VI.
Guernsey's stability, expertise and ready pool of fund structuring experts were cited as key reasons for six of the company's seven funds to be established here. The PIF is Guernsey's most light-touch regulated fund, allowing for up to 50 investors who are known to the manager (although there is no limit on the number you can actually market it to). It is gaining popularity in the club-deal circles and very appealing to managers around the globe who would like a structure that would facilitate those closer relationships between manager and investor.
One of Guernsey's biggest strengths lies in traditional private equity, and it remains an excellent choice to facilitate global capital flows. The island is also a centre of innovation while constantly evolving regulatory and business practices to keep in line with international standards. This solid foundation combined with flexibility and innovation can provide the perfect platform for a diversification strategy – US fund managers looking for a suitable international partner with an excellent track record need look no further than Guernsey.
An original version of this article was first published as part of pfm's Fund Domicile Guide, September 2017.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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