Why Guernsey For Private Fund Structures?
Guernsey is a leading domicile for funds, with more than 50 years of experience in the formation, administration and cross-border distribution of investment funds. It also offers a 'lighter touch' approach to Private Investment Structures ('PS'), also known as Private Funds ('PF'), which are 'related party' investment structures, particularly suitable for family office arrangements.
Private Funds are of particular interest as platforms for wealthy families and small groups of "club" investors to hold a wide variety of assets.
Private Funds are bespoke structures with minimal or no fund regulatory status. There is no legal definition for a PF, and they can be a legal entity with a similar choice of structure; for example, a limited company, limited partnership, trust and/or a cellular company.
Why are Private Fund Structures of so Much Current Interest?
There are several reasons for the current, increased interest in PFs, including:
- The ability for families and club investors to pool their assets and seek enhanced investment opportunities and greater economies of scale.
- The ability to 'unitise' specific assets to facilitate joint ownership,g. an aircraft, paintings, real estate etc.
- Independent calculation of the Net Asset Value ("NAV") and external audit of a PF, if required, provides reassurance to investors.
- A PF may offer a more straightforward concept for some clients, compared to trusts - particularly for clients in civil law countries.
- The opportunity to undertake basic succession planning, where interests can be gifted to other family members over time.
- A vehicle to hold a new business venture - with the ability to "lock in" investors, providing certainty and long-term commitment between them.
- They offer a single platform for family offices to manage wealth - with the ability to hold higher-risk assets (which might otherwise cause fiduciary risk concerns for trustees with duties to beneficiaries).
A PF can also offer potential tax benefits, depending on the investors' country(s) of tax residence.
The regulatory regimes of different international financial centres vary extensively and in Guernsey PFs are not subject to collective investment scheme legislation, as long as the following criteria are met:
- there is a small, defined and closely-linked group of investors;
- the investors are "sophisticated" by definition of their wealth and/or expertise;
- the "spread of assets" (number of holdings in the PF) is limited.
Meeting the above criteria generally means that a PF is considered to be a fiduciary structure, rather than a regulated fund entity. As such, it will only be subject to light or to no fund regulatory requirements in Guernsey.
If the number of investors and spread of assets grows and exceeds Guernsey exemption rules or practice, regulatory consent is likely to then be required. Consent from the Regulator may also be needed in relation to the entity undertaking investment decisions.
EXAMPLES OF PRIVATE FUND STRUCTURES
Limited Liability Company
The most straightforward structure is probably a Limited Liability Company with a robust shareholder agreement. The management and administration of the investment vehicle would be undertaken by a regulated Trust company with an option to outsource specialist management of more unusual assets to third party providers.
In this structure, a General Partner ('GP') needs to be appointed to manage the partnership - this might be the client or family office. As the GP typically has unlimited liability, this function will often be structured as a Special Purpose Vehicle (SPV).
The limited partners will sign 'Adherence Agreements' to specify how they will interact with the partnership.
In the case of a family Limited Partnership, the principal client may initially hold 100% of the interests in the Limited Partnership, and then periodically gift further interests to family members.
Protected Cell Company
A Protected Cell company (PCC) consists of one or more cells, each of which may be owned by separate clients. There is no comingling of assets and liabilities between the cells.
The cells are managed by the directors who can choose to contract out the administrative and accounting functions provided to each cell.
Costs are reduced, when compared to SPV vehicles or individual trusts, as overheads can be allocated to cells on a pro-rata basis.
Interest in PFs continues to grow as they offer an efficient tool for private wealth structuring.
Family members and groups of investors can benefit hugely from pooling their assets to maximise benefits. The ability to unitise specific assets, such as real estate, aircraft and artwork is also very useful.
The legal concept of a PF can be more straightforward for clients to understand, compared to a trust and/or a foundation, as the different investors hold specified units and will have agreed voting rights.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.