Guernsey – AIFMD answers to be found here

AIFMD guide GFM Special Report Jun 2014 www.globalfundmedia.com | 22
Guernsey
– AIFMD answers to be found here
By Fiona Le Poidevin, Guernsey Finance
Guernsey has been on the front foot
throughout the conception, development and
implementation of the Alternative Investment
Fund Managers Directive (AIFMD).
Guernsey has made early decisions
wherever possible in terms of how its funds
industry responds to the directive, while
awareness among fund managers of the
requirements imposed by AIFMD has been
somewhat mixed. Furthermore, and as
anticipated, the way the different EU Member
States have applied conditions has been
inconsistent. Indeed, at the end of May, Bill
Prew, Chief Executive of the independent
depositary services Indos Financial, claimed
that some 10 months on from the July 2013
transposition deadline for AIFMD, a third
of EU member states had still not fully
implemented the legislation at national
level – with not long left until the one year
transitional period that was allowed comes
to an end on 22 July 2014.
Guernsey’s proactive response to AIFMD
is evidenced as far back as 7 June 2013
when it became one of the first third country
jurisdictions to introduce its own domestic
AIFMD marketing rules. At that time our
regulator, the Guernsey Financial Services
Commission (GFSC), also published a set of
frequently asked questions (FAQs) to help
with AIFMD implementation as it unfolded.
This was then followed by our signing of
bilateral cooperation agreements with 27
securities regulators from the European
Union (EU) and the wider European
Economic Area (EEA)*. The cooperation
agreements which became applicable from
22 July 2013 provide a set of arrangements
for the on-going supervision of alternative
investment funds, including hedge funds,
private equity and real estate funds.
At the end of 2013 Guernsey also released
the set of rules which form its opt-in
regulatory regime of measures equivalent to
AIFMD. The AIFMD Rules, 2013, took effect
from 2 January this year, ahead of when, as
a third country, Guernsey would have been
required to do so. The introduction of the
opt-in regime means that we have another
piece of the jigsaw in place to ensure
that Guernsey funds can continue to be
distributed to both EU and non-EU countries
in the future.
It is clear that the uncertainty surrounding
AIFMD has not been aided by the fact that
several jurisdictions, such as the UK, have
had transitory years while others have not.
However, with this period coming to a close
at the end of July, it is important for managers
to know where they stand going forward.
Why Guernsey?
Managers and promoters have known since
early 2013 that Guernsey was introducing
a dual regulatory regime – thus providing
them with certainty to proceed with making
decisions so far as the commercial and
economic climate permitted.
Guernsey is not in the EU or wider EEA
(although it is in the European time zone)
and therefore, is not required to implement
the AIFMD. Although Europe remains one
of our biggest markets, we also have a
substantial and increasing amount of funds
business which originates outside of Europe.
As a result, Guernsey’s regulatory
regime ensures it is possible to continue to
distribute Guernsey domiciled investment
funds into both EU and non-EU countries via
the existing rules which remain in place for
those not requiring an AIFMD fund, including
those using national private placement (NPP)
arrangements and those marketing to non-
EU investors; as well as the opt-in regime
previously referenced which Guernsey
brought into play ahead of schedule.
Fiona Le Poidevin, chief
executive of Guernsey Finance
Guernsey
AIFMD guide GFM Special Report Jun 2014 www.globalfundmedia.com | 23
Guernsey
The approach means managers and funds with no
connection to Europe can continue to use the existing
regulatory rules which are completely free from the
requirements associated with AIFMD and as such, will
have significant operational and cost benefits. Where it
is desirable or otherwise necessary to do so, in order to
obtain authorisation under AIFMD, a manager will need
to comply with various organisational, operational and
transparency obligations, which will create significant
additional compliance costs, some of which will likely be
passed to investors in the fund.
Meanwhile, thanks to having the 27 bilateral
cooperation agreements in place, Guernsey’s position
as a third country means our managers and funds who
want to access Europe continue to be able to use NPP
regimes, which are expected to remain in place until at
least 2018.
It is also expected that a full passporting regime
for non-EU AIFMs will be implemented from July 2015.
Guernsey intends to ensure that our managers will
be ideally placed to take advantage of being able to
market AIFs on a pan-European basis with a single
authorisation, as passporting is currently envisaged to
operate.
Optionality
The attraction of Guernsey for fund managers wishing
to market into Europe is that it can provide a European
platform but one which is not actually in the EU and
therefore can offer optionality and all-important cost
saving opportunities for platforms.
For those marketing into Europe, we have already
seen that the NPP route is being favoured by many – as
it means little or no change to how things were done
before AIFMD.
It is expected that full-blown AIFMD compliance will
only be sought if there are particular commercial reasons
to do so. For example, it makes commercial sense for
a fund manager marketing almost exclusively to Europe
to have a fully AIFMD compliant platform. However, this
does not have to be based in a mainland European
domicile and indeed, it could be a Guernsey platform
given that there is a fully equivalent, opt-in AIFMD route
to market in place.
Managers should review whether the pan-European
marketing model is relevant to their investor base. Many
managers have increasingly geographically diverse
investors and, therefore, it is essential to have a platform
which suits all. European directives – such as AIFMD
but also the Undertakings for Collective Investment in
Transferable Securities (UCITS) Directive – cater for
European investors; as such, if you don’t need UCITS/
AIFMD or only need limited access to them for certain
investors, then it is advisable (and possible) to structure
in a way that will greatly reduce the obligations and
costs that come with those regimes.
For those managers with elements of EU and non-
EU business, it will be possible to break the non-EU
business away into a parallel or feeder structure for
which AIFMD compliance would neither be required
nor necessary. The potentially onerous administration
burden and costly compliance with the AIFMD will mean
that parallel structures are likely to be given serious
consideration. Conversely, if a manager has a platform in
a mainland European domicile then it will have to comply
fully with the AIFMD even if there were a large proportion
of non-EU investors. European mainland platforms do not
offer the ability to separate the reporting obligations away
from non-EU investors, as with a Guernsey platform.
Substance
One important factor is that AIFMs should ensure that
they do not fall foul of the letter box entity provisions,
i.e. sufficient substance is needed to demonstrate that
the management entity is established outside the EU, if
that’s what it is aiming to achieve for AIFMD purposes.
Therefore, investment houses must ensure they have
enough substance in the domicile of their fund if they opt
for it to be self-managed, for example.
Guernsey has an advantage over a number of
other third countries in this respect as there is already
significant substance present in fund structures. For
Guernsey fund facts
Guernsey has signed 27 co-operation agreements
with the securities regulators from the following EU/
EEA countries: Austria; Belgium; Bulgaria; Cyprus;
Czech Republic; Denmark; Estonia; France; Finland;
Germany; Greece; Hungary; Iceland; Ireland; Latvia;
Liechtenstein; Lithuania; Luxembourg; Malta; Norway;
Poland; Portugal; Romania; Slovak Republic; Sweden;
The Netherlands; and United Kingdom.
AIFMD guide GFM Special Report Jun 2014 www.globalfundmedia.com | 24
Guernsey
example, large hedge fund managers such as BlueCrest
and Man Group and private equity houses such as Apax,
BC Partners, Mid Europa, and Permira have Guernseydomiciled
funds as well as offices and staff based
here. Indeed, BlueCrest emphasised its commitment
to Guernsey when it became the first firm to register
a Limited Liability Partnership (LLP) in Guernsey on
the same day that the Limited Liability Partnerships
(Guernsey) Law, 2013, came into force on 13 May
this year.
Administration providers range from major international
names such as Northern Trust, State Street and Citco
to specialist independent providers. There is also a
significant pool of experienced non-executive directors
across a broad cross-section of industries.
There are also a number of global custodians based
in Guernsey and they are being supplemented by those
specialist fund administration providers who are applying
to establish Guernsey-based depositaries, particularly
to service private equity and real estate funds which
previously were not required to have a depositary, but
who can take advantage of a depositary-lite regime for
non-financial assets.
Indeed, Gentoo Depositary Services Limited was
the first non-financial asset depositary to be licensed
under the GFSC’s AIFMD Rules, 2013. Its launch at
the end of April this year along with similar plans
by other local administrators allows fund managers
the ability to choose a depositary that is familiar with
both the domestic regulatory regime and the private
equity asset class in order to manage the additional
regulatory pressures of AIFMD. Whilst it is possible to
appoint an EU depositary for a non-EU AIF, the ability
of local administrators to offer a Guernsey-based
depositary will help support the geographic residence of
Guernsey funds.
Guernsey has carved out a prominent place for
providing access to international stock exchanges,
particularly on the London Stock Exchange (LSE) where
more Guernsey companies have had successful Initial
Public Offerings (IPOs) of non-UK entities than from any
other jurisdiction in the world; there are currently 125
Guernsey entities listed on the LSE with a combined
market capitalisation of £34 billion.
This listings capability verifies Guernsey’s strong ethos
of corporate governance, as the two largely go handin-
hand as companies are subject to and adhere to the
rules applicable to the various stock exchanges on which
they list.
Industry growth
Guernsey’s funds industry itself has stood up admirably
to the challenges posed by AIFMD and saw a notable
increase in the number of new funds being approved
for domiciling or servicing in the Island during 2013.
There were a total of 103 additions during the course
of the year, bringing the net asset value of funds under
management and administration in Guernsey to £266
billion at the end of December.
The fund launches spanned a wide range of asset
classes but some of the most notable occurred in the
energy sector were that of Bluefield Solar Income Fund
and The Renewables Infrastructure Group, with City
sources quoting the latter as the largest IPO of a clean
energy firm in London, with an initial raising of £300m in
July 2013.
This focus on energy has continued into 2014 with the
launch of NextEnergy Solar Fund Limited. The Guernsey
closed-ended collective investment fund successfully
raised £86 million for its listing on the premium segment
of the main market of the LSE in March, while in April
the John Laing Environmental Assets Group Limited
raised proceeds of £160 million for its own placing and
IPO on the LSE.
Other notable Guernsey fund launches in 2014 have
included the likes of European private equity giant
HitecVision’s launch of HitecVision VII L.P., a Guernsey
closed-ended collective investment scheme. With a focus
on control buyouts and growth capital investments in the
oil and gas industry, the fund attracted commitments of
US$1.9 billion for its February launch. X2 has also chosen
Guernsey as the base for its new natural resources
venture, X2 Resources Partners LP Inc. X2 Resources
has raised US$2.5 billion of committed equity capital
funding and up to a further US$1.25 billion of conditional
equity capital funding for its Guernsey closed-ended
investment vehicle.
There have been many other successful IPOs
spanning infrastructure, real estate, aircraft leasing,
shipping and distressed and mezzanine debt. These
fund launches can certainly be seen as something of
a vote of confidence in Guernsey’s approach to AIFMD
as many have come after the implementation of the
directive across Europe. While these remain early
days in the evolution of AIFMD, the initial indications
are positive, with Guernsey’s funds industry still busy
domiciling, re-domiciling and servicing more new funds
in 2014.
What is important going forward is that managers
realise that an EU AIFMD compliant platform is not the
only answer and that in particular, Guernsey offers a dual
regulatory regime for the continued distribution of funds
into both European and non-European countries.
The early introduction of our opt-in AIFMD equivalent
regime from 2 January this year is testament to our
thorough and pro-active approach. Guernsey’s optionality
also means clients can be serviced in the manner most
appropriate to their specific circumstances. n