Guernsey’s Private Investment Fund regime was launched in November last year and has so far proved to be a popular route to launch a private fund. As the regime approaches its first anniversary, Annette Alexander of Carey Olsen, on behalf of the Guernsey Investment Fund Association, explains the PIF’s key features and the reasons behind its popularity.
Guernsey's new Private Investment Fund (PIF) regime, launched in November 2016, has been keenly welcomed by industry participants. Aimed at circumstances where a special relationship exists between managers and investors, the new regime dispenses with any formal requirements for information particulars such as a prospectus. It is not just the reduced marketing documentation which appeals to the industry: the quick regulatory turn-around is also a major attraction and increases the choices available to fund managers to serve investors' needs whilst reducing both the time and cost to fund launch. With more PIF launches in the pipeline, the regime is a very welcome addition to Guernsey's fund offering and demonstrates Guernsey's responsiveness to the industry's requirements.
What makes a PIF so attractive?
The PIF Rules allow for the fund and all other fund entities (such as associated general partner companies) to be registered and licensed following receipt by the Guernsey Financial Services Commission (GFSC) of one form (Form PIF) together with the application fee. The process takes one business day and no further documentation is required.
As the PIF caters for situations where there is a close relationship between the investors and management, it was anticipated that PIFs were likely to be used by start-ups and small fund managers looking to make their mark. Whilst this has been the case, the PIF has also proved popular within the established sector, with interest from large private equity managers.
GMT Partners, a leading private equity firm focussed on tech-enabled assets, launched the first and second funds of this type in Guernsey. Ashley Long of GMT Partners praised the new fund class, asserting that: "GMT Communications took advantage of the new Guernsey Private Investment Fund to launch its latest fund, the GMT Realisation Fund in April 2017. The one business day fast track approval process was a refreshing approach which enabled GMT Communications and its advisers to concentrate on the commercial imperatives of the transaction with swift execution of the administrative details."
The fast track approach applies to both the licence for the manager and the registration for the PIF with both applications being considered by the Commission in tandem, ensuring that the PIF regime maintains the regulatory efficiency it was created to provide.
The key features of a PIF are:
- it can be open-ended or closed-ended and may be established as a company, limited partnership or unit trust;
- there should be no more than 50 investors (or persons holding an ultimate economic interest) in a PIF but there is no restriction on the number of investors a PIF can be marketed to – a feature not available under comparable regimes;
- there is no requirement to produce information particulars (i.e. an offering document or prospectus);
- every PIF must appoint a Guernsey licensed manager who is responsible for making certain representations and warranties to the Commission on the ability of investors to suffer losses. No conduct of business rules apply to such licensed manager;
- except for a period of one year commencing from the date of first subscription, there is a ‘rolling test’ applied on a continuous basis in respect of new investors. In the previous 12 months, the PIF can add no more than 30 new ultimate investors; and
- they are subject to the PIF Rules which contain requirements for, amongst other things; managing conflicts of interest, submitting annual returns and submitting annual audited accounts within six months of the period end.
How close is close?
The GFSC does not offer guidance on how managers may become comfortable to provide warranties on the ability of a PIF's investors to sustain loss. What is clear is that a pragmatic and proportionate approach should be employed. Factors for managers to consider include:
- Is the investor a large institution or a small retail individual?
- Do they have a track record of investments of a similar size and nature?
- What percentage of the investor's net assets does the investment represent?
- How liquid is the investment?
When all is said and done, if the manager is not willing to warrant that the investors can absorb the risk of the investment then it is unlikely that they are sufficiently close to those investors to use the PIF model. The GFSC do advise that the manager cannot simply rely on a representation from an investor in the subscription agreement and must make their own enquiries to satisfy themselves that the investors have sufficient means to invest in the fund. The landmark PIFs kick-starting the trend include a vast continuum of investors, ranging from private individuals to institutional investors, indicating that managers are able to satisfy their own obligations under the PIF rules in a variety of investor scenarios with local experts on hand to provide guidance on such issues.
Managing investor numbers
The PIF has an initial 12 month period during which up to 50 investors can be admitted to the fund. Following the first 12 month period, only 30 investors can be added during any subsequent 12 month period. Naturally, these limits need to be carefully monitored in order to maintain compliance with the PIF Rules and should be recorded in the minutes admitting further investors to the fund.
Unlike registered or authorised funds, in a PIF structure where an appropriate agent is acting for a wider group of stakeholders such as a discretionary investment manager or a trustee or manager of an occupational pension scheme, that agent may be considered as one investor.
So has the reality lived up to the hype?
The industry seems to think so – PIFs represented 14% of Guernsey-domiciled fund launches in the three quarters up to the end of June 2017, with more in the pipeline before the end of this year.
Feedback from Guernsey based professionals involved in spearheading the regime has been extremely positive. Amongst these PIF pioneers is Estera's operations director Mel Torode, who explained that: "Estera worked with Carey Olsen to launch a PIF for an existing PE client quite soon after this new category of fund was introduced by the GFSC. The availability of this new product has been very well received by our client base so far and further demonstrates the agility and relevance of Guernsey as a first-class fund jurisdiction. The Carey Olsen team were responsive and knowledgeable during the process, being the first PIF launched by our team."
London based fund managers Pearl Diver, who specialise in securitised products also took the plunge, choosing the PIF regime for its sixth fund. Pearl Diver offers institutional investors access to US and global corporate credit in a structured format through investments in CLO tranches. BNP Paribas Head of Relationship Management Katy Hodgetts added: “Having recently migrated Pearl Diver Capital’s existing funds onto our platform, we were delighted to be appointed as administrator to the new PIF Fund ‘PDC Opportunities VI LP’, further building upon BNP Paribas’ very strong credentials as a leading administrator of debt funds.”
It is evident that existing clients of Guernsey service providers are keen to explore the PIF regime and that they are able to find the right mix of [enthusiasm] and expertise to guide them through the process.
The development of the PIF follows in the wake of the launch of Guernsey’s Manager Led Product (MLP), a regime adopted in anticipation of the extension to Guernsey of the third country passport under the Alternative Investment Fund Managers Directive (AIFMD). Much like the PIF, the MLP also allows a quick regulatory turn around and provides another option for managers under AIFMD, ultimately giving managers and investors a full range of investment opportunities in Guernsey.
Following on from the MLP, by the introduction of the PIF Guernsey's fund industry continues to innovate and anticipate the needs of fund managers and investors. The island's vibrant fund industry continues to go from strength to strength leading the world in innovation, speed and flexibility for the formation, launch and on-going management of funds.
An original version of this article was first published by Hedgeweek, September 2017.