An island gateway for fund managers

Guernsey’s pedigree as a leading
funds domicile relies on its ability
to continually meet the demands
of fund managers and their investor base.
Figures to the end of June 2013 show
that the value of funds under management
and administration in Guernsey reached
£286 billion ($457 million; €338 million)
– an increase of 5.6 percent on a year
previous – with private equity comprising
more than £87 billion. Indeed, global
private equity houses Apax, BC Partners,
Coller Capital, HabourVest and Permira
have all successfully raised multibillion
dollar Guernsey domiciled funds in the
last couple of years.
This illustrates that we have been
providing an appealing offering for General
Partners (GPs) and Limited Partners (LPs).
We believe we will continue to attract this
type of business because of our on-going
determination to ensure that we provide
the right environment for private equity
funds in the face of a changing landscape,
including the introduction of the EU’s
Alternative Investment Fund Managers
Directive (AIFMD) on July 22.
FUND FLEXIBILITY
Guernsey is not in the EU and therefore,
is not required to implement AIFMD.
However, with Europe still one of our
biggest markets, a large proportion of
business relates to the EU in some form.
Yet, we also have a substantial amount
of funds business which originates in
countries like the US and does not
touch the EU at all. It means Guernsey
has evolved its regime to ensure that it
continues to service both EU and non-EU
business in the most effective way.
Guernsey alternative investment
fund managers (AIFMs) and alternative
investment funds (AIFs) with no
connection to the EU continue to be able to
use the existing regulatory regime which
is completely free from the requirements
associated with AIFMD, while the Island’s
position as a ‘third country’ means that we
have not had to introduce a fully equivalent
AIFMD regime for our AIFMs and AIFs
to maintain access to EU markets. Those
who want to be able to access Europe can
continue to use National Private Placement
(NPP) regimes, which will remain until
2018.
Ahead of July 22, the Guernsey Financial
Services Commission (GFSC) signed
bilateral cooperation agreements with 27
securities regulators, including the UK,
Germany and France. These agreements
mean that Guernsey funds continue
to be able to receive investments from
appropriately qualified investors in these
European countries through their NPP
regimes.
However, the directive does also
provide the framework for establishing a
full passporting regime and the European
Commission is expected to implement this
regime for non-EU AIFMs in July 2015.
Guernsey will fully engage with this
consultation to ensure that our AIFMs
can take advantage of being able to market
AIFs on a pan-European basis with a single
authorization, as passporting is currently
envisaged to operate. Indeed, the GFSC
has issued a domestic consultation on a
full AIFMD equivalent opt-in regime and
these opt-in rules are expected to be fully
operational from 1 January.
SHOWING ‘SUBSTANCE’
A June 2013 survey of European asset
managers by fund software provider
Multifonds showed 77 percent of
respondents were considering establishing
funds for non-EU investors ‘offshore’ to put
GUERNSEY FINANCE
An island gateway
For private fund managers Guernsey can be a launch pad into
Europe, or an escape route from onerous EU regulations, writes
Guernsey Finance chief executive Fiona Le Poidevin
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FUND DOMICILES 2013
EXPERT COMMENTARY
them outside the scope of the directive.
However, this can only be achieved
if there is sufficient substance in the
jurisdiction to demonstrate that not just
the fund but also the manager can be
genuinely considered to be based outside
the EU. So called “letter box” entities
cannot claim to be managers and substance
will be required where a manager is
claiming to be domiciled. Similarly, the
extent to which activities such as portfolio
and risk management can be outsourced
must be considered and care must be taken
to ensure that the real decision making
powers lie with the entity that is claiming
to be the manager. This might, in certain
circumstances, encourage investment
houses to build their presence offshore and
take back in-house some of the previously
outsourced functions.
Guernsey has a huge advantage as a
fund domicile in the existing standards
regarding oversight and due to the
substance already present in existing
Guernsey domiciled structures.
Kohlberg Kravis Roberts & Co was
one of the first major private equity
managers to choose Guernsey. The US
firm’s KKR Private Equity Investors LP
raised more than $5 billion before listing
on Euronext Amsterdam in 2006, which
in turn demonstrated Guernsey’s capacity
to act as a gateway to access European
capital markets. Since then, other major
private equity managers have followed,
including Apollo, Cinven, Mid Europa
and Pantheon. Many have established their
own operations in Guernsey while others,
such as Terra Firma, have made Guernsey
their headquarters.
One of Guernsey’s biggest advantages
is that it has the infrastructure, including
fund administrators ranging from
major international names to boutique,
independent operations that can not
only provide support to in-house teams
but also provide third-party services.
Quality of service is evidenced by the
fact that Guernsey providers now not only
administer or manage assets of Guernsey
open- and closed-ended funds but also
nearly £100 billion worth of assets from
open-ended funds which are domiciled in
other jurisdictions, typically the Cayman
Islands, where there are local substance
challenges.
It is also not unheard of for promoters to
be so satisfied with their experience of the
Island through the ‘non-Guernsey scheme’
route that they decide to re-domicile their
funds to Guernsey. This certainly provides
more weight and substance from a tax
perspective.
ACHIEVING COMPLIANCE
AIFMD also requires depositaries to
provide extra oversight to the fund
structure. Unlike many of its competitor
jurisdictions, Guernsey already has
a wealth of custody businesses well
established on the Island. They provide
dealing and settlement and also offer
services over and above traditional custody
services to encompass robust support for
corporate governance, often performing
a fiduciary role.
Yet, much of Guernsey’s core business
of closed-ended private equity and real
estate funds will be able to access AIFMD’s
lighter touch regime for non-financial
assets that permits a wider range of
entities, such as lawyers and registrars,
to carry out custody functions, thus
benefitting from cost and operational
advantages of not requiring a formal
custodian. Indeed, we are already seeing
some Guernsey based administrators
setting up depository functions to provide
a ‘one-stop shop’, especially for clients new
to the requirement for a depository.
It should be emphasized that any
arrangements need to have sufficient
substance to work not just from a
regulatory perspective but also in terms of
tax, for example corporate residence and
implications for VAT and transfer-pricing.
Meeting these requirements is
important because AIFMD is not the only
regulatory or legislative initiative we will
see in the coming years. Indeed, the US
Foreign Account Tax Compliance Act (or
FATCA) has proved something of a game
changer and while there does appear some
potentially positive news regarding listed
entities, there is no doubt that it will add
yet another layer of compliance burden.
Guernsey has agreed in principle and is
already well down the path to signing a
Model I agreement with the US (and an
equivalent agreement with the UK).
CONCLUSION
Adopting these high standards means that
the Island is ideally placed to help private
equity managers deliver what is expected
of them not just now but also in the future.
Our position ‘offshore’ and outside of the
EU, coupled with our regulatory regime,
infrastructure and expertise mean that as
a domicile Guernsey offers optionality for
the international fund community. n
Fiona Le Poidevin is chief executive of
Guernsey Finance – the promotional
agency for the Island’s finance
industry.
Address: PO Box 655, North
Plantation, St Peter Port, Guernsey,
GY1 3PN
Phone: +44 (0) 1481 720071
Fax: +44 (0) 1481 720091
Email: [email protected]
Web: www.guernseyfinance.com
www.PRIVATEEQUITYMANAGER.com
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