WITH MORE than five decades of financial services experience Guernsey has developed a formidable investment funds eco-system. With an independent regulator, a local stock exchange and wide range of service providers, there is a sophisticated level of expertise, which makes the island a favourite jurisdiction for managers to establish operations and/or domicile funds.
This is particularly true of private equity, which has flourished in Guernsey thanks to both a mature financial environment geared towards the industry and attractive financial services laws. This is evidenced by a 2010 survey, which showed that Guernsey is the preferred jurisdiction of choice for 61 percent of chief financial officers of private equity firms.
The island’s success in the private equity space is in part because it was one of the first jurisdictions to move its focus away from traditional equity and cash funds aimed at retail investors towards embracing alternative investment funds
According to Jonathan Robbins, director, Mercator Fund Services Limited, “It is the maturity of the industry which sets Guernsey apart from other, newer, fund centres. It has proved over many years that it is able to respond to the changing demands of international regulation, whereas a number of newer jurisdictions have introduced legislation aimed at establishing themselves as fund centres but they lack the track record of continually developing and strengthening their regulations and oversight regimes in response to international developments.”
Guernsey’s maturity as a fund centre and focus on development have left it with an extremely well developed industry. The net asset value of the Guernsey funds industry is around £260 billion, of which private equity and venture capital funds represent around £80 billion; but Guernsey is more than just a fund and private equity centre.
“It also has very well established banking, wealth management and insurance sectors, and the breadth of its financial services industry means it has attracted global accountancy firms and major international banks, while a number of local law firms have developed into multi-jurisdictional practices,” says Robbins.
“There is also a large number of fund administrators servicing private equity funds, some as private equity specialists and others handling a range of different fund types.”
In addition, Guernsey’s regulatory authorities have a reputation for approachability and flexibility. The regulatory framework continues to evolve and the resulting change in the Protection of Investors legislation enabled the Guernsey’s Registered Fund regime, available for open-ended and closed-ended funds, which facilitates a fast-track three-day approval process.
According to Patricia White, managing director, Legis Fund Services, this is “proving a popular choice for promoters who can demonstrate an established track record, providing the components of speed to market and regulation.
“The Authorised Qualifying Investor Fund also offers a three-day process, the most appropriate choice being affected by the requirements of the detailed disclosure in the offering documents,” she adds. “Licensing of a GP can also be fast-tracked to a ten-day process. Competing jurisdictions currently achieve this turnaround time through their unregulated fund regimes.”
Guernsey’s flexible approach has been positive for the new era of Shariah funds, according to William Simpson, managing partner, Ogier Guernsey.
“In terms of Middle Eastern clients and Middle Eastern focused funds, Guernsey has shown that its fund regulations have the flexibility to accommodate requirements for Shariah compliant structures,” he says.
The island is also well placed geographically, politically and from a regulatory perspective, according to Simpson. Being in a European time zone close to London means that it is easily accessible and convenient for investors and promoters from a wide geographic base, while service providers on the island have also focused their attention on the Middle East and North Africa to a large extent.
“Service providers in Guernsey have worked hard over the past few years to develop their knowledge and understanding of the requirements of MENA clients and structures,” he says.
“Guernsey’s challenge is to continue Guernsey Finance and the private industry’s excellent work in communicating to Middle Eastern investors and promoters that Guernsey exists as an attractive jurisdiction which is keen to do business.”
Guernsey is also a strong location for asset managers targeting the broader emerging market space. Guernsey Finance, the promotional body for Guernsey’s finance sector, has led delegations to countries such as Russia, India and China, and has an office in Shanghai, so emerging markets are seen as a very important area of growth for the Island.
“There are already a number of links between firms in Guernsey and banks and fund managers in the MENA Region,” says Robbins. “At Mercator we have worked with Middle Eastern promoters and investors for many years and have also seen an increasing interest in Shariah compliant funds and other Islamic finance transactions. But many of the requirements of investors from the MENA Region are really no different to those of investors from other regions in terms of demanding that fund managers demonstrate a high level of regulation and governance before they commit their capital. The expertise and experience of Guernsey service providers in structuring and administering funds is key to managers meeting their investors’ demands.”
An additional point relevant to MENA investors is the absence of income and withholding taxes in Guernsey, which means that investment income can be returned to investors in a tax efficient manner as many MENA investors will not pay income taxes in their country of residence.
Of course challenges remain for the Guernsey private equity industry. One key issue is the European political reaction to the credit crisis and numerous new regulatory initiatives including the AIFM and Solvency II directives.
According to Neale Jehan, executive director, KPMG, Channel Islands, “As the debate surrounding the AIFM directive has developed, the position of private equity and Guernsey has become clearer; from a position where it looked bleak to now when there is a clear positive direction for the island.
“Private equity houses continue to raise successful funds from the island and, the changing European regulatory landscape does not indicate any plans for funds to redomicile elsewhere. In fact, there are several examples of private equity houses that have looked at comparable, parallel structures in the EU only for investors to realise the Guernsey proposition is more attractive.
KPMG expects to see the private equity industry continue to develop, boosted by changes that could hand more power to investors and alter the terms and conditions of funds.
“We may see new structures being developed in the coming years to tackle perceived challenges to the industry such as illiquidity, alignment of interests, more detailed investor reporting, etc,” he adds. “Guernsey, with its flexibility, innovation and private equity expertise is uniquely placed to assist the industry in developing solutions to these and other challenges.”
One other thing also attracts and keeps asset managers and service providers in Guernsey – the island life.
“Guernsey first attracted us as a young family in the early 1990s from the BVI due to its close proximity to England and the rest of Europe coupled with its developing finance industry,” says Simpson.
“Guernsey continues to be an attractive place to live due to its location, atmosphere and well managed government, finances and legal system. I believe that this, along with the favourable tax regime, still makes it an attractive place to set up and do business.
“It is commonly said that Guernsey is the perfect size and constitution to be able to adapt quickly and efficiently to new or emerging products or industries. In addition, Guernsey has a strong and efficient judicial system with a first class judiciary, which is an essential ingredient when selecting a tax neutral jurisdiction.”