Boost from permanent capital vehicles

The boost to Guernsey's image as a centre for hedge fund services resulting from the recent legislative and regulatory changes can be readily gauged by the growing list of funds that have been established on the island, in particular permanent capital vehicles from large hedge fund managers and private equity firms. Over the past year or so Guernsey has become the jurisdiction of choice for this form of capital-raising.

While the launch of high-profile Guernsey-domiciled private equity and hedge fund vehicles on Euronext Amsterdam and the London Stock Exchange has certainly raised the island's international profile, especially among US managers, it may not result in the flow of repeat business seen in other areas of the alternative fund industry.

Once a permanent capital vehicle has been established, the manager is unlikely to launch more such vehicles for a while, although further capital-raising exercises are possible. In addition, the recent surge of business coming to Guernsey has been assisted by extremely favourable market conditions that are unlikely to persist indefinitely. By contrast, many of the issuers of traditional closed-ended and some open-ended vehicles have launched a series of funds onto the market to exploit different strategies, bringing plenty of repeat business to service providers.

The work that is now coming into Guernsey is extremely varied. For example, over the past year Capita has received a number of instructions relating to funds investing in Eastern European opportunities, which are widely viewed - Russia apart - as a European Union convergence play. Various managers have established infrastructure and deal-making capabilities on the ground and are selling market beta exposure into the wider hedge community while taking their own bets on real estate, private equity and other non-traded market exposure.

Another significant area of interest for new funds is investment in structured debt. Capita has worked on several transactions involving the establishment of collateralised debt obligation funds and more are in the pipeline. Managers are looking at risk arbitrage in the CDO market after the sub-prime mortgage meltdown in the US, so more products of this type are likely to come to both Guernsey and Jersey in the future, principally from US managers who see opportunities to raise capital from UK and European investors.

For administrators, the primary additional issue involved in the servicing of listed funds is compliance with the listing rules of the exchange. Managers who seek to list their funds on a market with which they are not familiar are dependent upon the administrator to ensure the fund is in compliance with the rules, especially the exchange's regulatory filing requirements.

In markets such as Euronext there are additional complications such as the use of civil law rather than common law and an environment where English may not be the primary language. These issues present a range of administration challenges, but Guernsey stands out with its wealth of experienced people with wide-ranging skills and knowledge of the fund sector and of financial markets generally. Few competing jurisdictions possess the same strength in depth.

Guernsey is now viewed by investors as a mainstream jurisdiction for alternative funds. Both sponsors and investors take comfort that it has been operating for a long time, there is expertise across all the relevant disciplines, and its governance standards are well established - an increasingly important factor for an industry model moving to a greater degree of independence between fund managers and sponsors.

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