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Long before the recent boom that has made private equity investment known around the world, the Channel Islands Stock Exchange has led the field as one of the first stock exchanges in Europe to allow the listing of interests in limited partnerships. Today the CISX has a number of these listings, particularly from the Scandinavian region, where this type of structure has been used by pension funds to invest in asset classes such as property and for mezzanine financing.
The Exchange, which earlier this year marked the approval of its 2,000th security admitted to the Official List, is widely used for the listing of a range of alternative fund structures, including property and hedge as well as private equity funds. In addition, it has also established a specialisation in truly alternative funds that invest in a diverse range of assets; the CISX already lists the first wine fund, two art funds, a forestry fund and a tree fund.
But just as important to the private equity industry is the Exchange's role in providing a tax-efficient means for UK private equity to finance acquisitions. Over the past four years, issuers in England and Wales have been responsible for more than GBP30bn in debt listings on the CISX.
The listing of debt on a recognised stock exchange, as the CISX is by the UK tax authorities, exempts UK issuers from withholding tax on interest payments to investors outside the UK, a provision known as the Quoted Eurobond Exemption. This is important given the role of debt in private equity acquisition structures and the use of so-called payment in kind notes (PIK Notes) to pay interest in order to minimise cash payments during the life of the loan.
While these payments in kind trigger tax deductions for the issuer, withholding tax becomes payable, hence the importance of the Quoted Eurobond Exemption to mitigate this liability. Since the exemption is applied to interest paid as opposed to accrued, it means unpaid interest that accrued before the listing of the debt can escape the tax if it is paid subsequently.
As well as the CISX, various other stock exchanges within the European Union are recognised for the purposes of the exemption. However, because the Channel Islands are not members of the EU, issuers are not subject to a wide range of European legislation including the Prospectus Directive and the Transparency Directive.
This means, for example, that there is no requirement to prepare accounts according to International Financial Reporting Standards, with all the additional costs and complexity that entails; the Exchange offers issuers the flexibility to use US or UK GAAP instead. This is on top of flexibility in other areas, such as continuing obligations, and the speed and efficiency that gives the Exchange an advantage in terms of listing turnaround time.
The Exchange benefits, of course from practical advantages such as being in the right time zone to serve European issuers, but it also offers an impressive and comprehensive track record, the imprimatur of recognition from tax and regulatory authorities in other jurisdictions, and the ability to offer efficient trading infrastructure and genuine market liquidity.
This matters to issuers seeking investors who may not invest in securities unless they are fully listed on an exchange with full recognition status, and the numbers speak for themselves - at the end of November the CISX had some 2,400 listings, around 80 per cent of which are on a primary basis.
Tamara Menteshvili is chief executive of the Channel Islands Stock Exchange
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