Like other jurisdictions around the world whose fortunes depend to a degree on the health of the investment industry, Guernsey has been watching the storms buffeting the financial world over the pa
Like other jurisdictions around the world whose fortunes depend to a degree on the health of the investment industry, Guernsey has been watching the storms buffeting the financial world over the past year with some concern, but so far at least there is little or no evidence that the island’s financial services industry is suffering.
Earlier this month Lipper reported that Guernsey’s fund servicing industry grew by 20 per cent over the 12 months to the end of June to reach USD331.4bn (GBP166.5bn) in net assets. The industry regulator, the Guernsey Financial Services Commission reported GBP207.2bn in fund assets under management and administration in the island in mid-2008, a difference that may be accounted for by funds that are domiciled but not serviced in Guernsey.
Either way, the various problems that have beset private equity funds, funds of hedge funds and property funds – in that order, the main constituents of Guernsey’s fund industry – have at most slowed the island’s steady growth, kick-started three years ago with the introduction of the Qualifying Investor Fund regime and subsequently bolstered by a series of reforms whose blueprint was set out in spring 2006 by the Harwood Report.
The report was drawn up by a committee headed by distinguished Guernsey advocate Peter Harwood of Ozannes, based on input from the financial services industry, the regulator and the political authorities. It set out a new philosophy for the regulation of the industry based on supervision of service providers rather than of products, which also made it possible to launch products swiftly to meet market needs instead of having to wait for regulatory approval.
The changes, which are now all but complete, have made it easier for promoters and Guernsey service providers to react rapidly to the new challenges thrown up by the credit crunch and its shock waves, according to Peter Niven, chief executive of GuernseyFinance. The promotional organisation, which recently staged its latest fund industry seminar in London, plays a key role in ensuring that Guernsey’s marketing message is effectively conveyed in financial centres around the world.
Niven says some of the froth may have come off the fund industry over the past 12 months, but it remains in fundamentally extremely solid shape. ‘We’re still seeing a lot of business and hear that there is plenty more in the pipeline waiting to come through,’ he says. ‘However, lawyers report that things are not as manic as in the heady days of mid-2007 – it’s retreated to more sensible levels. In one sense the market problems seem to have separated the wheat from the chaff. Those coming to market are top-level promoters, and the average volume of individual pieces of business is probably higher.’
He believes that in some respects the kind of business that comes to Guernsey may be intrinsically less affected by the credit problems. ‘A lot of business now is at the corporate end of the market, like closed-ended funds in often quite esoteric asset classes,’ Niven says. ‘Whether it’s private equity and funds of hedge funds or assets such as timber, business is dominated by corporate and pension fund money looking for a effective diversification for their portfolios. Also, they are long-term investors, not quickly in and out.’
Roger Le Tissier, a partner in Guernsey with law firm Ogier, agrees that the island’s fund business continues to ride high. ‘Everyone’s talking about the credit crunch, but it’s not lessening business flows,’ he says. ‘We are up on all of our business from last year, except perhaps securitisation, and last year was an extraordinary one. I don’t see a detrimental effect on the kind of business we are doing. There are hedge funds that are enjoying the volatility, it’s something they trade on.’
The Harwood reforms are scheduled to be completed by a new package of legislation and regulation extending to open-ended funds the benefits of the registered closed-ended fund regime introduced last year. The new Protection of Investors legislation that will encompass both types of fund has been passed by the States of Guernsey, the island’s legislature, and awaits approval from the Privy Council in London in the final stage of the legislative process.
‘The Commission has rewritten the regulations accompanying the new law, but these largely reflect existing practice,’ Niven says, noting that the legislation will be of particular benefit to sectors that are used to open ended-structures, like private equity. ‘Rather than going through the tortuous regulatory route, they can be registered and signed off by the administrator, increasing speed to market. A lot of funds fall by the wayside because they miss their window of opportunity. Where promoters see an opportunity, they are desperate to get to market as quickly as possible. They can’t wait three months, it will have gone.’
Ozannes partner Gavin Farrell argues that the island’s flexibility has already helped it to gain business in an environment where the ability to react quickly is if anything even more important. ‘We’ve been in a position to adapt quite quickly to the current trends and changes in the financial services industry and in the economy,’ he says.
‘Obviously with the credit crunch the number of large closed-ended listings and public offerings has taken a bit of a downturn. However, a number of other types of structure are being set up to take advantage of the market conditions, such as distressed debt funds. In addition, private equity firms seem to be returning to a more traditional venture capital approach, and many of these funds are being set up in Guernsey, probably because of our degree of flexibility. We are very adaptable to new trends in the type of business that comes to Guernsey. We can deal with pretty much anything that walks through the door.’
Ben Morgan and Tom Carey at Carey Olsen, the island’s leading provider of legal advice to the sector with 929 fund clients, according to Lipper, say they have seen a shift in the pattern of business since the first half of 2007. In the months before the onset of the credit crunch business flows were dominated by funds of hedge funds listed on London’s Alternative Investment Market, Euronext Amsterdam and the Channel Island Stock Exchange, as well as high-profile private equity funds, including listed vehicles from leading US firms such as KKR and Apollo, and property funds.
‘There is now a lot of mid-market private equity business, especially in markets such as Germany,’ Carey says, but the firm is also seeing plenty of work from fund of hedge funds clients building their businesses. Adds Morgan: ‘In many cases they have protected cell companies on the island and they are still adding new cells to the PCCs. There is a huge stable of existing clients or friends of existing clients using Guernsey, because it has developed huge momentum in the industry. It has established key niches and made a name for itself.’
This is not just happenstance, says Bob Brown, director of Equity Fund Services in Guernsey, but stems at least in part from the choices made by the regulator. ‘The growth of Guernsey as a jurisdiction is partly down to the Financial Services Commission, in that they can identify a range of products for which they think the island will be best suited, and they can tailor the legislation and their own rules to suit those products,’ he says. ‘It’s easier to do closed-ended schemes in Guernsey than in Jersey, for example, because the regulator is much more amenable to these vehicles.’
While Jersey is hoping that its Unregulated Funds regime, introduced earlier this year, will prove a strong source of business in a difficult economic environment, members of the industry in Guernsey are more keen to stress the importance of the island’s reputation for strong regulation and its ability to deliver the corporate governance requirements increasingly required of alternative funds.
Stuart Mauger, a senior manager with Royal Bank of Canada in Guernsey and head of business development for RBC Wealth Management’s corporate and institutional business in the British Isles, says the bank’s role as a trustee of funds serviced by other administrators offers particular comfort to both investors and promoters because it provides an additional source of independent oversight of whether both the investment manager and the administrator are doing their jobs properly.
‘This ties very well with the corporate governance that we are promoting as one of Guernsey’s biggest strengths,’ Mauger says. ‘For a fund that receives administration services from a different provider where we act as the trustee, it gives the promoter and the investors comfort that there are two parties involved here, one keeping an eye on the other, as well as the board of directors.’
Niven believes that corporate governance could prove a trump card in the future to help it win more business from the Cayman Islands, currently home to most of the world’s offshore hedge funds. He says: ‘We are looking ahead potentially to attract more hedge fund business to the island – not going down the Cayman route, nor the Jersey route – because we think we have a better business model. It’s always seemed bizarre to me that London promoters go to Cayman. They are finding that HM Revenue & Customs are going through these structures and deciding that mind and management are here [in the UK].
‘The other issue is the rejection by US courts of Cayman as a forum for the Bear Stearns hedge fund bankruptcy, which puts a different complexion on the corporate governance of these vehicles. We’ve long been banging on about corporate governance, that we can demonstrate that mind and management is here, and in the future I think it will be very telling.
‘You can ally that to the opportunity perhaps to administer these funds somewhere else – instead of a Cayman domicile and Dublin administration, why not a Guernsey domicile and Dublin administration? If you wrap it up with corporate governance – we have a great cadre of non-executive directors, and a very robust structure that ticks all the boxes – there’s no earthly reason why promoters in London should be continuing beating a path to Cayman.’
Niven says the industry in Guernsey is examining the regulations governing hedge funds in particular – although he acknowledges that defining a hedge fund is ‘like sticking a pin into blancmange’ – and hopes that concrete proposals can be unveiled soon. ‘Corporate governance is the most important part, but we can also offer a more flexible structure,’ he says. ‘It will have a lighter touch than the current regime, which requires local oversight over any outsourced part of the administration process, and be specifically for funds with a high minimum investment threshold and expert investors who know what they’re doing.’
Robin Fuller, chairman of Dominion Group (Guernsey), a manager of absolute return funds, says Guernsey has probably benefited from its underdog status, particularly in relation to its larger Channel Island neighbour. ‘Guernsey has made significant advances in the past five or six years, I think, because as a smaller jurisdiction than many of our rivals you realise you have to work harder,’ he says.
‘We’ve had to look at things that some of our competitors haven’t. It means we can never afford to be complacent. We know what our constraints are in terms of the size of our workforce, so we have to work at things like training. It’s come from good planning and the key stakeholders – the government, regulator and industry – working together. What we do better than many of our competitors is that all three maintain a vibrant discussion and consult on any changes that will affect the industry.
‘Guernsey has done a good job in reforming its regulatory structure, but the process never ends. There are some things you do in order to be innovative, and there are others that you have to do because your competitors have done them. Take incorporated cell companies – we think PCCs are the core product, but we’re not going to let anyone steal a march on us by having something that is slightly more flexible, so we will always make sure that our legislation is the best.’
Adds Niven: ‘In Guernsey we’re always focusing on what clients want. Things change, so we have to be looking for the next change and to be ahead of the game. You don’t get competitive advantage for too long, because everyone else piles in after you."
