Why quality is key in a fund domicile
As managers and investors look for fund domiciles with a focus on quality, Fiona Le Poidevin (pictured), Chief Executive of Guernsey Finance – the promotional agency for the Island’s finance industry, explores how Guernsey is well positioned to meet these evolving needs.
There is an ever growing awareness among investors and promoters of the importance of looking towards jurisdictions with quality service provision, strong corporate governance and robust regulation. This change in emphasis and focus on improved standards – accelerated by the global financial crisis in 2008 – was long overdue, but has thankfully been to Guernsey’s advantage as we see these factors as among our greatest assets as a fund domicile.
It is why Guernsey continues to be consistently placed within the very top tier of fund domiciles and remains particularly attractive to investors and promoters seeking out quality. Indeed, a 2012 survey carried out independently by www.funddomiciles.com on the future of the UK offshore domiciles found that 24% of managers have their funds serviced from Guernsey, followed by the UK (20%) and Ireland (18%). A key finding from the representative sample of 50 UK-based alternative investment managers was that Guernsey was considered the jurisdiction of choice for private equity. Comments from managers in the research included Guernsey having ‘the reputation of being a stable domicile with a good regulator and solid reputation’; while another said they liked ‘Guernsey because of the quality of its service providers and the ease of access from London.’
The value of funds under management and administration in the Island reached more than £278 billion ($421 billion) at the end of December 2012 – up 6 percent on the same time a year ago, with private equity comprising more than £80 billion ($121 billion). Guernsey’s expertise in the private equity space was confirmed by a Private Equity News and State Street survey, in which 61 percent of chief financial officers who responded said the Island was their preferred destination for private equity outsourcing.
This is aided by Guernsey’s fund industry boasting a heritage that stretches back half a century and means the Island has built a wealth of expertise and first class infrastructure for the structuring, management, administration and custody of the widest range of funds, including institutional, alternative and niche funds. The broad selection of administrators in Guernsey ranges from independent, boutique providers – Alter Domus, Augentius, Aztec, International Administration Group (IAG) and Ipes – to large, multinational organisations such as JP Morgan, Northern Trust, RBC and State Street who can also act as custodians.
Guernsey has more than 50 fund managers, administrators and custodians, whose primary business relates to open and closed-ended funds, which are now promoted and sponsored by leading institutions in more than 55 financial centres globally. Statistics from the Guernsey Financial Services Commission (GFSC) show that 70 new open and closed-ended funds were licensed in the Island during 2012. A major advantage of using Guernsey entities is that they can be listed on the London Stock Exchange (LSE), Euronext Amsterdam, the local CISX and the Hong Kong Stock Exchange (HKEx), among others. Fund managers can also draw upon the services provided by the Island’s banking, wealth management and risk management sectors, which are supported by a comprehensive network of investment, legal, tax, audit, accounting and actuarial advisers, including multi-jurisdictional law firms and global accountancy firms.
This expertise and infrastructure means Guernsey providers are often asked to service schemes domiciled in another jurisdiction, such as Cayman. Statistics from the GFSC show that in 2012, the Island’s service providers entered into 25 new contracts to provide either management, administration or custody services to non-Guernsey schemes. Many Cayman funds are currently administered in Dublin and so the advent of the Alternative Investment Fund Managers Directive (AIFMD) may see increasing numbers of promoters considering a jurisdiction, such as Guernsey, which will be able to offer both an AIFMD compliant regime and a regime not subject to AIFMD.
It is not unheard of for promoters to be so satisfied with their experience of the Island through the ‘non-Guernsey’ route that they decide to re-domicile their funds to Guernsey. Certainly, this can provide more weight and substance from a tax perspective as the majority of services are provided from the jurisdiction in which the fund is domiciled.
AIFMD means the delegation of investment management functions will have to be carefully considered going forward and not exceed the margins set out in the directive’s legislation. The future AIFMD requirements also state that a manager should be able to demonstrate evidence that there is adequate substance within the Guernsey operation and that managers are not merely using the location as a ‘letter box entity.’ As part of that trend, managers are increasingly not just looking to have their funds administered by a third party where the fund is domiciled, but then looking to establish their own offshore operation, for example in Guernsey. Bluecrest Capital, the third largest hedge fund manager in Europe, relocated its headquarters from London to Guernsey in 2010.
Private equity houses with offices in Guernsey include Apax, BC Partners, EQT, Permira and Terra Firma. Indeed, not only did Terra Firma Chairman Guy Hands establish an office in the Island, he now lives in Guernsey. Another significant player in the private equity industry, Jon Moulton, Chairman of Better Capital, also owns a home in Guernsey and his investment company is domiciled and administered in the Island.
The way the Island was fully engaged regarding AIFMD from the beginning has demonstrated our knowledge, understanding and commitment to the funds industry. It was also why Guernsey was able to confirm at the end of last year that in relation to AIFMD it will be offering two parallel regulatory regimes for investment funds in order to best meet client needs going forward.
Guernsey intends to operate dual regimes from July 2013, which is the deadline for the AIFMD rules to be transposed into EU law. At a basic level this will enable distribution of Guernsey products into both EU and non-EU countries via normal marketing routes, including EU national private placement regimes where they remain available.
In addition, Guernsey is examining the possibility of operating a Guernsey “opt in” AIFM regime in order to access (on a bilateral basis) EU member states that align their private placement rules with AIFMD. In addition, Guernsey will be engaged in future consultations in relation to how third country ‘passporting status’ will operate from July 2015.
The bottom line is that Guernsey is well prepared for AIFMD and we believe that our approach means that managers will continue to use the Island because we will offer the full range of services to both EU and non-EU investors and managers.
We recognise that we have clients whose business does not touch the EU at all in terms of management or marketing of funds and it is important that these clients have the choice to elect to fall under the AIFMD regime or remain outside, as is their right. In being able to offer both EU and non-EU solutions from one location, Guernsey will be ideally placed to serve the global fund industry - because while we recognise that Europe remains our main source of business, we also respect the fact that the emerging markets offer exciting opportunities.
A major attraction of domiciling funds in Guernsey within this post-crisis environment where investors are demanding higher standards is that the GFSC has established a reputation for its robust yet pragmatic approach to regulation. For example, ‘fast track’ routes have been introduced which allow for the speedy launch of funds targeted at professional investors and yet, those investors also have the security of knowing that all Guernsey funds are regulated. In addition, the GFSC ensures that funds follow the appropriate local or international codes of corporate governance and the fact that the Island has a pool of experienced and well qualified non-executive directors reassures investors and promoters that Guernsey service providers are working to the highest standards.
Indeed, Guernsey’s position as a well regulated, cooperative and transparent jurisdiction has been reinforced by the fact that external agencies such as the IMF, OECD and Financial Stability Board (FSB) continue to place Guernsey within the very top tier of leading international finance centres globally.
Guernsey was among the first set of jurisdictions placed on the OECD ‘whitelist’ in 2009 and subsequent Global Forum reports have continued to recognise the Island as within the top tier of jurisdictions meeting international standards and thereby helping to protect global stability. To date, Guernsey has signed Tax Information Exchange Agreements with 40 jurisdictions and 16 Double Taxation Arrangements. Industry and local government continue to work on extending our DTA network and there are several other agreements in the pipeline.
The formal ratification of Guernsey’s zero-10 corporate tax regime in December last year by the EU’s Economic and Financial Affairs Council (ECOFIN) provides an additional layer of reassurance for investors and managers that Guernsey is a jurisdiction which is willing and able to move quickly to ensure it continues to meet international tax standards, while also retaining its position as an extremely competitive place to do business. All financial services products for our international client base will continue to be taxed at a zero rate and managers and promoters have the certainty of knowing that our tax exempt regime for collective investment schemes also remains in place. The regime was modernised in September 2011, updating the definitions of bodies which can be granted exempt status, which means the status now applies to any body forming part of the structure under which the scheme as a whole operates.
In the post-crisis environment, investors are demanding higher standards and therefore promoters and managers need to be able to make sure they can meet these expectations. Guernsey’s long standing expertise and infrastructure, combined with its robust regulation, strong corporate governance, tax neutrality and response to AIFMD means that it is ideally placed to be the global fund domicile of the future.
An original version of this article was published by Clearpath Analysis, Re-domiciling & Co-domiciling for Fund Managers, 2013.Find out more
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