Fiona Le Poidevin, Guernsey Finance

Why private equity keeps on choosing Guernsey

Experience, expertise, ‘fast track’ regulatory routes, listing capabilities and a dual regime for AIFMD are just some of the reasons why leading global private equity houses, such as HarbourVest, are continuing to choose Guernsey as their fund domicile, reports Fiona Le Poidevin (pictured), Chief Executive of Guernsey Finance.

An exit poll of the 400-plus delegates attending May’s Guernsey Funds Forum 2013 held in London revealed that they believed the future landscape of the investment funds industry will be affected by ‘external factors’, just as much as regulation.

The half-day conference and exhibition, titled ‘Back to the Future’, included two panel sessions – one on investor relationships and another on the effects of regulation – and a keynote debate featuring industry experts Nigel Vooght, PwC’s Global Financial Services Leader and head of its future-focused initiative ‘Project Blue’; and Better Capital Founder and Chairman Jon Moulton.

Using interactive voting, the event opened by asking delegates whether they thought the future of the investment funds landscape would be impacted more by investor influence, regulation or external factors, such as new technology, demographics, social change, the rise of state-directed capitalism and mounting pressure on the world’s natural resources.

On the first tally, the greatest proportion chose regulation, with external factors in second, closely followed by investor influence. However, after the debate, the exit poll revealed that while there had been an increased proportion of delegates believing regulation would be the most significant factor impacting the future of the investment funds industry, this was now matched by external factors, with investor influence a distant third.

Our debate had provoked the audience into thinking more about those issues which are going to impact over the long term rather than just those which are more tangible in our everyday work within the asset management industry, such as investor influence and regulation. That said, I realise that both of these are contributing towards the current fundraising challenge for managers.

The fundraising challenge

Guernsey practitioners recognise that fundraising is more difficult than ever before. Some who have spoken to Guernsey Finance recently highlighted how it is the funds being promoted by managers with a proven track record that are finding most joy in enticing investors who have become more cautious and demanding following from the global financial crisis.

Indeed, Sam Shires, Group Partner at law firm AO Hall, explained that funds which are getting away were coming from those with an established base of investors. In the opinion of counterpart Tom Carey, Partner at Carey Olsen, the number of larger, more established private equity houses that have closings slated for 2013, has resulted in difficulties for smaller or new promoters in raising capital unless they have a well-established track record in a specific investment space.

However, despite this landscape, it is clear that managers continue to view Guernsey as an attractive jurisdiction to domicile and service their funds. Guernsey has built a wealth of expertise and first-class infrastructure for the structuring, management, administration and custody of the widest range of funds.

The Island plays host to a broad selection of administrators, ranging from independent, boutique providers to large, multinational organisations, as well as leading custodians. Guernsey’s fund industry can also draw on the services provided by the island’s banking, wealth management and risk management sectors. In addition, it is supported by a comprehensive network of investment, legal, tax, audit, accounting and actuarial advisers, including multi-jurisdictional law firms and global accountancy firms.

The majority of their work relates to Guernsey open and closed-ended and listed funds, which are now promoted and sponsored by leading institutions in more than 55 financial centres globally. Guernsey funds can be established through a range of flexible investment vehicles such as companies, Limited Partnerships (LPs), the Guernsey-pioneered Protected Cell Companies (PCCs), Incorporated Cell Companies (ICCs) and unit trusts.

This expertise and infrastructure means that often Guernsey providers are servicing schemes domiciled elsewhere, such as the Cayman Islands.

This combination has helped to drive five consecutive quarters of growth in the value of funds business in Guernsey. The total net asset value of funds under management and administration in the Island grew each quarter during last year and by GBP19.7 billion (7.1%) during the first quarter of this year to reach GBP296.5 billion at the end of March 2013. This represents an increase of 9.8% on the year previous, growth of 12.4% on the same time two years ago and a rise of 50.2% since the end of March 2010.

Private equity trends

The net asset value of private equity funds under management and administration in Guernsey stands at more than GBP80 billion, which itself is a rise of 140% during the last five years. Indeed, in a Private Equity News and State Street survey, 61% of chief financial officers from private equity houses who responded said that Guernsey was their preferred destination for private equity outsourcing.

Our credentials as a leading international private equity funds domicile have been illustrated by the fact that houses such as Apax, BC Partners, Permira, Terra Firma and Mid-Europa have all established operations in the Island. In addition, houses which have their funds domiciled and administered in Guernsey include Ashmore, Better Capital, Cinven, Coller Capital and HarbourVest.

HarbourVest has managed capital for institutional investors since 1982 and currently manages investments in North America, Europe, Latin America, Asia Pacific and emerging markets. It has three investment funds currently domiciled in Guernsey.

HarboutVest’s latest Guernsey project involves HarbourVest Structured Solutions II L.P., an authorised closed-ended investment fund, which recently acquired an investment portfolio comprising private equity fund interests and direct co-investments from Conversus Capital L.P. (a Guernsey investment fund listed on NYSE Euronext in Amsterdam). The fund has assets under management of around US$1.2 billion.

Caroline Chan, Partner at Ogier in Guernsey legal advisors, said: “We believe that HarbourVest's decision to establish another fund in Guernsey reaffirms Guernsey as a jurisdiction of choice for investment funds – and private equity.”

Beyond PE

The members of the Guernsey investment community who spoke to us were clear that the Island is also proving attractive as a domicile for funds which can assist with financing arrangements i.e. distressed and mezzanine debt. Those funds with an income element are proving popular with investors, due in part to the prospect of capital growth being less likely in the current environment. Indeed, there was agreement among those we interviewed that there is still an opportunity for smaller and perhaps more innovative, esoteric funds where there is compelling case for investment.

Guernsey fund management and administration firm Dexion Capital launched DCG Iris, a closed-ended investment company, on the LSE in 2012. DCG Iris initially raised GBP40 million but this has now moved past GBP50 million following a further round of fundraising. Robin Fuller, Executive Director at Dexion Capital explained that because of its strong performance, his firm was now looking to do another Insurance Linked Securities (ILS) fund in 2013. He believes part of the reason Guernsey has still been able to attract this type of work is because centres such as London appreciate and respect Guernsey’s expertise in the funds arena, while institutional buyers also feel comfortable with what Guernsey has to offer.

Crescent Capital, who specialise in clean energy and infrastructure, has domiciled its Clean Energy Transition Fund L.P. (CETF) in Guernsey. The closed-ended investment scheme has some EUR200 million in committed capital and is Turkey’s first private equity fund with a focus on the energy sector.

These examples showcase the variety of funds being domiciled in Guernsey. In particular, the Island’s experience and expertise in the private equity space mean that it is ideally positioned to continue to act as a hub for the domiciling and servicing of funds coupled with the availability of securitisation vehicles which offer particular financing arrangements.

Exchange listings

A major factor behind Guernsey’s rise as a leading centre for private equity was when one of the largest US private equity houses, Kohlberg Kravis & Roberts (KKR) & Co. L.P., established a fund in Guernsey which listed on NYSE Euronext Amsterdam. At the time it was particularly innovative and as a result won a series of awards and really put Guernsey on the map as a gateway to accessing capital from European markets.

Guernsey entities can provide speedy access to list on a range of international stock exchanges including the LSE, Euronext, Australia, Toronto, Frankfurt, Hong Kong and the local Channel Islands Stock Exchange (CISX) – which has more than 5,000 securities listed, as well as many others around the world. The local listing platform offers a time and cost efficient way to access capital.

LSE figures to the end of December 2012 show that there are more Guernsey entities, 122, listed on its markets than from any other jurisdiction globally (ex-UK). Only recently, Oriel Securities Partner Joe Winkley, a widely respected adviser on listed funds, told an audience at a LSE event that he believed Guernsey would continue to dominate as a listing domicile going forward.

This seems to be holding true, with the first London-listed fund Initial Public Offering (IPO) of 2013 being ICG-Longbow Senior Secured UK Property Debt Investments Limited – a Guernsey closed-ended fund. The fund's IPO raised more than GBP104m by way of a placing by Investec Bank plc, who acted as sponsor to the company, to institutional investors. The Guernsey fund has a focus on raising, investing and managing funds in UK commercial real estate debt. This is another sign of debt becoming increasingly available from alternative lenders in an environment where banks remain limited in their appetite for lending.

AIFMD

There has always been an appreciation of Guernsey’s 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.

Investors and managers can also be reassured by Guernsey’s position regarding the Alternative Investment Fund Managers Directive (AIFMD), which comes into effect from 22 July 2013. Guernsey is not a Member State of the EU and is considered a third-country under the terms of AIFMD. However, Guernsey has embraced AIFMD and intends to operate a dual regime whereby it will be possible to distribute Guernsey funds into both EU and non-EU countries.

Ben Morgan, a Partner at Carey Olsen, said that Guernsey ultimately offered “optionality and flexibility.”

His view was that it would be wrong to assume that all existing Guernsey funds will opt to be self-managed and therefore be non-EU AIFM managed. Some will want their UK operation in the EU to be the AIFM and will therefore have the option to be AIFMD authorised.

On 7 June 2013 the Guernsey Financial Services Commission (GFSC) issued domestic Alternative Investment Fund Managers Directive (AIFMD) marketing rules, together with a notification form and confirmed they are able to accept applications prior to 22 July 2013. The GFSC has also provided a set of frequently asked questions (FAQs) which will be updated as the EU-wide implementation of AIFMD unfolds. 

Amending its domestic rules and the provision of guidance signals that Guernsey is well advanced in being able to continue to offer access to EU markets in view of the AIFMD coming into force on 22 July this year.

This most recent development follows approval from the European Securities and Markets Authority (ESMA) of the bilateral agreements to be signed which will create a formal framework of cooperation on matters of mutual interest between the GFSC and the equivalent bodies in the EU Member States, Croatia, Iceland, Liechtenstein and Norway.

I am extremely pleased that the rules have been released on the Commission’s website along with the FAQs, well ahead of the July implementation date. Together with the ESMA announcement, the approval of Guernsey’s domestic marketing rules demonstrates that Guernsey is well prepared for 22 July, when AIFMD goes live across Europe. Indeed, this gives certainty to those currently using or considering using Guernsey as a fund domicile, in terms of the Island’s approach to the Directive.

Guernsey will offer a dual regime. We will have an AIFMD offering for those EU investors and managers who need or choose to take this route and at the same time maintain our existing regime for those who fall outside the scope of AIFMD or are able to take advantage of NPP regimes. This reflects the fact that we always strive to provide the best solutions for the truly global client base of the Guernsey investment fund industry.

Guernsey intends to fully engage with the consultations on the third country passporting regime to be implemented by Europe, to ensure that Guernsey managers will be ideally placed to take advantage of the new benefits of being able to market funds on a pan-European basis with a single authorisation, as the regime is currently envisaged to work.

The right conclusion

What we can see is that the more cautious and demanding approach of investors, as well as an increasing regulatory burden, are impacting the fundraising landscape for managers. However, as I alluded to at the start, it is important not to lose sight of some of the wider factors which will be important over the long term. In a similar sense, when you are choosing a fund domicile or service centre then it is important to take a holistic view and as you have read, Guernsey has and will continue to prove an attractive proposition for many private equity fund managers.

An original version of this article was published in Real Deals, 13 June 2013


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