Fiona Le Poidevin, Guernsey Finance

Meeting GP & LP demands

Evidence shows that Guernsey continues to meet the demands of both private equity managers and their investor base, writes Guernsey Finance chief executive Fiona Le Poidevin (pictured)…

Guernsey’s pedigree as a leading funds domicile relies on its ability to continually meet the demands of fund managers and their investor base. Figures to the end of June 2013 show that the value of funds under management and administration in Guernsey reached GBP286 billion (USD457 million; EUR338 million) – an increase of 5.6 per cent on a year previous – with private equity comprising more than GBP87 billion. Indeed, global private equity houses Apax, BC Partners, Coller Capital, HabourVest and Permira have all successfully raised multibillion dollar Guernsey domiciled funds in the last couple of years.

This illustrates that we have been providing an appealing offering for General Partners (GPs) and Limited Partners (LPs). We believe we will continue to attract this type of business because of our on-going determination to ensure that we provide the right environment for private equity funds in the face of a changing landscape, including the introduction of the EU’s Alternative Investment Fund Managers Directive (AIFMD) on July 22.

Fund flexibility 

Guernsey is not in the EU and therefore, is not required to implement AIFMD. However, with Europe still one of our biggest markets, a large proportion of business relates to the EU in some form. Yet, we also have a substantial amount of funds business which originates in countries like the US and does not touch the EU at all. It means Guernsey has evolved its regime to ensure that it continues to service both EU and non-EU business in the most effective way.

Guernsey alternative investment fund managers (AIFMs) and alternative investment funds (AIFs) with no connection to the EU continue to be able to use the existing regulatory regime which is completely free from the requirements associated with AIFMD, while the Island’s position as a ‘third country’ means that we have not had to introduce a fully equivalent AIFMD regime for our AIFMs and AIFs to maintain access to EU markets. Those who want to be able to access Europe can continue to use National Private Placement (NPP) regimes, which will remain until 2018.

Ahead of July 22, the Guernsey Financial Services Commission (GFSC) signed bilateral cooperation agreements with 27 securities regulators, including the UK, Germany and France. These agreements mean that Guernsey funds continue to be able to receive investments from appropriately qualified investors in these European countries through their NPP regimes.

However, the directive does also provide the framework for establishing a full passporting regime and the European Commission is expected to implement this regime for non-EU AIFMs in July 2015. Guernsey will fully engage with this consultation to ensure that our AIFMs can take advantage of being able to market AIFs on a pan-European basis with a single authorization, as passporting is currently envisaged to operate. 

Indeed, the GFSC has issued a domestic consultation on a full AIFMD equivalent opt-in regime and these opt-in rules are expected to be fully operational from 1 January.

Showing ‘substance’ 

A June 2013 survey of European asset managers by fund software provider Multifonds showed 77 per cent of respondents were considering establishing funds for non-EU investors ‘offshore’ to put them outside the scope of the directive. However, this can only be achieved if there is sufficient substance in the jurisdiction to demonstrate that not just the fund but also the manager can be genuinely considered to be based outside the EU. 

So called “letter box” entities cannot claim to be managers and substance will be required where a manager is claiming to be domiciled. Similarly, the extent to which activities such as portfolio and risk management can be outsourced must be considered and care must be taken to ensure that the real decision making powers lie with the entity that is claiming to be the manager. This might, in certain circumstances, encourage investment houses to build their presence offshore and take back in-house some of the previously outsourced functions.

Guernsey has a huge advantage as a fund domicile in the existing standards regarding oversight and due to the substance already present in existing Guernsey domiciled structures. Kohlberg Kravis Roberts & Co was one of the first major private equity managers to choose Guernsey. The US firm’s KKR Private Equity Investors LP raised more than USD5 billion before listing on Euronext Amsterdam in 2006, which in turn demonstrated Guernsey’s capacity to act as a gateway to access European capital markets. Since then, other major private equity managers have followed, including Apollo, Cinven, Mid Europa and Pantheon. 

Many have established their own operations in Guernsey while others, such as Terra Firma, have made Guernsey their headquarters. 

One of Guernsey’s biggest advantages is that it has the infrastructure, including fund administrators ranging from major international names to boutique, independent operations that can not only provide support to in-house teams but also provide third-party services. Quality of service is evidenced by the fact that Guernsey providers now not only administer or manage assets of Guernsey open- and closed-ended funds but also nearly GBP100 billion worth of assets from open-ended funds which are domiciled in other jurisdictions, typically the Cayman Islands, where there are local substance challenges.

It is also not unheard of for promoters to be so satisfied with their experience of the Island through the ‘non-Guernsey scheme’ route that they decide to re-domicile their funds to Guernsey. This certainly provides more weight and substance from a tax perspective.

Achieving compliance

AIFMD also requires depositaries to provide extra oversight to the fund structure. Unlike many of its competitor jurisdictions, Guernsey already has a wealth of custody businesses well established on the Island. They provide dealing and settlement and also offer services over and above traditional custody services to encompass robust support for corporate governance, often performing a fiduciary role.

Yet, much of Guernsey’s core business of closed-ended private equity and real estate funds will be able to access AIFMD’s lighter touch regime for non-financial assets that permits a wider range of entities, such as lawyers and registrars, to carry out custody functions, thus benefitting from cost and operational advantages of not requiring a formal custodian. Indeed, we are already seeing some Guernsey based administrators setting up depository functions to provide a ‘one-stop shop’, especially for clients new to the requirement for a depository. 

It should be emphasized that any arrangements need to have sufficient substance to work not just from a regulatory perspective but also in terms of tax, for example corporate residence and implications for VAT and transfer-pricing.

Meeting these requirements is important because AIFMD is not the only regulatory or legislative initiative we will see in the coming years. Indeed, the US Foreign Account Tax Compliance Act (FATCA) has proved something of a game changer and while there does appear some potentially positive news regarding listed entities, there is no doubt that it will add yet another layer of compliance burden. Guernsey has agreed in principle and is already well down the path to signing a Model I agreement with the US, which would follow on from the equivalent Inter-Government Agreement the Island signed with the UK at the end of October.

Conclusion

Adopting these high standards means that the Island is ideally placed to help private equity managers deliver what is expected of them not just now but also in the future. Our position ‘offshore’ and outside of the EU, coupled with our regulatory regime, infrastructure and expertise mean that as a domicile Guernsey offers optionality for the international fund community.

Originally published in Private Equity Manager, November 2013.

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