By Simon Gray – After a blip at the end of 2011, Guernsey’s fund industry started the new year vigorously with growth in the total net asset value of funds under management and administration in the island of GDP8.7bn in the first quarter, according to the regulator, the Guernsey Financial Services Commission. This represented an increase of 3.3 per cent and took the sector’s total assets to GBP270.1bn at the end of March.
Year on year Guernsey’s fund assets grew by GBP6.4bn or 2.4 per cent, even after a drop of GBP10bn over the last three months of 2011. Says Guernsey Finance’s Fiona Le Poidevin: “The depreciation in the value of our fund business during the final quarter of last year was almost completely recovered during the first three months of 2012. There was an increase in fund values across the board, but the vast majority of the growth can be attributed to the launch of new closed-ended and non-Guernsey schemes.”
Closed-ended fund assets rose by GBP4.8bn or 4 per cent to GBP123.9bn over the first quarter, and were up GBP9.1bn billion or 7.9 per cent since March 2011, while non-Guernsey schemes for which some aspect of management, administration or custody is carried out in the island saw assets grow by GBP3.4bn (3.9 per cent) to GBP90.4bn over the three months to the end of March. However, non-Guernsey assets were GBP800m or 0.9 per cent lower than a year earlier.
Le Poidevin adds: “Most notable in terms of our success in the fund industry has been private equity, which has seen growth of 259 percent over the past five years and has been the cornerstone of the industry recently. There have also a lot of new closed-ended funds, and at the end of December we still had the most listings across all markets of the London Stock Exchange of any non-UK jurisdiction, with 108 listed vehicles.”
Across the fund industry managers are facing greater difficulty in raising money from investors, but this is particularly true of new firms, according to Appleby’s Barney Lee. “For a start-up manager to raise money, they need some kind of cornerstone investor,” he says. “They must have a good track record from the business they have left, and a good idea. Nevertheless, we have a few new managers with launches in the pipeline.”
While the stream of new fund business coming to Guernsey in the past few years has not matched the volumes seen in the boom years of the 1990s and early 2000s, Ogier partner Caroline Chan says promoters – especially in the private equity sector – continue to use the island successfully for some large fundraisings, such as EQT VI, “which raised approximately GBP4.75bn in difficult market conditions”.
At least in part, Chan attributes the island’s continuing buoyancy in an unfavourable economic environment to legislative and regulatory changes over the past few years. “Revisions to the fund regulatory regime from 2008 have made the approval process more efficient and cost-effective,” she says. “Promoters have the choice of authorised funds and registered funds, the latter having a slightly lighter regulatory touch.
“The introduction in 2007 of a fast-track registered funds route for closed-ended funds, since extended to open-ended funds, offers promoters quick turnaround times for fund set-ups. Working with Guernsey fund administrators, the Commission aims to provide registered fund approval within three business days of submission of an application.
“The fast-track process has been enhanced further by enabling investment managers and general partners of registered funds to obtain the requisite Protection of Investors licence within 10 business days of application. These developments, together with, for example, the introduction this year of a financial sector code of corporate governance, have developed and enhanced the funds products available to promoters and investors.”
Further refinements are on the way. “The Class B rules for open-ended funds are currently under review with the aim of improving timescales for implementing changes to schemes while retaining high governance standards through a disclosure-based regime,” Chan says.
“A foundations law is due to come into force before the end of the year, and amendments to the Companies Law and the Limited Partnerships Law are also under consideration. These changes offer structuring opportunities for fund managers and seek either to add to the range of structures currently available or to improve the flexibility of those already in use.”
The fund services sector in Guernsey is benefiting from these developments. While the island has been affected by rationalisation of operations by some administrators and mergers between others, it enjoys a reputation for specialist expertise that is serving it well at a time of increasing interest in so-called ‘alternative alternatives’ asset classes and strategies including agricultural land, forestry, sustainable technology, fine wines and the financing of legal cases.
The consolidation process has also seen the arrival or expansion of Guernsey operations by large global industry players, such as J.P. Morgan, which acquired a fund administration business on the island in 2010. At the same time, niche administrators have also set up new operations in response to market needs.
Says Lee: “Consolidation should be a good thing, bringing together the best elements of different service providers and attracting more of the big names here. The firms that have global systems and the ability to provide services from different locations, perhaps at a cheaper cost, can respond to market needs while maintaining excellent service quality and bespoke services where required.”
He adds: “Guernsey is regarded as a fund servicing centre of excellence. If you want to do something different, the perception will likely be that it can be done in Guernsey. There may not be particular expertise in that particular asset class, although that is developing in the cleantech and green technology area.”
Keith Parker, head of sales and marketing for Europe at administration software provider Pacific Fund Systems, says the Channel Islands are enjoying a recovery now after a few difficult years, in part as the hedge fund industry gains assets through convergence with traditional long-only investment management, but also as investors turn to hybrid special purpose vehicles and private equity structures to manage the regulatory environment in the Channel Islands and equivalent jurisdictions.
At the same time, he sees increased demand for data integration tools to facilitate straight-through processing and to flow the results into web-based reports that enable administrators – and managers – to deal with the new demands for transparency.
“There seems to be a flight to quality and to investment vehicle niches, which means using systems that are flexible to support hybrid vehicles and to provide full transparency, as well as to seek out reputable providers including lawyers, prime brokers and technology companies,” he says.
“This is very much the case in Guernsey, no doubt stimulated by the authorities’ emphasis on taking oversight very seriously, and it has a trickle-down effect on all the underlying constituent parts of the industry to do the same in their business. The plethora of new regulation is also fuelling this dynamic.”
PFS mostly serves third-party administrators, but it is also encountering greater interest from fund managers seeking to monitor the work carried out by their independent service providers or to take the next step into straight-through processing, whether in portfolio accounting, fund administration or shareholder services. “Undeniably this is starting to happen,” Parker says.
“We are talking to two types of fund managers. The first comprises managers that wish to have access to the administrator’s books via a web portal rather than having to create ‘shadow’ records which, although a historical trend, has subsequently waned, in our experience.
“In the second case, administrators and managers are seeking to streamline this relationship further and reduce replication by using straight-through processing from the source systems and to reflect those positions in the administrators system for reconciliation, middle office and NAV generation duties.”
The focus on greater transparency is also driving demand for new fund listings at the Guernsey-based Channel Islands Stock Exchange, although it too has been affected by the impact of the crisis on new launches and fund-raising. According to chief executive Tammy Menteshvili, the exchange, which has just passed the milestone of 4,500 listings, has seen some 50 new funds listed in 2012, including at least six from firms new to the CISX.
She says: “The financial crisis has made investors and regulators alike want more transparency about particular securities. The tendency now is to seek listing not only to obtain a commercial competitive edge but to provide information to investors, create a secure environment and ensure that transparency is inherent in the product. Being listed on the exchange is facilitating what the market actually wants now.”
Menteshvili says many of the new funds listed on the exchange are exploring innovative asset classes. “The popularity of different asset classes always varies from year to year,” she says. “The new thing one year is old hat the next. A couple of years ago there was a huge flurry of interest in litigation funds, but at the moment it is natural resources, energy and cleantech, biofuels, metals and other commodities, and shipping. There’s also a lot of interest in water, and people are looking more at ethical investments more.”
Lee points out that Guernsey’s reputation as a private equity centre was reinforced by the arrival earlier this year of Cinven, which moved its management vehicle to the island from the UK. “This is a vote of confidence,” he says. “Some other managers are looking to move business here.
“Private equity fundraising also is difficult, but managers who have good relationships with their investors and who have done well in the past can always raise money, if not necessarily attract as large allocations as they used to. And there is a sense that this could be a very positive vintage for private equity. If you have the money to allocate, there will definitely be some good opportunities. What has slowed things down up to now is a mismatch between buyer and seller price expectations, but sellers can only hold on so long.”
However, another traditional specialist field for the Guernsey fund business, funds of hedge funds, continues to make at best laboured progress. “We haven't seen a lot of activity in that area,” says Le Poidevin. “That reflects in part the struggles of the hedge fund industry as a whole. We are seeing more secondary funds than pure funds of hedge funds, but at the moment private equity is really where it is at.”
Lee says the island is attracting more property investment business, a sector in which it has long been overshadowed by its neighbour Jersey. “We are seeing quite a bit on the property side, particularly where there is an income element,” he says. “Usually that involves really strong covenants or otherwise opportunistic buying. There have been some really interesting deals in London prime commercial property, and there is also interest in prime residential property in London, as well as sectors such as student accommodation.”
Meanwhile, Guernsey continues to explore new markets. Says Chan: “A lot of work has been carried out over the past five years to raise awareness of the island’s fund industry in regions such as Asia, India, the Middle East and Russia, as well as with people looking to invest in those regions. This has attracted new business streams and is providing opportunities for the island’s finance industry generally, including areas such as private wealth structures.
“Guernsey is still attracting business from its traditional European markets, but increasingly it is coming from further afield. Funds with a focus on Russia have proved popular. The island also has a long history of funds investing into the Middle East, and the World Shariah Funds PCC, which is listed on the Channel Islands Stock Exchange, is an example of how the regulatory regime offers sufficient flexibility to accommodate Shariah-compliant structures.”
Ogier recently advised on the establishment of the Patria Brazil Fund, one of the first Guernsey-domiciled funds with a Brazil-based asset manager and a Brazil and South America investment focus. In Asia it became the first law firm to set up a Guernsey practice in Hong Kong in 2010, and Ogier also set up a representative office in Shanghai last year.
Ultimately, Lee says, Guernsey will stand or fall by the expertise it can offer because it will never be the cheapest location for fund business. “Expertise is what we have, and that has to sustain us,” he says. “If we don't have the expertise and we’re not cheap, we don't have anything. But expertise is what the industry is conscious that it needs to possess. And even low-cost processing still requires the right systems to get it done and the right expertise to implement and manage it. That’s where Guernsey must continue to set itself apart.”