By Peter Niven – Guernsey has an investment fund industry with a heritage that stretches back half a century. During the past two decades, the sector has seen a gradual yet sustained shift where the balance of business has moved from being largely retail, equity-traded/cash-based schemes to predominantly institutional, alternate and niche funds.
The period included signiﬁcant growth, particularly of esoteric asset classes through the middle of the last decade. This experience means that Guernsey has built a wealth of expertise and ﬁrst class infrastructure for the structuring, management, administration and custody of not just traditional funds but also alternatives, in particular private equity.
Private equity in Guernsey
It could be argued that the listing of the USD5bn Guernsey limited partnership KKR Private Equity Investors LP on the Amsterdam Euronext was so innovative that it has been the largest single contributor to the island’s recent success in this asset class. This highlighted that Guernsey was one of the few jurisdictions from which funds wishing to list on Euronext did not need to obtain a licence in the Netherlands because the Dutch AFM had ruled that there was already adequate “home” supervision. It also put Guernsey on the map internationally, particularly in the US and is something from which the island has never looked back, as it has become the jurisdiction of choice for private equity.
Today, the net asset value of investment funds under management and administration on the island stands at just over GBP274bn or USD428bn at the end of June 2011 – up 4% in the quarter and 22.5% year-on-year. The private equity and venture capital sector has seen especially strong growth, reaching a total net asset value of more than GBP75bn (USD117bn) at the end of June 2011. The island’s reputation for excellence in this asset class has been reaffirmed by a Private Equity News / State Street survey in which 61% of chief ﬁnancial ofﬁcers (CFOs) responding said that Guernsey was their preferred destination for private equity outsourcing.
Jon Moulton, chairman of private equity ﬁrm Better Capital, gave a ringing endorsement of the Island’s funds industry when speaking in front of more than 300 delegates at the Guernsey Funds Forum in London this May. Moulton, who has a house domiciled investment company is listed on the main market of the LSE, said: “Guernsey has a very good reputation; it works very well….Guernsey needs to carry on doing what it’s doing into the future and it will prosper.”
Another signiﬁcant ﬁgure in the private equity industry is Guy Hands, chairman of Terra Firma. As well as the private equity ﬁrm joining the likes of Permira and EQT by establishing an operation in Guernsey, Hands has also decided to buy a property and live on the island. This reﬂects the fact that Guernsey is not just an ideal location for locating management companies but is also attractive as a residence for the managers themselves.
This is no doubt helped by the fact that Guernsey has a zero rate of corporate tax as standard, no withholding tax on dividends paid, no capital gains tax, no inheritance tax and no indirect sales taxes, and personal income tax remains levied at a maximum of 20%, with a cap of up to GBP100,000 on non-Guernsey source income or GBP200,000 on all income.
Infrastructure and expertise
However, our standing in the private equity space does not mean that we are in anyway a “one-trick pony”. In fact, during the last year we have seen new investment structures launching across a range of niche asset classes, such as aircraft, classic cars, dispute resolution and ﬁlms which all add to the existing mix, which includes timber and renewable energy.
Our administrators and custodians also provide services to non-Guernsey funds but a large proportion of their business relates to Guernsey open and closed-ended funds, which are now promoted and sponsored by leading institutions in more than 55 ﬁnancial centres globally. These can be established through a range of ﬂexible investment vehicles such as companies, unit trusts, the Guernsey-pioneered Protected Cell Companies (PCCs), Incorporated Cell Companies (ICCs) and limited partnerships.
There is a broad range of administrators on the island, many with speciﬁc expertise and bespoke IT solutions for alternative assets. These include specialised private equity administrators such as Ipes, Augentius, International Administration Group (IAG) and Alter Domus, as well as globally recognised names such as JP Morgan, HSBC, Northern Trust, RBC and State Street, which can also act as custodians.
Guernsey’s fund industry can also draw on the services provided by its 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 the “big four” accountancy ﬁrms where there is specialist expertise in alternatives. The island’s ﬁnancial services regulator, the Guernsey Financial Services Commission (GFSC), has grown a reputation for its robust yet pragmatic approach to regulation – for example, all Guernsey schemes remain regulated but ‘fast track’ routes have been introduced which allow for the speedy launch of funds where appropriate. In addition, Guernsey’s skilled workforce not only has access to in-house training but also the GTA University Centre, which works with the Institute of Directors (IoD) to ensure that the island has a pool of experienced and well qualified non-executive directors maintaining high standards of
One of the island’s great strengths is the ability for Guernsey vehicles to list on the local Channel Islands Stock Exchange (CISX) – which now has more than 4,000 securities listed), Euronext Amsterdam or the London Stock Exchange. Data direct from the LSE to the end of December 2010, shows that there are more Guernsey-incorporated companies and securities listed on its markets than there are entities from any other competitor jurisdiction. In addition, Guernsey companies have recently received the green light to list on the Hong Kong Stock Exchange (HKEx).
The international stage
Receiving approval for Guernsey companies to list on HKEx is a very positive development for our finance industry in terms of doing business in Asia. This is a key part of our efforts to diversify business flows from traditional centres such as the City of London to the “emerging” markets of the Far East, India and Russia.
However, Europe still remains an important source of new business and that is why it was so important that we engaged early on in the discussions regarding the Alternative Investment Fund Managers (AIFM) Directive. Our government, industry and regulator worked extremely hard to inform and educate the community in Brussels about our ﬁnance industry and in particular the funds sector.
The resulting framework agreement of the Directive not only provides some certainty but also places Guernsey in a good position going forward in terms of having access to the EU market. There is still much work to do and we are continuing to ensure that Guernsey is represented in the most appropriate ways during the next stages of the process. We are conﬁdent that the outcome will be positive for the future of our funds industry.
Our position certainly will not have been harmed by the publication of two reports at the start of this year. In January, the IMF commended Guernsey’s high standards of financial regulation, supervision and stability along with our robust criminal justice framework to the extent that the Island was judged to have a high level of compliance with all the criteria against which it is assessed and scoring the highest of any jurisdiction so far assessed.
Later that same month, the OECD built on its white listing of Guernsey by endorsing the island’s ongoing commitment to tax transparency and exchange of information. Guernsey has now signed Tax Information Exchange Agreements (TIEAs) with 29 jurisdictions and we are in advanced discussions with a number of other jurisdictions.
We are not blind to the fact that there are many challenges ahead. For example, the Zero-10 corporate tax systems of the Crown Dependencies have come under European scrutiny. We are undertaking a review but our politicians have been clear from the outset that any future regime must be both compliant and also competitive, for instance there will be continued tax neutrality for ﬁnancial services products. As such, the fund industry’s exempt status is not under threat and may even be extended.
The waters ahead are unlikely to make for plain sailing but we will take the necessary steps to ensure that the conditions remain in place for Guernsey to continue as a leading centre for private equity fund administration into the future.
Peter Niven is the chief executive of Guernsey Finance – the promotional agency for the island’s ﬁnance industry.