James Travers, technical manager at Guernsey Finance, says that Guernsey is well placed to satisfy the ambitions of the developing market for offshore investment being seen in South Africa, with a cost-effective and practical funds solution…
A new generation of investment managers in South Africa have some lofty growth ambitions.
They have their sights set on not only on the opportunity to reinvest client money outside of the country following relaxation of exchange controls – now up to ZAR1 million a year or more in certain cases – but also on capital from overseas institutions and high net worth individuals into the country.
On the supply side, 2017 was a good year for South African investment managers, many of whom now wish to market their track records beyond their borders.
On the demand side, the world’s media has been watching as South Africa has succeeded in removing many of the more poisonous elements of its government. South Africa looks a considerably more attractive investment destination now than it previously did.
Fortunately for both investment managers and their would-be investors, the necessary tools are already available to them – offshore investment funds.
Won’t get fooled again
South Africans often invest this offshore allowance into mutual funds operated by the same fund managers who manage their money at home, but domiciled in an offshore finance centre such as Guernsey.
As elsewhere in the world, South African investment managers are familiar with the Undertakings for Collective Investment in Transferable Securities (UCITS) brand, which is becoming shorthand for a retail scheme.
But Paul Wilkes, investment funds specialist and head of the corporate and commercial team at Collas Crill in Guernsey, says that managers should look beyond the obvious.
“UCITS is a wonderful brand and a wonderful product but it is being misused. Only 3 per cent of the capital invested within the average UCITS is that of European retail investors – the remaining 97 per cent are bearing the burden of European regulation and compliance unnecessarily,” he says.
Wilkes says that a Guernsey “Class B scheme” is much quicker and more cost-efficient to launch and provides managers with far more flexibility and control than a UCITS.
“Drafting the fund particulars for a Guernsey fund is straightforward – you say what it is you’re going to do, then you do what it is you said. It’s a ‘disclosure-based’ model which allows for the widest-possible investment powers.”
The Protected Cell Company (PCC), pioneered in Guernsey in 1997 and replicated in a number of other jurisdictions since, also provides further flexibility not available elsewhere.
A PCC is a corporate structure in which a single legal entity is comprised of a core, and several cells that have separate assets and liabilities.
Simon Gordon, director at JTC Group, a fund administrator and corporate service provider with offices in both Guernsey and Cape Town, says the PCC is suitable for many hedge and mutual fund managers going offshore for the first time.
“At JTC Group, we administer The Offshore Mutual Fund (TOMF), a PCC with some half-dozen cells, owned and operated by our investment management clients. The economies of the structure make it economical for investment managers with as little as USD3 million assets under management.”
The same structure is often chosen by managers with ambitions to grow their business. A popular use of the PCC in investment management is to use different cells for different strategies. In such instances, a cell of one PCC can be ‘spun off’ to become a company in its own right, or a cell of another PCC.
“When a client has much more than USD20 million assets under management, or ambitions to launch multiple strategies, we tend to advise they move off TOMF and establish their own platform. This allows the client to negotiate their own administration, custody and audit fees and also provides them with a vehicle in which they can trap management and performance fees,” Gordon says.
Mike de Robillard, director at Deloitte, encourages clients to look beyond the establishment of the structure and consider its operation.
“One will have to live with the decisions one makes at the outset, so it is important to consider the whole life of a fund which, in the case of long-only equity funds, could last decades. It is in this area where we have seen pragmatism on behalf of administrators, custodians and auditors, here and in South Africa.”
Guernsey has been an international finance centre for more than 50 years and during that time has always sought to be a centre of substance. Today, the island is home to the “Big Four” accountancy firms as well as some 30 fund administrators, ranging from international institutions to independent boutiques.
However, Guernsey-domiciled managers have the flexibility of using the island’s outsourcing regime, which allows managers to choose a business model that suits them.
“Once steps are taken to ensure proper corporate governance takes place in Guernsey, much of the work can be done elsewhere. I have seen recent examples where much of the administration and audit is done by firms in South Africa while oversight remains in Guernsey,” de Robillard adds.
“A business model such as this can significantly reduce the cost borne by the fund and its investors, as well as making a manager’s first steps overseas seem like less of a step into the unknown.”
The value of a Guernsey platform is already well known to a number of established South African managers, and more are picking up on the opportunities offered all the time.