Clear skies ahead

12 October 2015

Written by Kate Clouston

What does the future hold in store for Guernsey? Guernsey Finance’s Kate Clouston paints pfm a bright picture

Guernsey’s reputation as a leading funds domicile has been reinforced by findings in a recent report published by KPMG.

The report, International Capital Flows, reveals the extent to which Guernsey’s funds industry facilitates the flow of capital globally, including £105 billion of investment in Europe – 49 percent of which originates from investors located outside Europe itself. Guernsey is highlighted as an integral conduit facilitating the raising of capital from investors in different countries, subsequently allowing for the redeployment of this capital into global assets. The report also emphasizes the fact that global investors are comfortable utilizing Guernsey structures, in large part due to the island’s reputation, regulatory track record and high standards of transparency.

The findings of the report reaffirm Guernsey’s particular expertise in working with alternative investment assets. Alternative investment assets remain a key asset class for many investors, and as such comprise an essential component of global capital flows. In August 2015, Preqin Investor Outlook surveyed 460 investors with a combined AUM of $7.2 trillion, finding that 79 percent of institutional investors were invested in at least one alternative asset class and over half of them had additional allocations in private equity, hedge funds and real estate. Private equity is the dominant sector in the Guernsey funds market, encompassing 70 percent of all deployed assets, while infrastructure and property each account for 8 percent of the market.

Capital markets

One of Guernsey’s key strengths in facilitating this type of global investment is the ability for Guernsey entities to quickly and easily access a wide range of international capital markets.

This includes not just the locally based Channel Islands Securities Exchange (CISE) but also the London Stock Exchange (LSE) and exchanges in Ireland, Paris, Amsterdam, Frankfurt, New York, Toronto, Johannesburg, Australia and Hong Kong.

Indeed, there are more Guernsey incorporated companies listed on the LSE than from any other jurisdiction except the UK. LSE data to the end of July 2015 indicates that there were 125 Guernsey-incorporated entities listed across the Main Market, AIM and the Specialist Fund Market. Many of these are entities established for cross-border investment, including a significant number of funds.

Notably, the largest AIM listing of 2014 was a Guernsey entity. The real estate focused Market Tech Holdings Limited combined a £750 million initial public offering with an oversubscribed placing which raised £100 million.

Distribution

Guernsey’s position “offshore” and outside of the EU enables tailored optionality for the international fund community. Onerous EU regulations, such as the Alternative Investment Fund Managers Directive (AIFMD), have driven many fund managers to focus efforts on their own domestic markets – a tactic that may well enable managers to avoid burdensome regulation but will also restrict access to investor interest and potentially lucrative investment opportunities across Europe.

In response to these challenges, Guernsey has introduced a dual regulatory regime in which it is possible to continue to distribute Guernsey funds into both European and non-European countries. This consists of the existing regime for those managers not requiring an AIFMD fund, including those using National Private Placement (NPP) regimes and those marketing outside Europe, as well as a new opt-in regime which is fully AIFMD compliant.

The Guernsey model

Our unique regime enables managers and funds with no connection to Europe to continue to operate under Guernsey’s existing regulatory framework, which is completely free from the requirements and costs associated with AIFMD.

For managers wishing to market into Europe, Guernsey provides a platform to access all the benefits and opportunities of European capital markets, but crucially is not actually in the EU. Indeed, the NPP route should be used where possible and full AIFMD status should only be sought if there is a specific commercial reason to do so. For those managers with elements of EU and non-EU business, parallel structures can also be utilized.

In July, the European Securities and Markets Authority (ESMA) announced its recommendation to grant Guernsey a “third country” passport under AIFMD. Guernsey is one of only three jurisdictions to receive the recommendation, which, if approved by the relevant European authorities later this year, would further enhance Guernsey’s position to distribute funds into Europe.

OECD backing

As a crown dependency, Guernsey has attained OECD membership via that of the UK – a fact that may not always be readily apparent. The UK’s HM Treasury and Ministry of Justice issued a clarifying statement in June of this year supporting the Island’s attractiveness as a fund domicile due to its position within the OECD.

The statement from the UK authorities explains the OECD Convention: “The OECD Convention was extended to Guernsey on 20 July 1990. This means that the OECD Convention applies to Guernsey and it is part of UK’s membership of the OECD. OECD decisions and recommendations apply to the same extent to Guernsey as they do to the UK.”

This point of clarification regarding OECD membership is particularly important as certain market regulators may prohibit the marketing of funds that do not originate from an OECD country. This also reinforces Guernsey’s position as an internationally compliant and reputable jurisdiction, and strengthens the attractiveness of Guernsey as a fund domicile.

Substance

Legislation such as AIFMD and Base Erosion and Profit Shifting (BEPS), amongst others, has generated increased scrutiny of structuring arrangements and in particular, issues of substance. Unlike some competitor jurisdictions, significant substance is already present in many existing Guernsey structures.

Our strong corporate governance is additionally enhanced by a significant pool of experienced non-executive directors with a deep knowledge of investment funds.

Leading investment houses such as Apax, Apollo, BC Partners, Coller Capital, HarbourVest, KKR, Pantheon, Permira and Starwood have funds domiciled and serviced in Guernsey (with a number also including offices and staff present). In fact, some $100 billion of non-Guernsey funds, typically from the Cayman Islands or Delaware, are administered and managed in Guernsey – a testament to our quality service provision. Additionally, our flexible migration rules allow certain promoters to easily re-domicile funds to Guernsey. In total, Guernsey’s funds industry now manages and administers more than 800 funds valued at nearly half a trillion US dollars.

Guernsey administrators range from major international names such as Northern Trust, State Street, JP Morgan and Citco to specialist independent administrators. Major global custodians are based in Guernsey, supplemented by specialist administrators that have established Guernsey-based depositaries to service private equity and real estate funds. These specialists can provide funds access to a depositary-lite regime for non-financial assets under AIFMD, even if they have not previously been subject to the requirement.

Conclusion

The KPMG report has showcased the way in which Guernsey acts as a facilitator of global capital flows. It has also reinforced the fact that the Island is well respected for its transparency, proven regulatory track record and expertise in listing entities on a wide range of stock exchanges globally. Our high standards combined with market and structuring adaptability ensures that Guernsey will continue to offer a fresh solution for promoters, managers and investors in the global financial community.

An original version of this article was published in pfm, October 2015.

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