Fund finance - another string to the bow of Guernsey
14 February 2018
In the Guernsey Press Q4 2017 Business Review, Carey Olsen Corporate and Finance Group Partner Andrew Boyce highlights sources of funding for investment funds in the island which he believes could prove a real opportunity in the local finance sector.
With the good news that the EU Council of Finance Ministers, ECOFIN, formally reaffirmed Guernsey's status as a cooperative jurisdiction, which should be no surprise to those who understand our industry, we can again turn our attention to moving our finance industry forward. The investment funds sector, which underpins the finance industry, encouragingly continues to be in relatively good health, with figures released at the end of September showing a 9.6% rise in the Net Asset Value (NAV) of all funds under management and administration in Guernsey from June 2016 to June 2017 - bringing the total value of the sector up to £271 billion. But the resulting optimistic feel-good factor needs to be tempered considerably in the face of increasing opposition and competition, and should not distract from the continuing need to develop our finance industry offering.
Indeed, identifying opportunities in the marketplace and ensuring that a supportive regulatory and legislative environment exists to allow products and services to be developed, adapted and aligned to cater for these prospects, which has been a key part of Guernsey's success, comes into much sharper focus. Picking that next big wave is the subject of much discussion in industry circles. But at the same time there is lower hanging fruit that can help sustain the industry and continue to build experience within the industry for the future. The fund finance market is exactly that.
As the name implies 'fund finance' is the set of financing solutions, available to investment funds, to a number of practical fund management issues, such as financial liquidity and efficiency and transaction execution. These range from short term subscription credit lines to longer term acquisition finance and leveraged finance facilities and are provided by traditional banks, alternative lenders or a combination of the two. These products were originally created almost 30 years ago to solve the financing needs of real estate funds and are now utilised across the full spectrum of fund types.
Why is fund finance important? One of the key performance enhancers of the ever important 'return to investors' (apart from picking great investments) is the financial efficiency within the investment vehicle itself i.e. creating the best possible processes to call in, invest and return investors monies by eliminating issues such as timing drag. Given the size of some of the funds that are domiciled and regulated in Guernsey even seemingly small efficiencies can deliver relatively well enhanced returns. Leveraged financing of investment capital, effectively borrowing to add to the amount of money you have to invest, is a simple example, as increasing the size of the investment can increase the returns. Another key enhancement role is in assisting funds to mitigate execution risk. In a competitive deal environment, what often sets one bidder for an asset apart from another is the ability of that bidder to close the deal i.e. prove the ability to pay for it immediately. Subscription credit lines, which are one of the primary products in the fund finance market, provide this by giving fast access to capital on time sensitive investments, effectively an immediately available overdraft facility to the fund.
What does this have to do with Guernsey? The key point from a Guernsey perspective is found in the sheer breadth of fund finance product variants, which touch on Guernsey-domiciled fund structures. Putting that into perspective, one estimate of the aggregate level of committed subscription credit facilities (which, while the most utilised fund finance tool, is only one of the available fund finance products/solutions) held by lenders globally puts it at approximately $400bn. Add to this the fact that today's fund managers view these types of facilities as a standard tool in their fund management kit, the absence of which would put a fund at a competitive and operational disadvantage, as well as the size of the fund industry in Guernsey and one can easily extrapolate a further vein of investment fund related work that would involve the Guernsey fund industry.
Where a Guernsey-domiciled fund is involved in a financing transaction, this involves a number of service providers within the finance industry in Guernsey. These include the local banks with which the fund may have bank accounts over which security is taken, local administrators who are responsible for ensuring appropriate recording and governance within the fund in relation to the facility, and local lawyers who are responsible for ensuring compliance with Guernsey law and regulation. Today, with virtually every new fund established, a subscription line facility is put in place and this together with the renewal, refinancing or amendment of these means that there is increasingly a level of expertise and established industry practice that is recognised globally and that provides a competitive advantage over other jurisdictions. The ongoing 'ring-fencing' by UK banks of their UK onshore retail banking services from their non-UK offshore services and the consequent balance sheet restrictions is also likely to create an increase in demand for these facilities to be written outside of the UK, which adds to the attractiveness of Guernsey as a one stop shop for finance services and fund domicile.
And it doesn't stop there. A report by international law firm Mayer Brown published earlier this year also anticipates a greater level of diversification in the types of fund financing products available to investment funds with the growth of, for example, 'hybrid', 'umbrella' and 'unsecured' or 'second lien' facilities, as well as the increasing geographic scope of lenders active in this area.
We absolutely must continue to look for ways to revolutionise our finance industry to ensure the continuation of Guernsey's leading place in the financial services world. But evolution is as much a part of survival as revolution, so we must take care to preserve and enhance what has already been so successfully built. Tapping in to existing veins of work that help in meeting the ever-evolving demands of investment managers and clients would seem to be an easy win.
Capital call facilities
Otherwise known as 'equity bridge lines' or 'subscription line facilities', these are a line of credit or a loan which is provided by a lender to a fund for the specific purpose of 'bridging' the time between the need to effect payment for an investment and the fund calling on its investors to pay down some of their commitments and that money being received by the fund. Once the called commitments have been received from the fund's investors (usually between 15 and 20 days after a capital call notice is issued), this loan is then repaid to the lender.
These are typically short term borrowings for anywhere from seven days to 180 days and are typically secured against the right to call on undrawn investor commitments i.e. the remaining amounts of commitments to the fund that the investors are contractually bound to pay when called. These facilities are also used to "smooth" calls from investors i.e. remove the need to call monies regularly in relatively small amounts, which can be administratively burdensome to both the fund and the investors.
The original version of this article first appeared in the Guernsey Press Q4 2017 Business Review, 9 January 2018.Back to News
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