Writing at the end of last year, I noted that a delegation from Guernsey was attending the SuperReturn Middle East conference in Abu Dhabi. Later last year a separate team also attended the Opal Middle Eastern Family Office Symposium in Dubai.
We found that both conferences were attended by a significant number of family offices (FOs) of wealthy Middle Eastern patriarchs looking for suitable investment opportunities and also fund managers who are seeking to raise capital from this potentially lucrative market.
From our conversations, there seemed to be strong recognition from both groups that Guernsey is able to bring together investors and managers in a reputable jurisdiction which is on the doorstep of - but not part of - mainland Europe and therefore free from many of the onerous demands of its regulations.
Those with the money
Wealth management encompasses not just preserving but also increasing wealth and therefore many patriarchs and families often wish to invest their money in high yielding investment funds. As such, attendees at both conferences included a large number of FOs seeking the right investment proposition. A number of FOs (both Muslim and non-Muslim) have been instructed by their clients to allocate money to investment funds based in domiciles which are ethical, reliable and uphold high regulatory and tax transparency standards as well as having strict investor protection rules; all of which, broadly speaking, bodes well within the context of Shariah principles.
Middle Eastern FOs or other direct investors also increasingly demand quality and timely service provision. Therefore, many FOs that we met were interested in Guernsey as a place to allocate investments due to the strong reputation and credentials of our funds sector:
- Fund AUM US$438bn; growth of 33% in the last five years
- Global managers and investors, including Mena region
- AIFMD ready – solutions for EU and non-EU business
- Access to capital markets – leader in non-UK London Stock Exchange listings
- 72 tax agreements, including Double Tax Arrangement (DTA) with Qatar
In particular, service providers in Guernsey lead the way in applying corporate governance and adopt procedures to ensure accurate records are maintained. This is seen as a key differentiator for Guernsey compared to some competitor fund domiciles.
Those seeking the money
The other group in attendance at the conferences was the fund managers keen to raise capital from the alluring wealthy Middle Eastern market. They are recognising that fund domicile increasingly matters when it comes to going out on the road to fundraise. They were interested in Guernsey as the domicile for their next fund due to the benefits for them and the attraction to their investor base, such as the FOs.
A number of US managers who have traditionally used Caribbean domiciles cited that they are under increasing pressure to have a fund located in a highly reputable jurisdiction that employs good governance which also links with legal robustness and transparency.
There was also noteworthy feedback from managers with funds in European domiciles that – except for the very large corporate players – the costs of operating these platforms is getting to a critical point. The main cost pressures are coming from two places: the cost of service providers with high administration and custodian costs really impacting the returns which the funds can give back to investors; and the costs of complying with the Undertaking for Collective Investment in Transferable Securities (Ucits) Directive and other European regulation.
It is becoming apparent that the costs of complying with Ucits can sometimes outweigh the potential benefits which the pan-European passport (and Ucits brand) can offer. Managers need to carefully consider the relevance of Ucits for their own investor base, i.e. retail versus institutional, and European versus non-European. Questions should be asked about whether it is beneficial to have a sole Ucits platform where corresponding costs apply to the entire platform and there is no ability to separate costs so that they only apply, for example, to the European retail investor base. Parallel and feeder structures should be utilised where appropriate and more managers are giving serious consideration to complementing their Ucits platform with a Guernsey operation. This model is already being used by a number of European managers.
The Alternative Investment Fund Managers Directive (AIFMD) is another set of European fund regulations but which applies to all non-Ucits funds, i.e. alternative investment funds. Managers should again carefully look to whether the pan-European passport offered is relevant to their investor base. Many managers have increasingly geographically diverse investors and therefore it is essential to have a platform which caters for all. European directives cater for European investors; as such, if you don't need Ucits/AIFMD or only need limited access to them for certain investors, then it is advisable (and possible) to structure in a way that will greatly reduce the compliance obligations and costs that come with those regimes.
Therefore, the attraction of Guernsey for the fund managers is that it can provide a European platform which is not actually in the EU and therefore can offer flexibility and proportionality. For example, it makes commercial sense for a fund manager marketing almost exclusively to Europe to have a fully AIFMD compliant platform and this could be a Guernsey platform, as the island has introduced a fully equivalent, opt-in AIFMD route to market from 2 January 2014.
On the other hand, if a manager has a Luxembourg platform, it would have to comply fully with the AIFMD even if there were a large proportion of non-EU investors. European mainland platforms do not offer the ability to separate the reporting obligations away from non-EU investors, as you potentially can with a Guernsey platform.
Bringing together those with the money and those seeking it
The World Shariah Funds PCC Limited (WSF) was established in Guernsey in 2010 as a regulated fund to operate according to Islamic Shariah principles, and is also suitable for investment by Ucits funds.
WSF is a protected cell company (PCC) with a number of cells, akin to holding/investment companies in their own right, each of which has a number of share classes. The PCC structure allows the flexibility for different investment objectives within the one overall investment platform, thereby appealing to a broader range of investors, while also providing administrative benefits, e.g. consolidated reporting.
This illustrates the way in which Guernsey can bring together investors and managers in a reputable fund domicile that offers both access to European markets but also provides an escape from the onerous requirements of European regulations.
An original version of this article was published by MENA Fund Manager, March 2014.
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