Fiona Le Poidevin, Chief Executive of Guernsey Finance, explains why private equity keeps domiciling its funds on the island.
An exit poll of the 400-plus delegates attending May's Guernsey Funds Forum 2013 held in London revealed that they believe the future landscape of the investment funds industry will be affected by 'external factors', just as much as regulation.
The half-day conference and exhibition, titled 'Back to the Future', included two panel sessions - one on investor relationships and another on the effects of regulation - and a keynote debate featuring industry experts Nigel Vooght, PwC's Global Financial Services Leader and head of its future-focused initiative 'Project Blue'; and Better Capital Founder Jon Moulton.
The event opened by asking delegates whether they thought the future of investment funds would be impacted more by investor influence, regulation or external factors, such as new technology, demographics, social change, the rise of state-directed capitalism and mounting pressure on the world's natural resources.
On the first tally, the greatest proportion chose regulation, with external factors in second, closely followed by investor influence. However, after the debate, the exit poll revealed that while there had been an increased proportion of delegates believing regulation would be the most significant factor impacting the future of the investment funds industry, this was now matched by external factors, with investor influence a distant third.
The debate provoked the audience into thinking more about those issues which will impact over the long term rather than just those which are more tangible in everyday work within the asset management industry, such as investor influence and regulation. That said, both of these contribute towards the current fundraising challenge for managers.
The fundraising challenge
Guernsey practitioners recognise that fundraising is more difficult than ever before. Some highlighted how it is the funds being promoted by managers with a proven track record that are finding most joy in enticing investors who have become more cautious and demanding following the global financial crisis.
Indeed, Sam Shires, Group Partner at law firm AO Hall, explained that funds which are getting away are coming from those with an established base of investors. In the opinion of counterpart Tom Carey, Partner at Carey Olsen, the number of larger, more established private equity houses that have closings slated for 2013 has resulted in difficulties for smaller or new promoters in raising capital unless they have a well-established track record in a specific investment space.
However, despite this landscape, it is clear that managers continue to view Guernsey as an attractive jurisdiction to domicile and service their funds. Guernsey has built a wealth of expertise and first-class infrastructure for the structuring, management, administration and custody of the widest range of funds.
The island plays host to a broad selection of administrators, ranging from independent, boutique providers to large multinationals, as well as leading custodians. Guernsey's fund industry can also draw on the services provided by the island's 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 global accountancy firms.
The majority of their work relates to Guernsey open and closed-ended and listed funds, which are now promoted and sponsored by leading institutions in more than 55 financial centres globally. Guernsey funds can be established through a range of flexible investment vehicles such as companies, limited partnerships, the Guernsey-pioneered protected cell companies, incorporated cell companies and unit trusts. This expertise and infrastructure means that often Guernsey providers are servicing schemes domiciled elsewhere, such as the Cayman Islands.
This combination has helped to drive four consecutive quarters of growth in the value of funds business in Guernsey. The total net asset value of funds under management and administration in the island grew each quarter last year to reach £276.8bn (¤324bn) at the end of December 2012. This represents an increase of 5.8% on the year previous, 7.5% on the same time two years ago and a rise of 50.3% since the end of December 2009.
Private equity trends
At the end of last year, the net asset value of private equity funds under management and administration in Guernsey reached more than £80bn (¤94bn), which itself is a rise of 140% during the last five years. Indeed, in a Private Equity News and State Street survey, 61% of chief financial officers from private equity houses said that Guernsey was their preferred destination for outsourcing.
Guernsey's credentials as a leading international private equity funds domicile have been illustrated by houses such as Apax, BC Partners, Permira, Terra Firma and Mid Europa all establishing operations there. In addition, houses which have their funds domiciled and administered in Guernsey include Ashmore, Better Capital, Cinven, Coller Capital and HarbourVest.
HarbourVest has managed capital for institutional investors since 1982 and currently manages investments in North America, Europe, Latin America, Asia Pacific and emerging markets. It has three investment funds currently domiciled in Guernsey.
HarbourVest's latest Guernsey project involves HarbourVest Structured Solutions II LP, which recently acquired an investment portfolio comprising private equity fund interests and direct co-investments from Conversus Capital LP (a Guernsey investment fund listed on NYSE Euronext in Amsterdam). The fund has assets under management of around $1.2bn.
Caroline Chan, Partner at Ogier in Guernsey legal advisers, said: "We believe that HarbourVest's decision to establish another fund in Guernsey reaffirms Guernsey as a jurisdiction of choice for investment funds - and private equity."
Guernsey's investment community is clear that the island is also attractive as a domicile for funds which can assist with financing arrangements, i.e. distressed and mezzanine debt. Those funds with an income element are proving popular with investors, due in part to the prospect of capital growth being less likely in the current environment. Indeed, there is agreement among local practitioners speaking to us that there is still an opportunity for smaller and perhaps more innovative, esoteric funds where there is compelling case for investment.
Guernsey fund management and administration firm Dexion Capital launched DCG Iris, a closed-ended investment company, on the LSE in 2012. DCG Iris initially raised £40m but this has now moved past £50m following a further round of fundraising. Robin Fuller, Executive Director at Dexion Capital, explained that because of its strong performance, his firm was now looking to do another Insurance Linked Securities fund in 2013. He believes part of the reason Guernsey has still been able to attract this type of work is because centres such as London appreciate and respect Guernsey's expertise in the funds arena, while institutional buyers also feel comfortable with what it has to offer.
Crescent Capital, which specialises in clean energy and infrastructure, has domiciled its Clean Energy Transition Fund LP in Guernsey. The closed-ended investment scheme has some 200m in committed capital and is Turkey's first private equity fund with a focus on the energy sector.
These examples showcase the variety of funds being domiciled in Guernsey. In particular, the island's experience and expertise in private equity mean that it is ideally positioned to continue to act as a hub for the domiciling and servicing of funds coupled with the availability of securitisation vehicles which offer particular financing arrangements.
A major factor behind Guernsey's rise as a leading centre for private equity was when Kohlberg Kravis Roberts established a fund there, which listed on NYSE Euronext Amsterdam. At the time it was particularly innovative and as a result won a series of awards, putting Guernsey firmly on the map as a gateway to accessing capital from European markets.
Guernsey entities can provide speedy access to list on a range of international stock exchanges including the LSE, Euronext, Australia, Toronto, Frankfurt, Hong Kong and the local Channel Islands Stock Exchange (CISX) - which has more than 5,000 securities listed - as well as many others around the world. The local listing platform offers a time- and cost-efficient way to access capital.
LSE figures to the end of December 2012 show that there are more Guernsey entities, 122, listed on its markets than from any other jurisdiction globally (ex-UK). Only recently, Oriel Securities Partner Joe Winkley, a widely respected adviser on listed funds, told an LSE event that he believed Guernsey would continue to dominate as a listing domicile.
This seems to be holding true, with the first London-listed fund IPO of 2013 being ICG-Longbow Senior Secured UK Property Debt Investments - a Guernsey closed-ended fund. The fund's IPO raised more than £104m by way of a placing by Investec Bank, which acted as sponsor to the company, to institutional investors. The Guernsey fund has a focus on raising, investing and managing funds in UK commercial real estate debt. This is another sign of debt becoming increasingly available from alternative lenders in an environment where banks remain limited in their appetite for lending.
There has always been an appreciation of Guernsey's robust yet pragmatic approach to regulation. For example, 'fast track' routes have been introduced allowing for the speedy launch of funds targeted at professional investors, and yet those investors also have the security of knowing that all Guernsey funds are regulated.
Investors and managers can also be reassured by Guernsey's position regarding the Alternative Investment Fund Managers Directive (AIFMD), which comes into effect from 22 July 2013. Guernsey is not an EU member state and is considered a third country under the terms of AIFMD. However, Guernsey has embraced AIFMD and intends to operate a dual regime whereby it will be possible to distribute Guernsey funds into both EU and non-EU countries.
Ben Morgan, a Partner at Carey Olsen, said that Guernsey ultimately offered "optionality and flexibility". His view was that it would be wrong to assume that all existing Guernsey funds will opt to be self-managed and therefore be non-EU AIFM managed. Some will want their UK operation in the EU to be part of the AIFM and will therefore have the option to be AIFMD authorised.
Guernsey will offer two parallel regulatory regimes for investment funds: an opt-in regime which is fully AIFMD compliant; and the existing regime which will remain for those investors and managers not requiring an AIFMD fund, including those using EU National Private Placement (NPP) regimes and those marketing to non-EU investors.
On 22 May the European Securities and Markets Authority (ESMA) approved the Memorandum of Understanding (MOU) which creates a formal framework of cooperation between the GFSC and the equivalent bodies in the EU Member States (and wider EEA). This will enable Guernsey to distribute to the EU under Member States' NPP regimes, i.e. the marketing route which Guernsey currently uses, once the AIFMD takes effect across Europe in July. Therefore, Guernsey will be in a position whereby it is outside of the AIFMD regulations but is able to offer access to the EU market. Guernsey will engage in future consultations in relation to how third-country 'passporting status' will operate from July 2015.
Certainly, Guernsey's position in relation to AIFMD means that the island will be uniquely placed to continue as a prime location for the domiciliation and marketing of investment funds and especially private equity.
The right conclusion
The more cautious and demanding approach of investors, as well as an increasing regulatory burden, are impacting the fundraising landscape for managers. However, it is important not to lose sight of some of the wider factors which will be important over the long term. In a similar sense, when you are choosing a fund domicile or service centre then it is important to take a holistic view and as you have read, Guernsey has and will continue to prove an attractive proposition for many private equity fund managers.
Originally published in Real Deals, June 2013
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.