7 November 2005
The investment funds industry in Guernsey has continued its growth in recent years both in relation to open-ended and closed-ended funds. As at 30 June 2005, there were 328 closed-ended funds with more than 25bn of assets. The growth of Guernseys private equity funds industry has been particularly noticeable over the past decade.
A Guernsey limited partnership is the vehicle most commonly established in Guernsey to facilitate private equity transactions. Guernsey has a modern limited partnership law the Limited Partnerships Law 1995. Guernsey limited partnerships do not have a separate legal personality as a matter of Guernsey law, unless they elect to have one, and this is a recent innovation.
There is no requirement for a Guernsey-based custodian for a typical private equity fund. However, there is a requirement to appoint a Guernsey-based administrator. There are currently more than 40 Guernsey registered fund administrators. This means that there are many to choose from. They range from the global players such as Credit Suisse and Northern Trust, to niche independent companies.
Of the funds registered in Guernsey it would appear that more than 80 per cent are concentrated among the top six to eight administrators. Among the specialist investment fund administrators in Guernsey who specialise in private equity funds, there has been a considerable investment in IT and training to accommodate the specific requirements of private equity vehicles. As the fund administrators have increased their capacity to administer these vehicles, the number of private equity funds launched on the island has increased.
One of the other big contributors to Guernseys success in recent years has been its ability to innovate by adapting its legislative framework to meet the industrys need. Its size has meant that it can move quickly to ensure that it maintains its competitive edge, without compromising its regulatory integrity.
Relaxation of audit requirements
In September 2005 Guernsey introduced changes to its audit requirements in relation to closed-ended limited partnerships. It is now no longer necessary for a Guernsey limited partnership to be formally audited, provided that the limited partnership agreement requires information on the state and prospects of the assets of the partnership to be provided to the limited partners in each financial year.
Limited partnerships are therefore no longer required to provide financial statements that show a true and fair view in line with accounting standards. Accounting standards, particularly the International Financial Reporting Standards, have caused serious compliance issues, especially in relation to the consolidation of portfolio companies. With the removal of the requirement to have audited accounts, general partners of limited partnerships will be at liberty to agree the format and the content of the financial reporting with the limited partners. The financial reporting requirements adopted by a Guernsey limited partnership can instead be enshrined within the limited partnership agreement.
Fast-tracking Qualifying Investor Funds
In February this year, the Guernsey Financial Services Commission (GFSC) launched a three-day approval process for establishing Qualifying Investor Funds (QIFs) in Guernsey. The streamlined authorisation process reduced the authorisation timescales, which used to apply from four to six weeks to less than three working days. This is achieved by shifting the due diligence burden, in relation to the review of the promoter and the funds prospectus, away from the GFSC to the fund administrator. The existing three-stage process which applies to non-QIFs is reduced to one, which simply requires: the relevant offer document; form QIF; its constitutional and third-party documents; a cheque in payment of the GFSCs fee; and the relevant GFSC forms.
Approval will be given by the GFSC on the basis of the administrators self-certification. The GFSC does not review the content of the prospectus or the other documents submitted. Instead, the organisation monitors the fund administrators compliance by on-site visits. In order to qualify as a QIF the fund may only be offered to qualified investors. A qualified investor is defined as a professional investor, an experienced investor and/or a knowledgeable employee.
Definitions of the different classifications of investors are referred to as including:
- A professional investor is a person whose ordinary business or professional activity includes underwriting, managing or acquiring investments whether as principal or agent, or the giving of advice on investments. The definition also includes financial services businesses or financial services professionals associated directly or indirectly with the operation of the QIF.
- An experienced investor is a person who has, in any period of 12 months, so frequently entered into transactions of a particular type in connection with investment funds or general securities and derivatives of a substantial size with, or through the agency of, reputable persons who carry on investment business that they can reasonably be expected to understand the nature and risks involved in investments of that kind. Alternatively, this requirement is satisfied if an appropriately qualified investment adviser confirms that the investor has obtained independent advice.
- A knowledgeable employee is any employee, director, partner or consultant of an appropriately qualified professional investor, or anyone who has fulfilled such a role within a period of three years up to the date of the application for investment in the QIF. The term employee will not cover, inter alia, administrative, clerical or secretarial roles. A knowledgeable employee will also include any employee, director, general partner, consultant or shareholder of an affiliate appointed by the QIF to advise, manage or administer the investment activities of the QIF and whose investment in the QIF is part of their remuneration or incentive arrangement or co-investment in the QIF.
The introduction of the QIF regime has been a considerable success. Since its introduction earlier this year, 24 QIFs have been launched. Also currently under review is the wholesale reform of Guernseys fund regulations, including the application process. The expectation is that the regulatory regime will be relaxed to meet the requirements of the private equity industry. Meanwhile, the funds sector goes from strength to strength. Further reform will reinforce Guernseys position in the marketplace as an attractive jurisdiction in which to establish private equity funds.
Ben Morgan is a partner at Carey Olsen