Location, location, location
30 July 2001
Guernsey has enjoyed two clear lines of funds business growth in the last few years, principally in private equity vehicles and multi-manager funds, particularly funds of hedge funds. Looking ahead, securitisation business may also increase significantly as a result of new legislation earlier this year.
The growth in private equity funds has been primarily through the use of limited partnership legislation, first introduced in Guernsey in 1995. The surge in private equity business across Europe has a spinoff in Guernsey, since the island is often selected as a preferred location for administering private equity schemes.
Two key factors are the pool of expertise in Guernsey and the advantages of the Guernsey limited partnership structure. The vehicle is tax transparent and so limited partners pay tax only in their home jurisdiction on their share of the income and gains from the investment.
But the tax element is often less important when institutions consider location. At a recent Channel Islands funds conference, one of the City of London-based speakers confirmed that Guernsey was selected for handling his firm's private equity business because of the skills available, irrespective of the tax position.
A second significant growth area has been in establishing multi-manager funds, with many fund sponsors specialising in the selection and monitoring of hedge fund managers. This originates mainly from London and Switzerland.
There are a number of factors that combine to make Guernsey an attractive option for this type of fund. The island's reputation as a well-run jurisdiction plays a part, as does the recognised pool of expertise available to administer the funds; also, the island offers originators a tax-neutral environment.
New legislation introduced by the Guernsey Financial Services Commission (GFSC) in respect of protected cell companies (PCCs) may also have significance for the institutional market. PCC legislation, introduced to make the advantages of captive insurance available to smaller companies by reducing costs, already provides Guernsey with an edge over competitor jurisdictions such as Jersey. In February this year the legislation was extended to enable two further classes of company to be incorporated as, or converted into, a PCC in Guernsey.
One of those classes would be a company established "for the purpose of issuing bonds or other debt securities where the repayment is to be funded from the proceeds of the company's investments". This enhancement will enable Guernsey's leading law firms and other professional providers to promote the island as a place to undertake a series of securitisations.
The statistics indicate that business in Guernsey is growing most quickly through its relationship with the institutional market, both in the City and across Europe. Figures from the GFSC show that the big growth area is in the establishment of closed-end funds, a structure favoured by the institutional market. There was a 41 per cent increase in the number of closed-end funds between December 1999 and 2000; during the same period there was only a 1 per cent increase in open-ended funds.
Lawyers and other fund promoters at major financial institutions in the UK and Europe are comfortable using Guernsey for their investment vehicles. The recent independent assessments by international organisations such as the Financial Action Task Force and the Financial Stability Forum, which reported favourably on Guernsey, and the findings of the Edwards Review, have all helped to reinforce the island as a quality jurisdiction with the correct level of regulatory checks. Its familiarity to London, its proximity to the rest of Europe and its flexible legislation combined with enhanced regulation is helping Guernsey develop as a leading centre for institutional funds business. All the signs are that this trend will continue.
Nigel Carey is a partner at Carey Langlois in Guernsey