Originally published in Private Equity International's Fund Administration and Technology Compendium, May 2010
During this last year the world has been picking itself up off the floor of the global financial downturn. We have seen the start of renewed confidence in the markets, but really this is just the start of a trip down what will be a very long road to recovery and at the moment I would gauge that the general economic conditions remain fragile and will remain so for some months to come.
Guernsey cannot be completely immune from these worldwide issues, although the island has to a large extent remained resilient in the face of the pressures. Perhaps the most significant fallout for us has been the increased international focus on so-called "tax havens" or "offshore" centres. But I am very pleased to say that the island is consistently recognised as being within the very top tier of international finance centres. There is still uncertainty over issues such as corporate taxation rates and the EU's Alternative Investment Fund Managers (AIFM) Directive. What I can say however is that we are taking all steps possible to ensure that the island continues to be a leading international funds centre. As such, I am extremely confident that Guernsey will build on its solid foundations to remain the European home of private equity business.
The KKR effect
Guernsey has a strong heritage in providing clients from across the globe with an extensive range of financial products and services. For example, our funds industry stretches back half a century. During the past two decades, the sector has seen a gradual yet sustained shift where the balance of business has moved from being largely retail, equity-traded/cash-based, open-ended schemes to predominantly institutional, niche, closed-ended funds. This included significant growth of esoteric asset classes in particular through the middle of the last decade.The experience means that the island has built a wealth of expertise and first class infrastructure for the structuring, management, administration and custody of not just traditional funds but also alternatives and in particular private equity.
It could be argued though that the listing of the $5 billion Guernsey limited partnership KKR Private Equity Investors LP on the Amsterdam Euronext was so innovative that it has been the largest single contributor to the island's recent success in the asset class. This highlighted that Guernsey was one of the few jurisdictions from where funds wishing to list on Euronext did not need to obtain a licence in the Netherlands because the Dutch AFM had ruled that there was already adequate "home" supervision. It also put Guernsey on the map internationally, particularly in the US. The listing was a point from which the island has never looked back, as it has become – in the words of Bridget Barker, partner at law firm Macfarlanes in London – "the jurisdiction of choice for private equity".
Strength out of adversity
Today, Guernsey has an investment funds industry with total business worth £184 billion. The island has not been immune from the global financial crisis, but having said that, our funds industry has continued to perform robustly. Although we have seen overall business decline during the last calendar year, it must be remembered that this comes in the wake of a severe global financial crisis. Our performance has outstripped some of our closest competitors and the fact that we have had two consecutive quarters of growth to the end of the year points again to a slow climb out of the general trough of 2008/2009.
Certainly, Guernsey practitioners are reporting a greater level of business than a year ago, with particular interest from promoters and sponsors in harnessing our experience and expertise in the alternative and niche asset classes using closed-ended funds. This is reflected in the fact that the number and value of private equity funds in Guernsey has continued to grow, reaching nearly £45 billion within 316 funds at the end of December 2009.
Centre of excellence
Leading private equity managers such as CVC and BC Partners have the operation of their funds facilitated in Guernsey. Our administrators do service non-Guernsey funds, but a large proportion of their business relates to Guernsey open- and closed-ended funds, which are now promoted and sponsored by leading institutions in 45 countries. These can be established through a range of flexible investment vehicles such as unit trusts, the Guernsey-pioneered Protected Cell Companies (PCCs), Incorporated Cell Companies (ICCs) and limited partnerships. There are a wide range of administrators on the island many of whom have specific expertise in creating bespoke IT systems for servicing private equity funds. These include dedicated private equity administrators such as Ipes, Augentius and International Administration Guernsey (IAG) as well as global brands such as HSBC, Northern Trust and State Street who have capacity to act as administrators and/or custodians.
Guernsey's funds industry can draw on the services provided by the banking, wealth management and risk management sectors. In addition, it is supported by a comprehensive network of investment, legal, tax, audit, accounting and actuarial advisors, including multi-jurisdictional law firms and the "big four" accountancy firms where there is specialist expertise in private equity. Guernsey is home to the Channel Islands Stock Exchange (CISX), which has more than 3,500 securities listed and also provides access for listings on both London and European exchanges. The Guernsey Financial Services Commission (GFSC) has grown a reputation for its robust yet pragmatic approach to regulation – for example, all Guernsey schemes remain regulated but "fast track" routes have been introduced which allow for the speedy launch of funds where appropriate. In addition, Guernsey's skilled workforce not only has access to in-house training but also the Guernsey Training Agency (GTA) University Centre, which works with the Institute of Directors (IoD) to ensure that the island has a pool of experienced and well qualified non-executive directors maintaining high standards of corporate governance.
Our pedigree is reflected in the fact that Jon Moulton, founder of Alchemy Partners and now Better Capital – and who has a property on the island – has said that Guernsey is "a terrific place in which to do business". In addition, private equity managers EQT and Permira have established their own bases on the island. Importantly, having a physical operation in Guernsey provides additional substance to management arrangements. Terra Firma has not only established in Guernsey, but chairman Guy Hands has decided to buy a property and live on the island. This reflects the fact that not only is the island an ideal location for conducting business or locating management companies but it is also attractive as a residence for the managers themselves. This is no doubt helped by the fact that Guernsey has a zero rate of corporate tax as standard, there is still no withholding tax on dividends paid, no capital gains tax, no inheritance tax and no value added or general sales tax, and personal income tax remains levied at a maximum of 20 percent, with a variety of capping options available depending on individual circumstances.
Guernsey has during its 50 years as a finance centre and particularly during the last decade or so, faced scrutiny from the likes of the UK government, the EU, the IMF, FATF and the OECD/G20. The island has always cooperated in these processes and on each occasion been placed within the premier division of international finance centres.
This has continued to be the case during the past eighteen months:
- Guernsey features alongside the UK and US on the OECD "white list" that was published at the conclusion of the London G20 summit in April 2009;
- The review of British Crown Dependencies and Offshore Territories by Michael Foot on behalf of HM Treasury placed Guernsey in the top division of international finance centres;
- Guernsey was ranked 22nd in the latest Global Financial Centres Index (GFC 7, March 2010) – within the very top echelon of the so-called "offshore" centres.
There is also every reason to believe that Guernsey has performed well under assessment by the IMF during the first half of this year. However, the island never rests on its laurels but is always looking to the future. We are currently facing challenges in a variety of guises, not least in terms of our corporate tax rates. It is reassuring that Guernsey's chief minister, Lyndon Trott, has said: "The fund management industry's exempt company status is not under threat and indeed its scope could well be extended." Guernsey has also been extremely proactive voicing its position in both London and Brussels regarding AIFM and we are confident that the island will continue to have access to European markets. It is so that we can tackle such challenges most effectively that the island is stepping up its representation within the corridors of power in both the UK and the EU.
Guernsey is determined to do all it can to ensure that it continues to be a leading international funds centre. As such, I am extremely confident that the island will build on its illustrious heritage to remain the premier European centre for private equity business well into the future.
Guernsey – in brief
- Situated in Europe between the UK and France
- A British Crown Dependency; outside the EU
- English speaking
- Currency: British pound Sterling (GBP)
- Same time zone as the UK
- Links to both London and Europe
Why Guernsey for private equity?
- Range of administrators
- Experience and expertise
- Favoured by leading managers
- "Fast track" capability
- Exchange listings
- Respected international finance centre
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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