Originally published in the HFM Week, Guernsey Report, June 2008
Writing in this supplement last year I was reporting on Guernsey's 'booming' investment funds industry – all the statistics were going through the roof. Given the substantial growth that was the hallmark of 2006 and that this continued into 2007, it appeared that we might not be able to sustain such a pace throughout the year. This became even more likely in light of changes on the world economic scene, most notably the sub-prime crisis and its implications.
However, whilst activity is not quite as frenetic as pre-'credit crunch', business flows have remained more than robust well into 2008. What I hear is that for the second half of this year there is still a strong pipeline of business coming into the Island and there are other substantial flows out there to be won. That is why Guernsey continues to enhance its environment to attract hedge business and market itself internationally as a fund domicile that continues to punch above its weight.
Robust Growth
Statistics just released by the Guernsey Financial Services Commission (GFSC) show that the Island's funds industry has continued to deliver robust growth despite the economic climate:
- The value of funds under management and administration
reached £204bn at the end of March 2008 – a
rise of 45% year on year.
A breakdown reveals that:
- Guernsey domiciled open-ended funds grew by 22% during
the year to reach £72bn. at the end of March.
- Guernsey domiciled closed-ended funds finished quarter
one this year at £79bn – an increase of 40%
during the previous 12 months.
- Non-Guernsey schemes, for which some aspect of management
and administration is carried out in the Island, rose in
value by 107% to reach £53bn at the end of March
2008.
Fund approvals have also continued at pace:
- At the end of March the total number of funds under
management and administration in Guernsey stood at 1,160
– 179 more than 12 months previously.
- During the year the number of Qualified Investor Funds
(QIFs) – the fast-track consent process for funds
targeting experienced investors – grew by 96 to
reach 191.
- In February last year the Island also introduced a
registered closed-ended funds regime and by the end of March
this year 92 such funds had been given consent by the
GFSC.
Market conditions have undoubtedly played their part in these results but primarily the figures show that promoters, sponsors and managers are viewing the Island as a jurisdiction of choice for their business. Whilst traditional funds remain well represented and Guernsey is attracting funds of more esoteric asset classes including fine wine, fine art and timber, the main driver of these increased flows is the growth in alternatives such as private equity, property and hedge funds/funds of hedge funds. Indeed, Guernsey now has hedge funds/funds of hedge funds worth more than £28.2bn. under management and administration.
Hedge Fund Friendly
Guernsey's four decades of experience in providing investment funds products and services has helped establish an industry with a wealth of expertise and a first-class infrastructure, which makes the Island a particularly attractive location for the domiciling, administration and also management of funds and especially alternatives such as hedge funds.
Today, world-renowned investment managers of alternatives, for example, EQT and KKR (private equity); Kenmore and F&C (property); and Man and Fauchier (hedge funds/funds of hedge funds), have the operation of their funds facilitated in Guernsey.
There are more than 45 administrators in the Island – including recent significant additions BNP Paribas, Capita and Citco, a world leader in providing hedge fund services – and a large number of these specialise in alternatives. The majority of the funds that they service are Guernsey open and closed-ended funds, which are now promoted and sponsored by leading institutions in 45 countries. These funds can be established through a range of flexible investment vehicles such as unit trusts, PCCs, ICCs and limited partnerships, which the administrators are skilled at using.
Guernsey's administrative heritage is increasingly being complemented by the availability of fund managers and in particular those specialising in hedge funds, including Financial Risk Management (FRM), Dexion and BBBSA Strategic Management Limited. The Island plays host to award winning managers: Sigma Asset Management Guernsey received a leading industry award for the 12-month risk/return performance of one of its fund of hedge funds; and Dawnay Day Milroy was named 'Best Retail Product Provider' at the Hedge Funds World Awards Middle East 2008.
Earlier this year private equity giant Terra Firma established a presence in Guernsey. This demonstrates that Guernsey has an offering which makes it attractive for managers to locate their offices in the Island. The Island is rightly renowned for strong corporate governance and has a large pool of experienced and qualified non-executive directors to take up board posts and thereby ensure clear delineation between the onshore investment management and offshore overall management and control. However, having a physical operation in Guernsey provides additional substance to the offshore arrangements. In addition, on 1 January this year Guernsey moved to 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%.
Enhanced Offering
The trend in recent years has been to domicile hedge funds in jurisdictions like Cayman because of the speed of set-up but Guernsey is now laying down a challenge in this area. On 1 July this year the new Guernsey Company Registry will come on-stream in parallel with the new Guernsey Companies Law. This will see the Island's system for company formation and maintenance move from a court-based model to a streamlined statutory process.
The registry will utilise the very latest systems and online technology to provide users with a simpler and quicker service – offering incorporations in 15 minutes – whilst maintaining the Island's hallmark of personalised delivery. The new arrangements will intimately involve the local corporate service providers who will become the gatekeepers for the incorporation and maintenance of companies.
We are also looking at how the regulation of hedge funds in the Island might be changed so that particularly those originating from London that might have previously gone to Cayman will in the future come to Guernsey. Currently a review is being undertaken into how this might best be achieved and the results are expected just after the summer. This will be in addition to the introduction of a registered open-ended funds regime later this year, which will complement the equivalent closed-ended framework that is already in place and be particularly attractive for hedge funds.
A major advantage that Guernsey already holds over Cayman, especially with UK investment managers, is the convenience in terms of time zone and travel by it being situated between the UK and continental Europe.
In addition, Guernsey's offering also includes a broad-based financial services industry comprising not just a wide-range of investment businesses but also banking, fiduciary and insurance providers; support services such as multi-jurisdictional law firms and accountancy firms including the 'big four'; the Channel Islands Stock Exchange (CISX); a bespoke professional development facility the Guernsey Training Agency (GTA) University Centre; and a robust yet pragmatic regulator, the GFSC.
The Right Conclusion
In a world of ever-increasing competition, Guernsey continues to punch above its weight as a fund domicile through its on-going enhancement of attractive products and pragmatic regulation. In fact, all the ingredients are in place for Guernsey to maintain its position as a jurisdiction where clients want to conduct hedge business (and keep coming back for more) – long may that continue.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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