Carey Olsen partner Andrew Tually explores how Guernsey has established itself as a premier jurisdiction for investment funds: offering proportionate, principle-based regulation, a neutral tax environment, speed to market, and competitive ongoing costs.
An original version of this article was first published by IFC Review, Tuesday 20 August, 2024
With respect to venture capital (VC) funds in particular, recent research conducted by global law firm Proskauer Rose LLP has revealed that Guernsey remains the most prevalent jurisdiction for European VC funds, with twice as many funds raised in Guernsey during 2022-2023 as compared to the next most popular jurisdiction.1
As the leading legal adviser to Guernsey's investment funds sector by both number of funds advised and by assets2, we believe this trend is attributable to the following features of the Guernsey investment funds landscape:
- Easy-to-understand range of fund structures to suit closed-ended, open-ended and semi-liquid strategies.
- Reasonable and proportionate regulation.
- Neutral tax environment.
- Ease of attracting international investors via an internationally-recognised structure.
- Guernsey's competitive edge with respect to costs and timings for the establishment and regulation of fund vehicles (NB: regulatory approvals can be obtained in one business day).
Despite a tumultuous couple of years, VC performance is reportedly stabilising with the 'AI buzz' driving strong valuations in AI and technology-related sectors.3 With fundraising conditions expected to improve, we've taken the opportunity to summarise some of the recent trends in fund structuring, as well as to highlight the appeal of Guernsey as a funds domicile for VC promoters and investors.
Trends In Fund Structuring
Deal by deal SPVs: An increasing share of promoters are offering investors deal-by deal opportunities and/or co-investments alongside regulated fund structures. Such deal-by-deal and co-investment structures (usually an SPV holding a single asset or acquiring a pre-defined portfolio of assets) are typically not regulated as collective investment schemes in Guernsey – permitting very fast turnaround times for fundraising and deployment. Plus, such structures are typically cheaper to set-up and administer because they are subject to reduced regulatory, compliance, and audit requirements. Naturally, speed to market and cost minimisation remain very important considerations in VC structuring.
Warehouses: Some promoters have taken advantage of Guernsey's speed to market and reasonable, proportionate regulation to establish regulated funds that act as warehouses for onshore funds, ie to admit early investors and make seed investments ahead of the launch of onshore products (eg semi-liquid funds aimed at 'private wealth' investors, which by their nature have significant lead times to licence and launch onshore). The investments and investors in the regulated Guernsey funds are subsequently tipped into the corresponding onshore products at the relevant time and the Guernsey vehicles are dissolved.
Continuation funds: The rise of GP-led secondaries activity in tough M&A and IPO markets is well documented4. This activity has increased demand for continuation funds in Guernsey, whether to provide runway for single/star assets, or to provide an efficient end of fund-life solution. Such continuation funds are being established in Guernsey merely because it is easier to do so (compared to doing so onshore).
Guernsey as an alternative to Luxembourg: Guernsey's competitive edge was recently reinforced in a report by the Corvus Group4, which described Guernsey as a cost-effective and operationally efficient alternative to Luxembourg for raising European capital. The key findings of the report:
- Passported Luxembourg structures are "a very costly and administratively complicated option with no unique upside following completion of the distribution phase".
- The administrative costs of establishing a passported Luxembourg structure and engaging a third party AIFM could easily reach €3 million over the lifetime of a fund, impacting fund and carried interest returns.
- Only three per cent of EU funds are registered for sale in more than a handful of Member States, and the cost of registering a non-EU fund in those Member States is small.
- Distribution pathways for non-EU funds via Article 42 notifications and registrations are tried and tested, and work well.
These considerations are especially important for VC funds, which – on account of their tendency to raise smaller amounts than PE/buyout funds – are more cost sensitive and might not require a fully passported structure in order to effectively market into the EU.
Private investment funds: Perhaps the 'go to' fund option for VC managers in Guernsey, private investment funds (PIFs) were introduced in 2016 to provide a fast-track route to market for first-time fund managers and managers with a closer connection to their investors. Broadly, the key features of PIFs include:
- Regulatory approval in one business day.
- No requirement to appoint a Guernsey manager.
- If a Guernsey manager is appointed, the manager is not required to comply with "conduct of business" or "capital adequacy" requirements.
- No requirement to prepare a PPM or prospectus.
- No minimum subscription amounts.
- No limit on marketing, although the total number of investors having an ultimate economic interest in the fund cannot exceed 50 (subject to exceptions).
If the number of investors should exceed 50 after setting up the fund as a PIF, then it is a relatively simple process to convert the regulatory status of the fund to a type which does permit more investors.
Why Choose Guernsey?
Regulatory regime: Guernsey maintains a proportionate, flexible and competitive funds regulatory regime, adopting a risk-based approach to ensure that appropriate levels of investor protection are maintained, whilst at the same time avoiding unnecessarily complex or burdensome regulation. Simplicity is also key: Guernsey fundamentally has only two fund types – registered or authorised – each of which has a small number of classes aimed at various types of investors.
Guernsey's financial services regulator, the Guernsey Financial Services Commission (GFSC) works closely with the funds industry to ensure that the regulatory regime continues to evolve and provide the kinds of structures required by today's investors. There is ongoing engagement between the GFSC and industry experts to further the island's interests.
Political and legal regime: Guernsey is politically and fiscally autonomous, with stable politics and legal institutions. Though originating from Norman customary law, nowadays Guernsey law has adopted many principles of English common law and equity. The principle of the right of contracting parties to agree a deal between themselves is upheld, and legal redress can be sought through a reliable judicial system, with ultimate appeal to the Privy Council in England.
Fund vehicles: The legislation governing Guernsey companies, limited partnerships, and trusts, provides flexible regimes to facilitate the establishment and operation of these vehicles. For example, Guernsey companies can make distributions of capital to investors based on simple solvency tests, whilst Guernsey limited partnerships can elect to have their own separate legal personality, and have specified 'safe harbours' to avoid limited partners losing their limited liability status by conducting the management of the partnership.
Taxation: Guernsey provides an uncontroversial tax neutral environment for funds and fund managers. Funds structured as limited partnerships are tax transparent in Guernsey. Funds structured as companies or unit trusts may apply for an annual exemption from income tax. Income from the provision of investment management services to collective investment schemes in Guernsey is subject to income tax at zero per cent. Guernsey does not levy any form of GST, so management fees charged or transaction/deal costs incurred by a Guernsey manager do not suffer any tax leakage. Also, Guernsey does not levy any form of capital gains tax or inheritance tax. No stamp or document duty, or transfer tax, is payable in respect of companies, unit trusts or limited partnerships that are funds.
Service providers: Of Guernsey's funds under management and administration, private equity/venture capital funds remain the most popular product with a net asset value of US$387.9 billion (approximately 75 per cent of the total assets under management and administration on the island). As you would expect from a jurisdiction with such significant levels of funds under management and sectoral expertise, Guernsey has a wealth of first-class administrators, auditors and custodians. The jurisdiction also has a deep pool of experienced, independent, non-executive directors to provide guidance and oversight to funds, and to ensure that the highest standards of corporate governance are observed.
Geography and international appeal: Located in the English Channel, Guernsey is in the same time zone as the UK and (as an English-speaking Crown Dependency) has strong links with the UK government and the UK funds industry, and benefits from excellent transport links with the UK. Guernsey funds also boast a broad international appeal and familiarity, are promoted or sponsored in more than 55 jurisdictions globally and are well known to the market worldwide. Guernsey is a tried and tested fund domicile for investors from all key global markets (North America, UK, Asia, Middle East, South Africa, Switzerland and continental EU).
The AIFMD: Or, rather, the lack of it. Guernsey is neither a member nor an associate member of the European Union (the EU), and as such is classified as a 'third country'. The AIFMD5 therefore has no application to Guernsey funds or fund managers when they are not marketed into the EU. Guernsey funds continue to raise significant amounts of capital from EU-based investors by utilising national private placement regimes. These are now thoroughly tried and tested routes to market, typically requiring only partial adherence to the provisions of the AIFMD which can result in lower running costs and higher investor returns.
Thus, although marketing into the EU brings with it a requirement to adhere to some or all of the AIFMD, this is entirely optional. A fund manager may wish to steer clear of the EU entirely, and will thus avoid all of the (arguably unnecessarily burdensome and costly) requirements of the AIFMD, including:
- Restrictions on remuneration policies. Guernsey does not impose any restrictions or obligations on the pay policies of managers of Guernsey funds.
- Capital adequacy requirements. Guernsey imposes clear and straightforward capital adequacy requirements on the manager and depositary of a Guernsey fund.
- Asset stripping provisions. Guernsey does not impose any 'asset stripping' provisions on Guernsey funds or managers of Guernsey funds.
- Depositary requirements. Guernsey only imposes the requirement for a separate depositary on open-ended funds, which may – following consultation with the regulator – be waived in certain circumstances.
Such a flexible approach to AIFMD can make Guernsey an appealing alternative to EU structures, since the AIFMD applies automatically and in full to such EU funds/managers, which can materially impact on establishment and ongoing costs.
International cooperation: Guernsey has given its full support for the transparency principles central to the current G20, OECD, and EU tax initiatives, and is working as part of the wider international community in the development and effective implementation of internationally agreed standards, including those set by the Financial Action Task Force (FATF) and the Organisation for Economic Co-operation and Development.
Guernsey has been assessed as being amongst the best quality financial centres in the world when measured against the rigorous international standards for tackling money laundering and terrorist financing set by the FATF.
Guernsey also participates fully in numerous international initiatives such as the OECD's base erosion and profit shifting project and developing the global 'Common Reporting Standard', and the automatic exchange of information between tax authorities.
Legal Expertise
At Carey Olsen, our lawyers understand the requirements and priorities of each interest group and tailor our services accordingly. We have a collective depth and breadth of knowledge and experience unrivalled in Guernsey, and remain abreast of the latest developments and trends, working closely with leading onshore counsel to advise many of the world's most successful fund managers. In many cases, Carey Olsen's funds lawyers have previously worked in major international onshore law firms, and have extensive experience of delivering for clients as both lead onshore and lead offshore counsel.
Footnotes
2. 29th annual Monterey Insight Guernsey Fund Report.
3. Venture Capital Valuations: Mid-Year Outlook 2024 (preqin.com)
4. See our website briefing at Guernsey: an ideal domicile for continuation funds | Carey Olsen.
5. 2024-05-21-The-cost-of-EU-distribution-final.pdf (corvusgroup.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.