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Guernsey 2018Special Report
FEATURING Estera // Guernsey Finance //Maitland // Ogier // PwC
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Change in the asset & wealth management industry is now accelerating at an exponential rate. Although the industry is set for growth over the next ten years, asset and wealth managers must become business revolutionaries, even disruptors, if they’re to survive and prosper. Now is the time for action.
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INTRODUCTION
he HFM Guernsey report 2018 analyses this year’s key talk-
ing points and developments.
When the time comes for the UK to leave the European
Union, Guernsey’s proximity coupled with its passporting rights into
Europe, will see it emerge as a leading jurisdiction for domiciling al-
ternative funds. This, and the further advantages of setting up on the
island, are outlined within.
Elsewhere, the report discusses the increasing comfort provided
by the one-stop shop service provider and the benefits of having a
gender-diverse board of directors.
The latter section of the report focuses on Guernsey’s special-
ist private equity capabilities. Contributors chart the evolution of
new technologies on the island such as blockchain, and analyse the
benefits they will bring to traditionally labour-intensive front- and
back-office processes within the PE sector.
As one of Guernsey’s key specialisms, the overall virtues of PE fund
structures on the island are also highlighted.
Overall, this report will provide a clear picture as to why Guernsey
remains a beneficial, flexible jurisdiction in which to establish a broad
range of structures.
Ross Law
Report editor
A flexible jurisdiction
T
This report will provide a clear picture as to why Guernsey
remains a beneficial, flexible jurisdiction in which to estab-
lish a broad range of structures
GUERNSEY 2018 HFM.GLOBAL 03
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Inn vativeLet’s get to the point: we understand funds.
Ogier’s specialists have been at the forefront of
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inception of the industry with many actively
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fund structures across our international
jurisdictions. We act for banks, financial
institutions, funds and promoters, working with
blue chip clients with established track records
and the most innovative and entrepreneurial
new sponsors entering the market. We pride
ourselves on providing responsive and
practical advice, while our hands-on, partner-led
teams ensure a consistent approach.
ogier.com
CONTENTS
GUERNSEY 2018 HFM.GLOBAL 05
Guernsey 2018Special Report
Financial services GUERNSEY’S GLOBAL REACH AIMS TO HELP MANAGERS TO OVERCOME BREXIT Dominic Wheatley, of Guernsey Finance, lays out the reasons why Guernsey’s private equity market is strong in light of Brexit
Fund services SHIFT IN THE PERCEPTIONS OF ONE-STOP SHOPS Greg Kok and Gareth Smith, of Maitland, reflect on the altered perceptions of one-stop shops and the firm’s presence in Guernsey
Fund services DIVERSITY ON BOARDS – A FUND PERSPECTIVE Estera provide their views on board diversity PRIVATE EQUITY FOCUS
Fund services TECHNOLOGY REVOLUTION Alex Burne, of PwC, details how technology is set to transform the sector within Guernsey
Legal SIMPLICITY, FLEXIBILITY AND SPEED TO MARKET Bryon Rees, of Ogier, outlines the virtues of the Guernsey private investment fund
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FINANCIAL SERVICES
uernsey’s global reach is proving increasingly valuable to private equi-ty managers who need
to escape the uncertainty brought about by Brexit.
Earlier this year the island launched a campaign to promote its global fund distribution capabil-ities – particularly timely as uncer-tainty over what might happen for UK and European managers after Britain leaves the European Union was hanging over the industry, and even threatening to derail fundrais-ing launches until more certainty emerged in the market.
Guernsey has, for over 50 years in the international finance world, positioned itself at the centre of a network of bilateral agreements fa-cilitating international capital flows. Its long-term position outside of the EU, and access to EU capital markets, will not change as a result of Brexit.
Today a Guernsey-domiciled fund reaches the parts of the globe that asset managers want to reach. In-stitutional investors in more than 50 jurisdictions across five continents, representing more than 80% of the world economy, can be accessed with a Guernsey fund, including those in the major economies of the United States, the EU and China.
Guernsey is not just a short-term solution for Brexit, however. The island can provide asset manag-ers with a single route to investors which avoids the duplicate costs of a parallel or feeder structure, at a time of low investment returns and rising regulatory costs when managers are
looking for jurisdictions which can provide a single, secure route to in-vestors and avoid much of that cost.
Comparable savings over Ucits funds are typically more than 1% of assets under management over the lifetime of a fund.
Guernsey’s history in private eq-uity is well-known and its expertise highly regarded. A niche has been developed over the years in private equity and listed funds.
Guernsey has developed a prov-en operating model with structures that are legally robust and fiscally neutral. Corporate and limited part-nership structures are utilised to hold assets of all types, and Guern-sey private equity funds span a wide range of investment strategies, in-cluding venture capital, growth buy-out and debt.
Success as a premier private equi-ty funds centre is due to meticulous planning by the Guernsey author-ities over the years to cultivate a conducive legal, regulatory and tax environment, coupled with a flexible and innovative approach to doing business.
The island continues to innovate in the sector, with latest developments including the use of blockchain in private equity fund administration, pioneered by Northern Trust, the island’s largest administrator, with accountants PwC.
In recent years Guernsey has also overcome the challenges imposed by the EU’s Alternative Investment Fund Managers Directive, making regulatory changes to attain equiva-lence on the way to pursuing a ‘pass-port’ to sell qualifying funds across Europe.
Two years ago, almost to the day, Guernsey was among a select group of third countries set to receive the passport. Then Brexit took over.
It now appears probable that Na-tional Private Placement Regimes (NPPR), pre-existing agreements al-lowing offshore funds to be market-ed to European institutional inves-tors, will need to remain in place for the foreseeable future.
However this has turned out to be a significant benefit to jurisdictions such as Guernsey. NPPR provides a proven, smarter and faster route to access European investors, particu-larly with the vast majority of funds targeting only one jurisdiction at a time, and, in the alternatives sector, pan-European fundraising almost non-existent.
Only 3% of alternative investment funds are registered for sale in more than three EU member states.
“Given the massively oversub-scribed fund raisings enjoyed by so many Guernsey alternative invest-ment fund managers over the last few years, it is quite clear that the NPPR route for third-country man-agers is working. The EU AIFM Di-rective has not held Guernsey man-agers back,” said Ben Morgan, funds partner at offshore law firm Carey Olsen.
G
Guernsey’s global reach aims to help managers to overcome Brexit
Dominic Wheatley, of Guernsey Finance, lays out the reasons why
Guernsey’s private equity market is strong in light of Brexit
Dominic WheatleyGuernsey Finance
Dominic Wheatley is the chief executive of Guernsey Finance, the promotional body for the finance industry in Guernsey. He has more than 20 years of experience in the Guernsey finance sector
06 HFM.GLOBAL GUERNSEY 2018
FINANCIAL SERVICES
In the run-up to Britain leaving the EU, the island is also locked in discus-sions about the future of its financial services sector, particularly in rela-tion to funds and the relationship with the UK.
Guernsey has promoted greater mutual recognition of financial reg-ulatory standards, which was en-dorsed in a report from think tank the Institute of Economic Affairs (IEA) on improving global financial services regulation, and fostering economic growth and innovation post-Brexit.
The IEA called for the reinstate-ment of Section 270 of the Finan-cial Services and Markets Act 2000, which offered a marketing route into the UK for non-Ucits funds that was well-used by Guernsey funds before the introduction of the EU’s Alter-native Investment Fund Managers Directive. It said such a move would “actively encourage” funds present-ly managed from London but domi-ciled in the EU to move back to the UK, Crown Dependencies or Over-seas Territories.
“The IEA support for leveraging mutual recognition across invest-ment funds regime is something we strongly support and applies not purely in the Brexit context. We have been regularly making this point ourselves,” said Dr Andy Sloan, act-ing director of strategy at Guernsey Finance.
“We also endorse the IEA’s sup-port for moves to enhance the Chan-nel Islands’ ability to complement the UK investment management
by the UK as part of the withdraw-al from the EU to ‘allow financial services to continue smoothly post-Brexit’.
The report also recognised that Guernsey, and the other Crown De-pendencies, are key assets of the City of London, capable of fulfilling several roles.
“The Crown Dependencies and Overseas Territories are assets to the City of London that can allow the UK to build on its global network,” it said.
Firstly, Guernsey can provide a specialist domicile for new retail products designed to bring new op-tions to UK investors. This recognis-es our unique ability as a small and nimble environment to adapt regu-latory standards to reflect the risks and meet the needs of new services and structures.
Secondly, we enhance the UK’s global network through our sophis-tication and experience in operating as a conduit for capital flows be-tween different tax and regulatory environments.
We certainly hope and expect that our background and future in trading funds into the EU will help to encourage the UK towards an open trading relationship, once the EU border no longer lies between Guernsey and the Isle of Wight.
A Guernsey-domiciled fund reaches
the parts of the globe that asset
managers want to reach
sector post-Brexit by reinstating the mechanism for recognition of funds regimes. We believe this particular move strongly enhances the UK’s competitive position.”
It also suggests that the Crown Dependencies’ status of EU equiva-lence recognition should be copied
Guernsey PE value tops £100bn
The total value of private equity business in Guernsey is now more than £100bn. The sector passed the threshold at the end of 2016, after a year where the net asset
value of private equity funds under management and administration in the island grew by £25bn. There were substantial launches by Guernsey-based promoters including Permira, Apax Partners, Cinven, Macquarie, Partners Group and Inflexion.
Guernsey Finance chief executive Dominic Wheatley described the period as “a consist-ent undercurrent of fundraising on top of which we have seen a number of showstopper launches”.
“This continues to underline the fact that Guernsey is an attractive destination for pri-vate equity funds due to our first-class financial services infrastructure, attractive to global investors as a stable, well-regulated and tax-transparent place to conduct business in tur-bulent times.”
Ben Morgan, funds partner at offshore law firm Carey Olsen, said that Guernsey contin-ued to dominate various sectors of the alternative closed-ended fund market and is the “number one jurisdiction in particular for the large buyout houses”.
GUERNSEY 2018 HFM.GLOBAL 07
FUND SERVICES
n the context of wider regulated financial ser-vices, it is often asked what constitutes one-
stop shop servicing. In essence, one-stop shop servicing refers to companies that offer a number of different services or products within their own group. Some of the most common offerings include manage-ment company (ManCo) or AIFM services, fund administration, de-positary, corporate services, private client services and legal work in some instances. Perceptions of the one-stop shop model have changed in that in the past offering manage-ment company and other delegated services such as fund administra-tion was regarded as impossible under the same umbrella. For a long time most of the market steered clear of this model, due to inherent conflicts of interest, but this is now all changing. A strong element of this old perception is based on the understanding of how to set up a delegated structure for an invest-ment manager who is not physically present in the location of the AIFM or ManCo.
A UK asset manager, for instance, who is looking to set up a fund struc-ture will require certain elements to make the structure work, including a ManCo, fund administrator, cus-todian or the depositary, auditor, law firm and more. It was previously assumed that if a fund were to del-egate the accounting and transfer agency work to a third-party en-tity, and if that entity was also a member of the same group as the ManCo, a conflict of interest would be inevitable and unavoidable. The financial services industry is now at a point, however, where there are increasing levels of comfort in these services being included under the same umbrella, based largely on the ability of these organisations to
segregate their duties and create Chinese walls between group func-tions and entities.
By having a detailed understand-ing of what segregation means, and clearly defining this in the eyes of the regulator to ensure they are comfortable that these two differ-ent functions can be accommo-dated under the same umbrella while keeping segregation intact, has rendered one-stop shops more credible.
We see this shifting perception within the ManCo landscape where industry and regulators are current-ly more comfortable with the one-stop shop concept. We have seen a rapid increase in the number of organisations that have started to accumulate, either through M&A activity or licensing from within, all of these services under one banner. Banks are also becoming increasing-ly comfortable with the one-stop concept and choosing to bolster their offering. This has been a major shift. Although banks universally do want to remain at their core bank-ing institutions, they are simply able to offer more ancillary services alongside their core competency.
Benefits of the one-stop shopIn terms of benefits of the one-stop shop, there are obviously consider-able cost efficiencies to be gained by engaging with a single entity offering the full range of services.
Negotiation becomes easier under this arrangement, too. On the prac-tical side, there is only a single point of contact, who should be able to respond to clients’ questions on any of the range of services offered by the one-stop shop. Most true one-stop shops (those who really can offer every single service a client will require) tend to be the most es-tablished players, and using them is plainly appealing because of their prestige, which ensures a high level of comfort from the outset.
On the other hand, while the in-dustry has grown increasingly com-fortable with the management of the inherent conflicts of interest in this model, these conflicts still re-main. That is probably the biggest concern that one would have as well as the simple ability to perform multiple functions well within the same group.
We are often asked how one-stop shops can ensure a uniformity in the quality of each of their offerings. This is really a matter of looking at each individual service and having clear management structures and escalation points within those, with high-level internal responsibility for each. These different service lines view themselves as separate busi-nesses and run themselves in this manner. But from a client’s perspec-tive, they are getting access to all of those very well-run independent businesses through a single point.
Regulators perceive this model increasingly favourably but with some apprehension. The perspec-tive of the regulator is always to ‘dig deeper’. When a regulator comes for a site visit, they ask very specific questions about all of the components and lines of business. And, as long as these questions can be answered credibly, regulators generally have an increasingly high degree of comfort with the model.
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Shift in the perceptions of one-stop shopsGreg Kok and Gareth Smith, of Maitland, reflect on the altered
perceptions of one-stop shops and the firm’s presence in Guernsey
Greg KokGlobal head of ManCo services Europe, Maitland
Greg Kok is the global head ManCo for Maitland. A finance professional with 20 years of global exposure. Formerly the MD at MPL Management and executive director of alternatives at FundRock Management Company in Luxembourg.
Gareth SmithDirector of Maitland Administration Guernsey
Gareth Smith joined MAGL (which, prior to the acquisition by Maitland, was formerly R&H) in 2008 and has 15 years’ experience in the finance industry. Prior to R&H, he worked for Ernst & Young in Jersey and London as an audit and assurance manager after training with Deloitte in South Africa and the United States.
08 HFM.GLOBAL GUERNSEY 2018
FUND SERVICES
Future trendsWe believe that the one-stop shop model will continue to develop in the future. We will see more en-trants into the market and it will be interesting to see whether banks begin to develop themselves into true one-stop shops – a move we feel is unlikely but remains to be seen. Another interesting element to watch is whether some of the players in this space start to encoun-ter issues with their clients because they are, in a sense, offering compa-rable services to that of their clients and therefore become competitors. If that situation starts to develop, it may influence people away from the one-stop option. However this is not currently the case, and Maitland is seeing an increase in the number of players in this area. A large por-tion of the development of the one-stop shop option is also going to depend on the regulator’s continu-ing comfort levels and their support
of the model’s existence. The onus here is on the industry to continue providing evidence that they are able to manage the conflicts of in-terest and provide the segregation between the various entities, and do so credibly.
Maitland in GuernseyWithin the above context Maitland established a presence in Guern-sey through the acquisition of R&H Fund Services (Guernsey) Limited during September 2017 to form Maitland Administration (Guern-sey) Limited (MAGL). MAGL provides ManCo services in Guernsey as part of Maitland’s wider ManCo service offering.
Maitland has identified an in-creased need for quality ManCo services in Guernsey. MAGL is well placed to provide this service, and works closely with our ManCo de-partment under the leadership of Greg Kok, who is based in Luxem-bourg. He has been appointed to the MAGL board.
MAGL continues to provide tradi-tional fund administration and cor-porate services to Guernsey domi-ciled and non-domiciled open- and closed-ended collective investment schemes, investment management companies and various other cor-porate and partnership investment structures. Furthermore. MAGL has also expanded to offer a full suite of private client and trust services following receipt of its full fiduciary licence in January 2018. This de-partment is being headed up by Iris Harvey, a director of MAGL. She was previously a partner in Maitland’s legal practice in London.
Maitland has identified an
increased need for quality ManCo
services in Guernsey
GUERNSEY 2018 HFM.GLOBAL 09
locateguernsey.com Your home Your lifeYour business
To find out more contact Andrew Carey on: +44 (0)7911 719082 or email: [email protected]
Excellent air links to London
Same time zone as UK British poundEnglish speaking
With more than a thousand open and closed ended funds domiciled in the Island, Guernsey has the critical mass, infrastructure and expertise for your fund management business to flourish.
A low tax jurisdiction with a pragmatic and innovative regulator, a very skilled workforce and a high-quality professional services community; Guernsey has all the key elements for long-term success. The island has personal as well as professional appeal: it’s beautiful, safe, with strong transport links, a friendly tax environment and an exceptional quality of life.
Guernsey is a centre of excellent for funds – talk to Locate Guernsey, part of Guernsey’s government, for free advice and assistance on personal or corporate relocation to the island.
GUERNSEY The perfect home for fund managers
FUND SERVICES
he argument for great-er diversity on boards seems to have grabbed the headlines in recent
years, as companies and organisa-tions across the globe increasingly realise the benefits offered in terms of fresh ideas and insight.
Diversity in itself is a very broad church – covering everything from gender, race, sexuality, disability, so-cial demographics, different ways of thinking, age, professional expertise and much more.
The reality, however, is that the concept has been gaining traction for much longer than many people realise.
Go back to 2009, and research by University of Queensland’s Busi-ness School found that boards with more female directors were char-acterised by greater participation of directors in decision-making; tougher monitoring of the CEO; and more alignment with the interests of shareholders.
More recently, in 2016, a report from the Peterson Institute for Inter-national Economics , which surveyed 21,980 publicly traded companies in 91 countries, demonstrated that the presence of more female leaders in top positions of corporate man-agement correlated with increased profitability.
And these are by no means iso-lated studies – other independent reports come to similar conclusions.
But female directors can also im-prove a firm’s social performance and social responsibility. A 2016 re-search paper co-written by Lehigh University professor Corinne Post and Georgia State University profes-sor Kris Byron showed that men and women have different values and that women tend to be more holis-tic, think more broadly, and be more attuned to environmental and social concerns.
So, when there’s a discussion in the boardroom, those views
(thinking about the implications for employees and the communities we work in) might be more likely to be voiced because those perspectives are present on the board.
Sarah Demerling, head of funds and a client director at Estera, agrees with these findings. “Diver-sity brings a different perspective and challenges the norm,” she says. “A board comprising men from sim-ilar schools and backgrounds will often see things from the same an-gle. Diversity helps drive innovation and improved results; it also brings different and positive traits to the table.”
A PwC study in February 2017 supports Demerling’s view. It found that 91% of directors surveyed said diversity enhanced board effective-ness and 84% said that diversity led to enhanced company performance.
Time for action?These statistics are highly posi-tive, but appreciating that diversity makes a difference and acting on this evidence are two different things.
The Hampton-Alexander Review, which is aimed at increasing the number of women in leadership po-sitions of FTSE 350 companies, pub-lished reports in 2016 and 2017.
These reports propose targets for the number of women on boards
TSarah DemerlingEstera
Sarah Demerling, client director at Estera in Bermuda, was formerly a partner of a magic circle law firm in Bermuda. She serves as an independent director on a number of companies covering a range of sectors including captives, ILS funds, oil and gas. Demerling is an active member of the Asset Management Committee of the Bermuda Business Development Agency and one of the founders of 100 WIF.
Amit TaylorEstera
Amit Taylor is the managing director of Estera in Guernsey with overall responsibil-ity for leading and developing the funds, corporate and trust business locally. He is an economics graduate and chartered accountant with over 20 years’ experience in financial services across both the investment management and trust sectors.
Mel TorodeEstera
Mel Torode is the operations director of Estera in Guernsey. She is currently a director on a number of boards, including funds, general partners and associated Guernsey companies. Torode has an extensive background in fund administration working on large private equity structures, listed funds, property funds and mezza-nine funds all investing in a variety of jurisdictions.
Diversity on boards –a fund perspectiveEstera provide their views on board diversity
GUERNSEY 2018 HFM.GLOBAL 11
FUND SERVICES
and highlight the need for an ur-gent increase in the pace of change, estimating that 40% of all appoint-ments need to go to women over the next three years to achieve their recommended targets.
But it’s not just women who are underrepresented in the board-room. The 2016 Parker Report in association with EY, was set up to examine the ethnic diversity of UK senior management. It found that the boardrooms of the UK’s leading public companies didn’t reflect the ethnic diversity of either the UK or the stakeholders that they seek to engage and represent.
According to EY, at the end of July 2017, only 85 of the 1,050 director positions in the FTSE 100 were held by people from ethnic minorities. In fact, only 2% of director positions were held by people from ethnic mi-norities who are UK citizens, despite this group making up 14% of the to-tal UK population. Perhaps more sur-prisingly, 51 companies in the FTSE 100 don’t have any ethnic minorities on their boards.
The Parker Report recommends that each FTSE 100 board should have at least one director of colour by 2021 and each FTSE 250 board should have at least one director of colour by 2024.
The specific targets set by both the Hampton-Alexander Review and the Parker Review are talking points in themselves – the concept of ‘quo-tas’ is always contentious.
Institutional investors Another way to encourage compa-nies to broaden the make-up of their boardroom is for investors to flex their muscles.
Institutional investors are increas-ingly integrating environmental, social and governance (ESG) factors into their investment decision-mak-ing processes. Indeed, certain insti-tutional investors are beginning to vote for board members according to a company’s board diversity.
The NY State Common Retirement Fund and BlackRock have stated that they will oppose re-election of directors of US corporates if they don’t currently have women on their boards. In 2017, State Street sent letters promoting gender diversity to companies in which it invests .
Torode says. “In the financial servic-es sector it’s far more inclusive, with management and leadership pro-grammes showing a broad range of people that there is a pathway to the most senior roles.”
Different culturesThe ethnic mix in Bermuda and Cayman is different to the Chan-nel Islands . As Sarah Demerling stresses, Bermuda and Cayman have immigration controls to en-sure local residents are offered all jobs prior to them being taken up by non-residents.
These controls mean that the incoming talent complements the existing workforce which has been built up over several decades to sup-port the international reinsurance market and funds markets.
Building up existing talent is the key point here and will prove piv-otal in improved diversity at board-room level in future years. Report recommendations and institutional investors will play their part but, as Demerling argues, it’s as much about younger people with fresh ideas coming onto boards at an ear-lier time.
The more diverse a board becomes over time, the more comfortable companies become in appointing people from different backgrounds in future succession planning.
Prescriptive quotas may focus the mind – and investor demands will undoubtedly do the same – but it’s hard evidence in the shape of per-formance and results that may coax companies to see the bigger picture.
Demerling illustrates the point. “I was talking to a female fund manag-er recently who was a Harvard grad-uate. She didn’t have the support of her male colleagues at first, but when she proved highly successful in her role, things changed and her col-leagues were knocking at her door to invest.” She concludes: “If there is a track record of diversity on a board and performance is good, then peo-ple are going to take notice.”
Estera is a world-leading global provider of fiduciary and administra-tion services. We pride ourselves on being inclusive and understand the need for acceptance and diversity. Please contact us to see how we can help diversify your board.
The argument for greater diversity
on boards seems to have grabbed
the headlines in recent years
Amit Taylor, managing director at Estera in Guernsey, believes institu-tional investors play a key role in fo-cusing minds at board level on diver-sity. “BlackRock is such a major and influential player that others will di-rectly follow their lead,” he says. “In-stitutional investors will make their voices heard and can exert signifi-cant influence, and listed companies have to justify themselves to their investor base.”
Board structures We’ve looked at incentives for a list-ed company to adopt greater diver-sity, but what about fund boards?
Estera directors serve not only on fund boards but also on boards in the private equity, CLO, insurance and reinsurance, and shipping spac-
es. They can bring experiences seen from other industries to the table when discussing best practices, board efficiencies, how to deal with new regulation and such like.
Mel Torode, operations director at Estera in Guernsey, explains that in terms of diversity, there are large disparities in board composition. “We see a wide range of different board make-ups from some that are very diverse to those that consist of people with similar backgrounds.”
Torode explains, however, that in many instances, board selection on funds is more about experience and different skillsets than gender and ethnic background. The situation is entirely different to that of a global plc, which has a huge pool of talent to draw on – both within and out-side the group. She also points out that rigid targets in somewhere like Guernsey – which by its nature is less diverse – wouldn’t work in practice.
This doesn’t mean there can’t be progress. “There was a time when our client boards were all white men of a certain age and all from Guern-sey. That is changing, albeit slowly,”
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P R I VAT E E Q U I T Y F O C U S
DRAWDOWN FOCUS FUND SERVICES
n my role I’m responsi-ble for the design and implementation of in-novative tools across
our business unit, primarily focused on our assurance practice, so I’m well aware of all the overused buz-zwords and hype in the innovation space. What can’t be ignored, how-ever, is the momentum that is build-ing around digital transformation and the pace of change – the likes of which we’ve never experienced be-fore. It’s exciting and something we have to embrace and adapt to.
Guernsey has a long history of in-novation that extends well before our financial services industry. A his-tory of readiness and a conviction to change to be proud of. This is partly down to the island’s characteristics, its infrastructure and skilled work-force, all collaborating and working together to remain best in class. It is our world-class stature that
continues to attract a diverse range of players, from major global brands to small independent, entrepreneur-ial individuals. Combine that with the unique ability to get lawyers, accountants, developers, regulators and government in one place and at one time – and at short notice –and we are a formidable place for change.
One of Guernsey’s specialisms is in alternative offerings with Private Equity (PE) being the jewel in our crown. At PwC, we have a 33% mar-ket share locally (June 2017 Mon-terey), auditing more investment funds in Guernsey than anyone else. PE has been with the island for dec-ades and we have a world-class rep-utation for delivering exceptional
service to the PE sector. However, PE is a very traditional, labour-intensive and complex industry. It’s ripe for change. This is an industry that has problems that need to be solved.
Blockchain solutionsAt PwC, we believe blockchain tech-nology can solve many of these problems and indeed, we are work-ing with companies on the island to do just that. One such successful collaboration is Northern Trust’s launch of the first commercial use of this technology for the PE market. Another example is Solidium, the Guernsey-based insurance entity that for the first time, has issued dig-itised notes on a private blockchain, replacing the role of a traditional settlement system.
According to our recent global fintech report, 77% of business-es expect to adopt blockchain as part of an in-production system or
I
Technology revolutionAlex Burne, of PwC, details how technology
is set to transform the sector within Guernsey
Alex BurnePwC Channel Islands
Alex Burne is the leader of business transformation for PwC Channel Islands and a private equity and venture capital specialist.
14 HFM.GLOBAL GUERNSEY 2018
FUND SERVICES DRAWDOWN FOCUS
process by 2020. It really does look like blockchain is ‘coming out of the lab’. This is consistent with the find-ings from our most recent Asset & Wealth Management (AWM) report: Embracing Exponential Change. Technology is set to disrupt all areas of the AWM industry from the invest-ment advice, research and portfolio management, right through to the middle and back offices and to client engagement and distribution. The banking sector has been receptive to utilising blockchain for certain back-office operations, but PE man-agers are moving slower, perhaps in part due to uncertainty about its purpose, use and reach. Let’s explore this further with a particular lens on PE. But before that, let me just be clear about how I see blockchain.
I’ve listened to numerous experts talk on this subject, and some have kept my attention, and some have lost me in the depths of references to cryptography, blocks, hashing and hyper-ledgers, so allow me to curate my own description. I see blockchain as a decentralised record of trans-actions that no one owns yet all parties have access to via a peer-to-peer computer network. So no one owns the data. And that means that all parties can see and confirm each transaction on the decentralised records. This record system is often referred to as a ‘distributed ledger’. The blockchain is a secure, indisputa-ble record of transactions which can-not be altered without consensus of all parties. Aside from the operation-al efficiencies, it is these character-istics which creates “one version of the truth” that will attract PE man-agers to this technology.
If you think about client due dil-igence, portfolio company opera-tions, deal execution, management reporting and investor relations – traditionally these areas are labour intensive and complex, yet surpris-ingly many managers still run these functions on spreadsheets. We’re seeing more focus from managers on their systems and processes. Some have made the painful move from a spreadsheet environment into a more structured system in recent years. However, there are some managers clinging onto the spreadsheet world where the risk of error, operational effectiveness
and efficiency are all unfavourable. Take a capital call or distribution as an example. On the face of it these should be very simple transactions, but with multiple parties involved, perhaps different versions of agree-ments and side letters, and the use of spreadsheets riddled with human intervention – these can become complex. In a blockchain world, all the original fund records are secure-ly executed and stored. These are made available to all parties grant-ed permission (this concept of “one version of the truth”) and the capital transaction can be processed with all the necessary approvals, with documented delivery and move-ment of funds with minimum inter-vention – this is all done seamlessly and reliably.
The scenario I’ve outlined above could be applied to many of the functions a manager is involved with. Deal execution for example. In this space, intermediary costs such as due diligence and legal can run into millions and can be long and time-consuming processes. Block-chain technology has the capacity to streamline this process among all the parties involved, resulting in shorter time to market and ulti-mately improving returns for the investors.
Now, in a shameless display of self-interest, turning my atten-tion back to assurance activities, I’m thinking about what this could mean for the future of my industry. Let’s look at another example in the PE space – valuations. The manager (and the auditor) is heavily reliant on the data the underlying portfolio company provides when it comes to valuing that company. Now let’s apply blockchain use to this case. Indisputable data shared between
multiple stakeholders on a real-time basis including the underlying port-folio company’s financial records and the other inputs into a valua-tion (such as discount, interest, fx rates, and comps) – you can start to see a picture developing of how and where valuations move from a quar-terly, semi-annual, or annual basis to a real-time basis. The proposition of an integrated, real-time audit is an exciting one and one I’m sure we’ll become accustomed to in the not too distant future. But what could this mean for PE?
Look at the secondary market, principally a much-needed market to provide liquidity to what is an illiquid asset class. Purchasers will typically be looking to acquire an interest in a fund’s remaining assets and/or take on the selling investor’s commitment. Managers are also selling the ‘tail-end’ assets, those assets in a mature fund, which frees up management time and can lock-in accelerated returns. This market has grown rapidly in the past dec-ade and is set to continue. Accord-ing to Prequin, secondary trans-actions in private capital in 2017 totalled approximately $60bn. I can see blockchain and real-time au-dited data (because managers will be required to inform investors of NAV and holdings on a periodic ba-sis) as a platform to remove a huge amount of operational friction from this process.
In 2017, Blockchain Capital raised a portion of its fund by issuing a blockchain token, so investors can sell that token to another investor in a secondary market, thereby allow-ing a fund to lock up the capital it needs, without locking up the inves-tor. This is a really interesting area, especially as we see emerging com-pliance and regulation platforms supporting this.
Do or die… the most successful managers tend to be the ones that are innovative and lead the way on change. Should the application of new technologies lead to outper-formance and cost savings, expect their peers to adapt quickly. Guern-sey is ideally positioned to facilitate managers keen to seize the opportu-nities within the digital and transfor-mation space. Are you ready for the change? I am!
PwC in Guernsey is focused on
alternative asset management
clients who account for more than
85% of our client base, with
private equity being the dominant
asset class. This is what we do!
GUERNSEY 2018 HFM.GLOBAL 15
DRAWDOWN FOCUS LEGAL
he introduction of the Private Investment Fund (Pif) shows why Guernsey is one of the
world's leading fund domiciles and demonstrates its continued ability to meet the needs of fund promot-ers and investors.
The Guernsey Financial Services Commission (the Commission), fol-lowing industry consultation, deliv-ered a simple, flexible, appropriately regulated fund categorisation which recognises that in some cases there is a closer relationship between the fund manager and investors.
The Pif provides a flexible fund structuring option that falls be-tween those funds having more than 50 investors and unregulat-ed investment structures that do not constitute collective invest-ment schemes for Guernsey law purposes.
Although only introduced in late 2016, the Pif is proving to be an in-creasingly popular option for the full spectrum of fund promoters.
Pif structure flexibility – no exclusionsPifs are flexible and may be closed-ended or open-ended. They may be corporates (including cellu-lar companies), limited partnerships, unit trusts or any other vehicle ap-proved by the Commission.
Timing – speed to marketWith a Commission response time of one day for registration, the Pif offers promoters speed to market with a regulated fund product and the flexibility to follow their own timelines. Promoters can place greater focus on the commercial as-pects of their fund.
This response time applies to the registration of the Pif itself and the licensing of the Pif's related Guern-sey manager.
The Pif manager requirement A Pif requires a Guernsey-domiciled and licensed manager (Pif manager) to take responsibility for its manage-ment. This may, for example, be the general partner of a limited part-nership, an investment manager of a company or the trustee of a unit trust.
Such Pif manager requires a li-cence under the Protection of In-vestors (Bailiwick of Guernsey) Law, 1987 (the POI Law), although unlike non-Pif persons licensed under that law, the Pif manager will not be sub-ject to the conduct of business or
capital adequacy rules that ordinar-ily apply.
The Commission, while not impos-ing rules on it, sees the Pif manager as having a role of substance in dis-charging corporate governance. The stated philosophy being that the Pif manager exists for the promoter of the Pif, who will have a relationship with the investors.
The manager/investor relationshipThe Pif categorisation is intended for those arrangements where there is a close relationship between the manager and the investor. As a re-sult, to receive the benefits of the Pif categorisation, the Pif manager is required to declare upon applica-tion for a Pif registration that it has made an assessment of the investors known to be intending to invest, and as far as it has reasonably been able to ascertain, those investors are able to sustain the loss of their invest-ment in the fund at the time of their investment.
The Commission, as part of its continued interaction and respon-siveness to the market, has recently made clear that this declaration is not a warranty. In addition, on top of the close manager/investor relation-ship, to assist in understanding how comfort might be obtained to give this declaration, the Commission
T
Simplicity, flexibility and speed to market
Bryon Rees, of Ogier, outlines the virtues of the Guernsey private
investment fund
Bryon ReesOgier
Advocate Bryon Rees is a partner in Ogier's Guernsey Investment Funds and Corporate teams, and advises on a broad range of investment fund, regulatory, and finance matters. He originally joined Ogier in 2005 and has previously worked at South African law firms, Edward Nathan Sonnenbergs and Deneys Reitz (now Norton Rose Fulbright).
16 HFM.GLOBAL GUERNSEY 2018
LEGAL DRAWDOWN FOCUS
has included information in its an-swers to the frequently asked ques-tions guidance it has provided (see below).
Number of investors – promotion and admissionNo limit has been placed on the number of investors to whom a Pif may be marketed. A feature distin-guishing the Pif from certain similar regimes in other jurisdictions.
Absence of this limit means that having promoted to a potential in-vestor who declines to invest re-
moves the ability for another inves-tor to take that place. It also makes the Pif suitable for open-ended fund structures where investors may come and go.
There is no restriction on the na-ture or type of person who may in-vest in a Pif. In addition there is no minimum investment size stipulat-ed, which is again more favourable than certain comparable regimes in other jurisdictions.
Although there is no limit on the number of investors to whom a Pif may be marketed to, a Pif may have as investors no more than 50 legal or natural persons holding an ultimate economic interest. This excludes where the investment is made by an investment manager acting as agent for a wider group of stakeholders – for example, a manager acting as agent for investors in a collective in-vestment scheme, pension holders in a pension scheme or government funds (local or sovereign).
Subject to the 50 investor restric-tion referred to above, in the first year of the Pifs operation there is no restriction on the number of in-vestors that may be added. In each subsequent rolling 12-month period a Pif may not add more than 30 new ultimate investors.
Information particulars – not requiredThere is no obligation on a Pif to have information particulars (such as offering memorandum, private placement memorandum, prospec-tus or listing particulars), nor to make certain stipulated disclosures. This is again more favourable than certain comparable fund regimes elsewhere.
That said, should there be a desire or need to have information particu-lars they may be prepared, although with the flexibility of no stipulated Guernsey content requirements. If prepared they will be the responsi-bility of the Pif manager.
Simple streamlined application processThe application process for a Pif reg-istration and related Pif manager li-cence is simple. The filing of a single form (Form Pif) with the Commis-sion, together with the application fees and related personal question-naires for certain persons, is all that is required.
The Form Pif requires certain out-line information in respect of the Pif and the Pif manager and includes declarations to be signed by the pro-posed Pif manager and designated administrator (see below).
Rules – those that apply and those that don'tA Pif is a regulated fund subject to the Private Investment Fund Rules, 2016 (the Rules). The Rules are lim-ited yet sufficient in nature, contain-ing requirements for:
• managing conflicts of interests;• submitting certain limited im-
mediate notifications (such as a change of administrator or pro-posals to reconstruct or wind-up), quarterly statistical infor-mation and annual notifications; and
• submitting annual audited ac-counts and report.
As mentioned above, the Pif man-ager will not be subject to conduct of business or capital adequacy rules.
In addition to the above the Pif manager and/or designated ad-ministrator will be required to
ensure compliance with Guernsey anti-money laundering and counter-ing of terrorist legislation.
Frequently asked questions – the Commission respondsApart from the responsiveness it showed in implementing the Pif re-gime, the Commission has continued to show that, not only is it a strong and well-recognised regulator, it is a helpful regulator. It has produced on its website responses to a number of frequently asked questions in rela-tion to Pifs. Such responses provide useful guidance in support of the Pif Rules as to implementation and on-going operation to Pifs.
Designated administrator and other service providersFinally, as regards service providers:• A Pif is required to appoint a
Guernsey licensed and domiciled administrator (known as the "designated administrator"). The designated administrator will as part of signing the Pif applica-tion form confirm to the Com-mission that it has performed sufficient due diligence to be satisfied that the promoter is fit and proper;
• a closed-ended Pif is not re-quired to appoint a custodian. While an open-ended Pif is re-quired to appoint a custodian the Commission is prepared to accept that the designated administrator also takes that role while non-Guernsey dom-iciled custodians will also be considered;
• the Pif and the Pif manager will need to appoint an auditor; and
• the Pif manager is not required to have Guernsey-based direc-tors (although may practically do so for tax or administrative purposes).
Why wouldn't you use a Pif?In conclusion, for a fund that will have less than 50 investors at any point in time (noting the carve out discussed above), the Pif offers un-paralleled flexibility for a regulat-ed fund, as well as substance, cost savings and speed to market, all in a leading fund domicile. In a short pe-riod of time it has become a solution to many. So why not for you?
Although only introduced in late
2016, the Pif is proving to be an
increasingly popular option for the
full spectrum of fund promoters
GUERNSEY 2018 HFM.GLOBAL 17
SECTOR NAMESERVICE DIRECTORY
Estera is a leading global provider of fund administration services. Established for over 25 years, Estera provides fund, corporate, trust and accounting services to clients across the world. It has over 500 highly qualified professionals across 12 jurisdictions onshore and offshore. Estera collaborates with clients and their advisers to deliver smart, considered and most of all practical solutions. Our commercial focus, attention to detail and responsiveness coupled with a resolute commitment to the delivery of service excellence, is what sets us apart.
GUERNSEY [email protected] // T: 01481 720071 PO Box 655, St Peter Port, Guernsey. GY1 3PN
Guernsey Finance - the promotional agency for the island's finance industry internationally - is a joint industry and Government initiative responsible for the promotion of Guernsey. Under the leadership of Chief Executive Dominic Wheatley, the agency ensures that the core values and competencies of Guernsey's finance sector are accepted and respected by the global community, and that financial business development flows in insurance, investment funds, trust, pensions, investment management and banking are enhanced.
LOCATE GUERNSEYAndrew Carey, Head of Locate [email protected] // T: +44 (0)7911 719082 Market Building, PO Box 451, Fountain Street, St Peter Port, Guernsey, GY1 3GXwww.locateguernsey.com
Locate Guernsey promotes and facilitates the relocation of businesses and high value individuals to the Channel Island of Guernsey. A part of the island’s government, the States of Guernsey, Locate Guernsey provides a single contact point that is friendly, confidential and free, for your relocation needs. Guernsey has an international reputation for its financial services in which funds is a growth area. The innovative approach taken in Guernsey makes it an excellent base for fund managers.The beautiful island is self-governing, has a competitive tax environment and an exceptionally high quality of life.
MAITLAND Gareth SmithT: +44 1481 749 362 // [email protected] Van SchalkwykT: +44 1481 749 363 // [email protected]
Maitland is a global advisory, administration and family office firm providing seamless legal, fiduciary, investment and fund administration services to private, corporate and institutional clients across multiple jurisdictions. Our tailored solutions embrace complexity to deliver simplicity by combining our talent, one-firm approach and best-of-breed multi-jurisdictional platforms. We are privately owned and fully independent with 17 offices in 12 jurisdictions, over 1,100 employees and over $250 billion in assets under administration. We leverage our strong values and a collaborative culture to develop and maintain trusted relationships with our clients.
OGIERT+1481 721672 // [email protected]
Ogier in Guernsey focuses principally on finance, including investment funds, private equity and corporate, banking and finance, restructuring and insolvency, and all aspects of trust and private wealth matters and commercial and trust dispute resolution. We act for a large number of leading global financial institutions, investment managers and corporate entities, and are also instructed by many leading law firms and other intermediaries, on many of the noteworthy and complex transactions and cases that involve Guernsey.
PRICEWATERHOUSECOOPERS CI LLPAlex Burne, Director, T: +44 1481 752107, email: [email protected], www.pwc.com/jg
At PwC, our purpose is to build trust in society and solve important problems. It is this focus which informs the services we provide and the decisions we make. With offices in 158 countries and more than 236,000 people, 400 of whom are based in the Channel Islands, we are among the leading professional services networks in the world. We help organisations and individuals create the value they're looking for, by delivering quality in assurance, tax and advisory services.
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18 HFM.GLOBAL GUERNSEY 2018
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Our multi-jurisdictional team of experts provide a full range of services for both open and closed ended funds.
With over 500 people in 12 jurisdictions onshore and offshore, we deliver flexible fund solutions that demonstrate technical expertise, in-depth regulatory knowledge and support your needs.
Call 01481 231 100 or 01481 742 742 to find out more.
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