By Fiona Le Poidevin, Guernsey Finance – Guernsey has been on the front foot throughout the conception, development and implementation of the Alternative Investment Fund Managers Directive (AIFMD).
Guernsey has made early decisions wherever possible in terms of how its funds industry responds to the directive, while awareness among fund managers of the requirements imposed by AIFMD has been somewhat mixed. Furthermore, and as anticipated, the way the different EU Member States have applied conditions has been inconsistent. Indeed, at the end of May, Bill Prew, Chief Executive of the independent depositary services Indos Financial, claimed that some 10 months on from the July 2013 transposition deadline for AIFMD, a third of EU member states had still not fully implemented the legislation at national level – with not long left until the one year transitional period that was allowed comes to an end on 22 July 2014.
Guernsey’s proactive response to AIFMD is evidenced as far back as 7 June 2013 when it became one of the first third country jurisdictions to introduce its own domestic AIFMD marketing rules. At that time our regulator, the Guernsey Financial Services Commission (GFSC), also published a set of frequently asked questions (FAQs) to help with AIFMD implementation as it unfolded. This was then followed by our signing of bilateral cooperation agreements with 27 securities regulators from the European Union (EU) and the wider European Economic Area (EEA)*. The cooperation agreements which became applicable from 22 July 2013 provide a set of arrangements for the on-going supervision of alternative investment funds, including hedge funds, private equity and real estate funds.
At the end of 2013 Guernsey also released the set of rules which form its opt-in regulatory regime of measures equivalent to AIFMD. The AIFMD Rules, 2013, took effect from 2 January this year, ahead of when, as a third country, Guernsey would have been required to do so. The introduction of the opt-in regime means that we have another piece of the jigsaw in place to ensure that Guernsey funds can continue to be distributed to both EU and non-EU countries in the future.
It is clear that the uncertainty surrounding AIFMD has not been aided by the fact that several jurisdictions, such as the UK, have had transitory years while others have not. However, with this period coming to a close at the end of July, it is important for managers to know where they stand going forward.
Managers and promoters have known since early 2013 that Guernsey was introducing a dual regulatory regime – thus providing them with certainty to proceed with making decisions so far as the commercial and economic climate permitted.
Guernsey is not in the EU or wider EEA (although it is in the European time zone) and therefore, is not required to implement the AIFMD. Although Europe remains one of our biggest markets, we also have a substantial and increasing amount of funds business which originates outside of Europe.
As a result, Guernsey’s regulatory regime ensures it is possible to continue to distribute Guernsey domiciled investment funds into both EU and non-EU countries via the existing rules which remain in place for those not requiring an AIFMD fund, including those using national private placement (NPP) arrangements and those marketing to non-EU investors; as well as the opt-in regime previously referenced which Guernsey brought into play ahead of schedule.
The approach means managers and funds with no connection to Europe can continue to use the existing regulatory rules which are completely free from the requirements associated with AIFMD and as such, will have significant operational and cost benefits. Where it is desirable or otherwise necessary to do so, in order to obtain authorisation under AIFMD, a manager will need to comply with various organisational, operational and transparency obligations, which will create significant additional compliance costs, some of which will likely be passed to investors in the fund.
Meanwhile, thanks to having the 27 bilateral cooperation agreements in place, Guernsey’s position as a third country means our managers and funds who want to access Europe continue to be able to use NPP regimes, which are expected to remain in place until at least 2018.
It is also expected that a full passporting regime for non-EU AIFMs will be implemented from July 2015. Guernsey intends to ensure that our managers will be ideally placed to take advantage of being able to market AIFs on a pan-European basis with a single authorisation, as passporting is currently envisaged to operate.
The attraction of Guernsey for fund managers wishing to market into Europe is that it can provide a European platform but one which is not actually in the EU and therefore can offer optionality and all-important cost saving opportunities for platforms.
For those marketing into Europe, we have already seen that the NPP route is being favoured by many – as it means little or no change to how things were done before AIFMD.
It is expected that full-blown AIFMD compliance will only be sought if there are particular commercial reasons to do so. For example, it makes commercial sense for a fund manager marketing almost exclusively to Europe to have a fully AIFMD compliant platform. However, this does not have to be based in a mainland European domicile and indeed, it could be a Guernsey platform given that there is a fully equivalent, opt-in AIFMD route to market in place.
Managers should review whether the pan-European marketing model is relevant to their investor base. Many managers have increasingly geographically diverse investors and, therefore, it is essential to have a platform which suits all. European directives – such as AIFMD but also the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive – cater for European investors; as such, if you don’t need UCITS/AIFMD or only need limited access to them for certain investors, then it is advisable (and possible) to structure in a way that will greatly reduce the obligations and costs that come with those regimes.
For those managers with elements of EU and non-EU business, it will be possible to break the non-EU business away into a parallel or feeder structure for which AIFMD compliance would neither be required nor necessary. The potentially onerous administration burden and costly compliance with the AIFMD will mean that parallel structures are likely to be given serious consideration. Conversely, if a manager has a platform in a mainland European domicile then it will have to comply fully with the AIFMD even if there were a large proportion of non-EU investors. European mainland platforms do not offer the ability to separate the reporting obligations away from non-EU investors, as with a Guernsey platform.
One important factor is that AIFMs should ensure that they do not fall foul of the letter box entity provisions, i.e. sufficient substance is needed to demonstrate that the management entity is established outside the EU, if that’s what it is aiming to achieve for AIFMD purposes. Therefore, investment houses must ensure they have enough substance in the domicile of their fund if they opt for it to be self-managed, for example.
Guernsey has an advantage over a number of other third countries in this respect as there is already significant substance present in fund structures. For example, large hedge fund managers such as BlueCrest and Man Group and private equity houses such as Apax, BC Partners, Mid Europa, and Permira have Guernsey-domiciled funds as well as offices and staff based here. Indeed, BlueCrest emphasised its commitment to Guernsey when it became the first firm to register a Limited Liability Partnership (LLP) in Guernsey on the same day that the Limited Liability Partnerships (Guernsey) Law, 2013, came into force on 13 May this year.
Administration providers range from major international names such as Northern Trust, State Street and Citco to specialist independent providers. There is also a significant pool of experienced non-executive directors across a broad cross-section of industries.
There are also a number of global custodians based in Guernsey and they are being supplemented by those specialist fund administration providers who are applying to establish Guernsey-based depositaries, particularly to service private equity and real estate funds which previously were not required to have a depositary, but who can take advantage of a depositary-lite regime for non-financial assets.
Indeed, Gentoo Depositary Services Limited was the first non-financial asset depositary to be licensed under the GFSC’s AIFMD Rules, 2013. Its launch at the end of April this year along with similar plans by other local administrators allows fund managers the ability to choose a depositary that is familiar with both the domestic regulatory regime and the private equity asset class in order to manage the additional regulatory pressures of AIFMD. Whilst it is possible to appoint an EU depositary for a non-EU AIF, the ability of local administrators to offer a Guernsey-based depositary will help support the geographic residence of Guernsey funds.
Guernsey has carved out a prominent place for providing access to international stock exchanges, particularly on the London Stock Exchange (LSE) where more Guernsey companies have had successful Initial Public Offerings (IPOs) of non-UK entities than from any other jurisdiction in the world; there are currently 125 Guernsey entities listed on the LSE with a combined market capitalisation of £34 billion.
This listings capability verifies Guernsey’s strong ethos of corporate governance, as the two largely go hand-in-hand as companies are subject to and adhere to the rules applicable to the various stock exchanges on which they list.
Guernsey’s funds industry itself has stood up admirably to the challenges posed by AIFMD and saw a notable increase in the number of new funds being approved for domiciling or servicing in the Island during 2013. There were a total of 103 additions during the course of the year, bringing the net asset value of funds under management and administration in Guernsey to £266 billion at the end of December.
The fund launches spanned a wide range of asset classes but some of the most notable occurred in the energy sector were that of Bluefield Solar Income Fund and The Renewables Infrastructure Group, with City sources quoting the latter as the largest IPO of a clean energy firm in London, with an initial raising of £300m in July 2013.
This focus on energy has continued into 2014 with the launch of NextEnergy Solar Fund Limited. The Guernsey closed-ended collective investment fund successfully raised £86 million for its listing on the premium segment of the main market of the LSE in March, while in April the John Laing Environmental Assets Group Limited raised proceeds of £160 million for its own placing and IPO on the LSE.
Other notable Guernsey fund launches in 2014 have included the likes of European private equity giant HitecVision’s launch of HitecVision VII L.P., a Guernsey closed-ended collective investment scheme. With a focus on control buyouts and growth capital investments in the oil and gas industry, the fund attracted commitments of US$1.9 billion for its February launch. X2 has also chosen Guernsey as the base for its new natural resources venture, X2 Resources Partners LP Inc. X2 Resources has raised US$2.5 billion of committed equity capital funding and up to a further US$1.25 billion of conditional equity capital funding for its Guernsey closed-ended investment vehicle.
There have been many other successful IPOs spanning infrastructure, real estate, aircraft leasing, shipping and distressed and mezzanine debt. These fund launches can certainly be seen as something of a vote of confidence in Guernsey’s approach to AIFMD as many have come after the implementation of the directive across Europe. While these remain early days in the evolution of AIFMD, the initial indications are positive, with Guernsey’s funds industry still busy domiciling, re-domiciling and servicing more new funds in 2014.
What is important going forward is that managers realise that an EU AIFMD compliant platform is not the only answer and that in particular, Guernsey offers a dual regulatory regime for the continued distribution of funds into both European and non-European countries.
The early introduction of our opt-in AIFMD equivalent regime from 2 January this year is testament to our thorough and pro-active approach. Guernsey’s optionality also means clients can be serviced in the manner most appropriate to their specific circumstances.
Guernsey fund facts
Guernsey has signed 27 co-operation agreements with the securities regulators from the following EU/EEA countries: Austria; Belgium; Bulgaria; Cyprus; Czech Republic; Denmark; Estonia; France; Finland; Germany; Greece; Hungary; Iceland; Ireland; Latvia; Liechtenstein; Lithuania; Luxembourg; Malta; Norway; Poland; Portugal; Romania; Slovak Republic; Sweden; The Netherlands; and United Kingdom.