Fiona Le Poidevin, of Guernsey Finance explains why Guernsey is a leading investment funds domicile and why it attracts significant business from the MENA region.
In July, the MENA Private Equity Association published its annual report for 2012. It reported that the fundraising environment remained relatively challenging with a decrease in total funds raised compared to 2011. However, the private equity industry in the Mena region was continuing to show signs of recovery in 2012 with an increase in the number and total value of known investments compared to the previous year. It will be very interesting for us to hear how the Mena private equity community is faring this year when we attend the SuperReturn Middle East conference in Abu Dhabi in October. The conference has become a staple of our marketing activity in recent years. This year, the representatives joining us from Guernsey's investment funds sector will be Richard Avery-Wright from asset manager RAW Capital Partners, Mark Douglas of fund administrator Mercator and Darren Bacon from law firm Mourant Ozannes. We are reminding private equity managers in the Middle East that during the past 50 years Guernsey has established a reputation as a leading investment funds domicile. It possesses a wealth of expertise and first class infrastructure for the structuring, management, administration and custody of not just traditional funds but also alternative and esoteric asset classes. Indeed, during the past two decades, the sector has seen the balance of business move from being largely retail, equity-traded/cash-based schemes to predominately institutional and alternative funds, especially private equity. This period has also seen us attract significant business from the Mena region.
Mena business in Guernsey
Mena asset managers with Guernsey-domiciled investment funds include Arab Bank, Ahli United Bank, Global Investment House, Kuwait Investment Company, MENA Capital, Mubadala, the National Bank of Abu Dhabi and Strategia Investment Company. More specifically, Arab Bank has a number of investment products domiciled in Guernsey. The funds, structured within Protected Cell Companies (PCCs), have been set up to attract investment from institutional clients in the Mena region. Examples include the AB MENA Feeder Fund, the IIAB Sukuk & Murabaha MENA Fund and the IIAB MENA Feeder Fund which were each established with legal advice from Mourant Ozannes and are serviced by local administrators Legis and custodians Butterfield Bank. All three are listed on the Channel Islands Stock Exchange (CISX) and were established adhering to Shariah principles. Locally based Argyll Investment Services (now part of MitonOptimal) was responsible for the launch of the World Shariah Funds PCC Limited, a Guernsey-based suite of Islamic-compliant investments, listed on the CISX. The legal advice was provided by Ogier and the fund administrators are Legis. In addition, other Mena investment houses such as SHUAA Capital and the Islamic Development Bank have their funds domiciled in another jurisdiction but the administration is carried out in Guernsey due to our mature infrastructure and expertise.
Infrastructure and expertise
The net asset value of investment funds under management and administration in Guernsey reached more than £286bn (US$452bn) at the end of June 2013 – up 5.6% year on year and 26% in the last three years. Within these figures, private equity has experienced particularly strong growth, reaching more than £86bn (US$136bn) at the end of June 2013 – up 6% in the year and 65% since June 2010.
Guernsey's expertise in the private equity space was confirmed by a Private Equity News and State Street survey where 61% of chief financial officers who responded said the island was their preferred destination for private equity outsourcing. Guernsey-based administrators range from large, multinational organisations to independent, boutique providers. These include specialised private equity fund administrators such as Alter Domus, Augentius, Aztec, International Administration Group (IAG) and Ipes, as well as globally recognised names such as HSBC, JP Morgan, Northern Trust, RBC and State Street who can also act as custodians. A large part of their business relates to Guernsey open and closed-ended funds, which are now promoted and sponsored by leading institutions in more than 55 financial centres globally. These can be established through a range of flexible investment vehicles such as companies, limited partnerships, unit trusts, the Guernsey-pioneered PCCs and Incorporated Cell Companies (ICCs). However, the high levels of expertise and mature infrastructure of the island's investment funds sector mean that Guernsey providers are often asked to service schemes domiciled in another jurisdiction, such as the Cayman Islands or the British Virgin Islands (BVI). As previously mentioned, some Mena asset managers already take this approach. Managers who have used the 'non- Guernsey schemes' route have been so impressed by the service standards in the island that they have either migrated funds to, or established subsequent structures in, Guernsey. This is something we might expect to see continue, if not accelerate, as the legacy of the global financial crisis leaves fund managers and investors increasingly seeking greater substance to their arrangements. Indeed, Guernsey is also home to some of the leading global private equity houses, including Apax, BC Partners, EQT, Mid Europa, Permira and Terra Firma. They not only have their funds serviced in Guernsey but have also established a physical presence in the island with offices and staff. This is another trend we might expect to see continuing, if not accelerating, especially among European-headquartered investment houses who are seeking to ensure there is sufficient substance behind their arrangements in order for their management entities to be outside the EU for the purposes of the EU's Alternative Investment Fund Managers Directive (AIFMD).
Regulation
The AIFMD seeks to regulate EU-based Alternative Investment Fund Managers (AIFMs), managers of EU established Alternative Investment Funds (AIFs) and managers that market AIFs into the EU. So, in essence, if either the manager or the fund has a relationship with the EU then the Directive comes into play. Guernsey is not in the EU (although it is in the European time zone) and therefore, is not required to implement the AIFMD. However, Guernsey has evolved its regime to ensure that we can continue to service both EU and non-EU business in the most effective way. Managers and funds with no connection to the EU continue to be able to use the existing regulatory regime which is completely free from the requirements associated with the AIFMD, thereby having significant operational and cost benefits. Yet, Guernsey can also offer managers access to the EU markets through the continuing National Private Placement (NPP) regimes until at least 2018, while the Island is also in the process of establishing a fully equivalent AIFMD regime from 2014. This means that Mena investment houses can use Guernsey for either non- EU or EU business. Indeed, the island is ideally placed for Mena fund managers to access European capital markets. Guernsey structures can list on the CISX, Euronext Amsterdam, Frankfurt and the London Stock Exchange (LSE). Indeed, there are more non-UK entities listed on the LSE markets from Guernsey than any other jurisdiction globally. Guernsey also offers access to other exchanges around the world, including Toronto, Australia and Hong Kong.
Conclusion
The conclusion is that Mena investment houses, in particular those wishing to access EU markets, should be aware of Guernsey's strength as a private equity funds centre. The Mena investment community already uses structures or services in the island and the changed international environment means that Guernsey is very much the right place at the right time for Mena private equity business.
