Joe Truelove examines the Alternative Investment Fund Managers Directive (AIFMD), which has been a principal area of interest for Guernsey since details of the proposed directive were first made public four years ago.
Guernsey is a favoured domicile for illiquid alternative investment funds such as private equity, debt, property and infrastructure funds. It has also attracted a number of promoters of traditional equity funds and funds of funds over the years.
The government, the regulator and the funds industry in Guernsey have been working together with respect to the Alternative Investment Fund Managers Directive (AIFMD) since details of the proposed directive were first made public four years ago. While there has been a certain amount of uncertainty caused by the proposed new legislation and its impact on funds distributed in the EU, Guernsey practitioners have kept up to date with every twist and turn to identify how best to respond and what opportunities arise from this new piece of regulation.
This legislation has been a principal area of interest for the Guernsey Investment Fund Association (GIFA) and its members. The fund forums which we have organised in London over the last four years have included international speakers debating and discussing the value, impact and potential benefits of the Directive to their businesses. Back in Guernsey the GIFA Technical Committee has arranged a series of industry wide briefings and produced updates and briefing notes so that everyone in the local industry is well prepared to assist our clients to meet the additional requirements of the Directive.
Alternative Investment Fund managers and advisors based in the EU are repeat users of Guernsey domiciled investment funds and some of them hope to benefit from the ability to passport such funds throughout the EU once the Directive is implemented.
However, it is also apparent that many Guernsey-based alternative fund managers and other EU and non-EU based fund managers and advisors with Guernsey funds do not want to be captured by what is regarded by some as an unnecessary piece of additional regulation, which is expected to increase the costs of fund management and diminish returns to investors.
So the big question is whether or not to comply with the Directive. However, Guernsey will be able to offer both positions!
Guernsey is almost uniquely placed as a European alternative fund domicile that is not in the EU and therefore whose managers are not obliged to comply with the Directive, but also provides a very well regarded regulatory framework and has the infrastructure and service providers capable of creating AIFMD compliant structures.
Guernsey therefore intends to offer dual regimes from July 2013, which is the deadline for the AIFMD rules to be transposed into EU law. This will enable distribution of Guernsey domiciled investment funds into both EU and non-EU countries via normal marketing routes, including EU national private placement regimes where they remain available. Guernsey is also considering the possibility of operating a Guernsey ‘opt in’ AIFM regime in order to access (on a bilateral basis) EU member states that align their private placement rules with the AIFMD. Guernsey will be engaged in consultations in relation to how third country ‘passporting status’ will operate from July 2015.
Promoters of Guernsey funds are a diverse group with a wide range of structures. For example, Guernsey is well known for private equity as an asset class and these promoters favour a General Partner and Limited Partnership structure. Guernsey is also well known as the offshore domicile of choice for London listed investment funds, which typically use a corporate structure. Less well known is the significant portion of Guernsey fund promoters who have established open ended Guernsey funds whether corporate or unit trust structures typically used for investing in traditional equities portfolios or into other funds. There is therefore no ‘one size fits all’ response to the Directive and each fund promoter will need to carefully consider its regulatory strategy.
Opportunities Provided by the AIFMD
Funds Distributed Outside of the EU
Guernsey funds are popular worldwide and not just for distribution to the EU. We have many funds incorporated in Guernsey which have investors from every corner of the globe including the US, Australia, Switzerland and South Africa. Investors value Guernsey’s easy to understand and proportionate regulatory regime, while fund promoters benefit from working with our pragmatic regulator and responsive service providers. While the AIFMD has an impact on funds managed from or marketed in the EU there is a huge non-EU market which continues as before and represents a massive opportunity for Guernsey as a fund domicile.
Sub Threshold Managers
A large number of EU managers with funds domiciled in Guernsey fall below the thresholds for which the EU AIFMD becomes a requirement. We envisage that Guernsey’s non-EU AIFMD equivalent regime may become a good way of launching a start up fund and associated fund manager. This could work equally well for open and closed ended funds in pretty much any asset class.
Fund managers often need to build up a track record as a collective group of individuals before they can entice institutional investors to place significant funds with them. Guernsey is therefore extremely well placed for offering solutions to start up managers who have a small number of friends and family interested in investing alongside the founders. Once a track record is built up then there will be an opportunity to make the fund AIFMD compliant and open up to bigger investors.
Non Fund Structures
Private equity fund promoters have been finding it very difficult to fund raise for some time now. This has led to an increase in the numbers of investment vehicles which are not classified as funds at all. For example club deals, joint venture arrangements and standalone investment holding companies.
In the liquid asset classes managed accounts represent a further opportunity for the right investment manager to manage a portfolio on behalf of one significant investor. These often require the services of a fund administrator and custodian although they are not funds because the investor will want similar access to information, reporting and risk management in place.
Compliance and Regulatory Advice
With increased regulation comes an increase in the volumes of work required to comply with that regulation. Work volumes are likely to increase in Guernsey as a direct result of the proposed introduction of the AIFMD. Guernsey firms are very well placed to assist Guernsey based fund managers and EU based promoters of Guernsey schemes to understand the impact of the Directive on their activities and provide them with the back and middle office support they will need.
There is no clear theme at the moment but individual managers are considering the various structures which they currently have and how best to make use of them with respect to their fund ranges. Some managers are likely to move management into the EU and some may prefer to move management out of the EU as a result of the Directive. The local law firms are being kept busy with transfers in both directions at the moment.
Guernsey as a jurisdiction is well served by an impressive number of licensed custodians. They are typically part of large international banks like JP Morgan, Northern Trust and State Street or are part of smaller banking groups like Bank of Butterfield and Kleinwort Benson. Most if not all of these are accustomed to act in a role not altogether dissimilar to that of a depositary as described by the Directive with respect to Guernsey open ended schemes. The requirement under the Directive for closed ended schemes to have a depositary therefore represents a potential increase in the number of business opportunities for licensed custodians.
Fund administrators of illiquid funds, including property and private equity in particular, are also keen to become involved with the role of depositary with respect to non financial assets and here again there is a readiness by those specialist service providers to accept that additional responsibility.
Self Managed Funds
In the listed closed ended fund sector, which Guernsey dominates, the Association of Investment Companies has proposed that its members are managed by their boards of directors. In that case if the fund is domiciled in Guernsey and the fund is self managed it will not be caught by the AIFM Directive. Guernsey, which has a ready pool of experienced and highly qualified non-executive Directors (NEDs), can certainly accommodate the option of domiciling self managed funds there if that is the decision of the board. It is standard practice in Guernsey for board meetings to physically take place as opposed to meetings held by resolution.
Because of Guernsey’s dominance in the listed fund sector NEDs and service providers in Guernsey have extensive experience of following the UK Governance Code and the AIC Code as well as the various listing rules. This best practice has spread into the other sectors of Guernsey’s investment fund industry and is supported by the Guernsey Code of Corporate Governance. NEDs in Guernsey are not limited to attendance at four board meetings a year; they are actively involved in the management of the funds and approving individual investments, performing detailed analysis outside of board meetings and also physically visiting real assets wherever they are situated. One trend I have noticed recently is for NEDs to be paid for provision of services for a fixed number of days per annum with a time cost fee basis provided for additional days because of the potential variability of the workload.
Risk Management and Portfolio Management
An AIFM cannot delegate both of these activities and therefore many are considering the implications for existing fund models and where activities are best placed going forward. Luckily for Guernsey and AIFMs established there we have firms with a background and expertise in these disciplines. There is an emerging trend for a number of managers who wish to set up their own offices and hire their own staff directly to perform one or both of these roles on the island. Fund management as opposed to pure fund administration is thus becoming a growth area and discipline in its own right. This is a benefit of our diversified funds sector, which includes significant numbers of people working in banking, international settlements, portfolio management and risk management as well as fund custody and fund administration. Many individuals have acquired transferable skills and have considerable operational experience which adds value to fund managers seeking to further develop their businesses here.
Attracting Traditional Fund Managers
As UCITS schemes are not caught by the AIFMD at all, there is an opportunity for Guernsey-based fund managers with liquid investment strategies to promote UCITS funds established in the EU while retaining their existing Guernsey domiciled funds for sale to non-EU investors. A number of promoters use Guernsey as a domicile for either feeder funds or parallel investment funds so that they can meet the demands of an international client base some of whom prefer a non-EU investment vehicle.
Guernsey is also regularly chosen to provide services to non-Guernsey schemes. Administration, custody and management of non-Guernsey schemes may be undertaken by Guernsey based service providers. This has been a growth area where EU based fund managers with schemes incorporated and domiciled in a different time zone have preferred to take advantage of Guernsey’s location and high quality service provision but also where non-EU based managers require to have administration and corporate governance taking place in the time zone where they are investing. A number of Guernsey law firms have also acquired or opened offices in other jurisdictions or hired non Guernsey lawyers to provide BVI or Cayman legal advice from Guernsey.
Guernsey is well placed to respond to the needs of fund promoters in an ever changing regulatory environment. Guernsey has a geographically well diversified investment funds sector and a wide range of service providers to accommodate a variety of asset classes and to suit all styles of fund managers from Blue Chip to small start ups. Guernsey’s dual track approach continues to reinforce our belief that Guernsey is an innovative, responsive and well regulated jurisdiction, with the legal and regulatory firepower to provide cutting edge products and services to the international fund management community.
AIFMD provides many opportunities for Guernsey service providers to add further value to their clients.
Joe Truelove, Vice Chairman of the Guernsey Investment Fund Association, is a Director of Kleinwort Benson (Channel Islands) Fund Services Limited. Joe is a Chartered Accountant with a diverse range of experience in the investment fund industry which has included roles in audit, financial control, operations, business development and fund administration. His investment fund industry experience includes a wide range of traditional and alternative asset classes and open, closed, listed and private investment fund structures.