By Tony Lane, Partner in the Corporate and Finance Group of Carey Olsen.
New fund products for Guernsey - the Private Investment Fund (PIF) and the Manager Led Product (MLP)
Guernsey has introduced two new regulated fund products, each of which are designed to offer flexibility and ease of establishment where the investor profile is appropriate.
Most recently, in December 2016, the Private Investment Fund (PIF) was introduced in order to offer a product that is designed for funds that will be held by relatively small numbers of sophisticated investors. The PIF is an entirely new category of fund for Guernsey and offers a number of advantages over traditional, more highly regulated funds. The key features are:
- The application for a PIF will be processed by the GFSC within one business day.
- The fund documents for a PIF are not subject to any prescribed disclosure requirements, which potentially reduces the cost and processing time for launching a fund.
- A PIF must appoint a Guernsey licensed manager, which must provide warranties to the GFSC on the ability of the investors to suffer loses.
- The PIF is subject to the Private Investment Fund Rules but the manager is not subject to conduct of business rules or financial resources requirements.
- A PIF can have no more than 50 investors at any one time, and no more than 30 investors may be admitted in any 12 month period.
- There is no limit on the number of potential investors to whom a PIF may be marketed.
The PIF has generated significant interest since being introduced. While the GFSC has always been flexible in the way in which it has applied fund regulation, having regard to the risk to investors, it appears that managers are attracted by the guaranteed regulatory flexibility offered by this structure.
The other new product is the Manager Led Product (MLP) that has been adopted in anticipation of the extension to Guernsey of the third country passport under the AIFMD. The regulatory focus of the MLP regime is on the investment manager (the AIFM) rather than the fund and therefore mimics the approach taken by AIFMD. In order to qualify for the MLP regime, the AIFM will need to comply with Guernsey's optional AIFMD-compliant regime. Therefore, it will be most useful when the third country passport is available, as AIFMs will then need to opt in to the AIFMD-compliant regime in order to make use of the passport.
Once the AIFM has opted in to the MLP regime, neither the fund nor any general partners or other fund entities would be subject to regulation in their own right. The AIFM would sponsor the structure and assume all regulatory responsibility. As a result, the MLP should simplify local regulatory requirements for structures which choose to be AIFMD complaint.
Increasing substance
We continue to see managers looking to increase their substance on the islands and opening a permanent physical presence. This is driven by a number of factors, not least the desire to ensure that the manager qualifies as a non-EU AIFM. Often this substance is achieved by a combination of key personnel relocating to the islands and the hiring of local staff with expertise from the fund management industry. At the very least the local team will conduct day to day portfolio management and/or risk management, thereby making a high value contribution to the management function.
AIFMD – third country passporting delayed
In July 2015 Guernsey and Jersey were each given positive assessments by ESMA and it was confirmed that there were no significant obstacles impeding the application of the third country passport to the islands, when that process is eventually switched on. This assessment was repeated in July 2016. In effect, the islands are at the front of the queue (alongside Canada, Japan and Switzerland) and nothing further has been asked of the islands in this regard. However, the EU Commission has not yet finalised its assessment of the ESMA advice and so, for now, we wait and continue to rely on national private placement regimes in order to make Channel Islands funds available to EU investors. This is a tried and tested route that is familiar to, and generally liked by, managers.
The UK's Brexit vote has undoubtedly affected the timetable for the third country passport, although there ought to be no reason why the passport could not be switched on ahead of Brexit, with the UK being granted third country passporting rights upon Brexit. It is possible that the third country passport may not become live until late 2017, and that it may not occur until after AIFMD II.
PRIIP – delay for KIDs
Certain Channel Islands funds, in particular listed funds, will qualify as Packaged Retail and Insurance-based Investment Products (PRIIPs) and will therefore need to comply with the KIDs rules when they are imposed. The need to provide KIDs has been delayed, with the original start date of 1 January 2017 being pushed back to 1 January 2018. This is to be welcomed as the content requirements for KIDs had not been finalised.
Lessons for Brexit – being a third country
Representatives from Guernsey and Jersey have been liaising with UK industry bodies and the UK government in order to share their experiences gained from decades of having a significant trading relationship with the EU, whilst being outside the EU. A large proportion of Channel Islands funds involve the channelling of non-EU investment into the EU, or providing sophisticated EU investors with investment structures that would be difficult, or expensive, to provide from within the EU.
The UK and the Channel Islands are not directly equivalent (the Channel Islands have no UCITS industry, for instance) but there are useful lessons to be learned regarding the adoption of EU-equivalent regulations, and the mutual benefits that can be gained from co-operation.
A quiet year for listed funds
Guernsey and Jersey continue to rank second and third, respectively, on the league table of the number of entities listed on the London stock exchanges, with the majority of such entities being investment funds. Only the UK itself has more London-listed entities. Nevertheless, the anticipation of the UK's Brexit referendum had an early dampening effect on new listings during the first half of 2016, only to be followed by a continuation of that dampening effect once the country voted for Brexit, much to the surprise of many in the industry. This was particularly noticeable given that 2015 was a bumper year for fund listings in London.
The "Trump rally" has returned some confidence into the markets but it remains to be seen whether that will be sustained into 2017, and whether the Brexit negotiations will continue to make IPOs difficult. We are aware of a number of possible launches in the pipeline, and hope that 2017 will be more like 2015 than 2016.
About the author
Tony advises clients on a wide range of corporate matters including mergers and acquisitions, equity fundraisings, flotations, joint ventures, corporate governance issues and the rules of public equity markets. He also advises on all aspects of the establishment, regulation and operation of investment funds.
Carey Olsen is a member of our International Funds Network – a non-exclusive network of law firms who share our values and provide expert advice and excellent service at a fair price in their jurisdictions.