Nov 2008 Guernsey Hedge Fund Services 2008 · Since then the offshore fund industry has largely...

Harwood fundreform processcompleted

Outsourcing modelrelieves strain onisland resources

New administratorsadd to Guernsey’sspecialist appeal

GuernseyHedge FundServices2008

Nov 2008

GUERNSEY Hedgeweek Special Report Nov 2008 www.hedgeweek.com | 2

CONTENTS

In this issue…03 Regulatory reforms help fund industryspread its wingsBy Simon Gray

05 Flexibility wins out in a changingenvironmentBy Gavin Farrell, Ozannes

09 Legal changes complete new fundregime By Ben Morgan and Tom Carey, Carey Olsen

11 Outsourcing model eases island’sresources constraintsBy Simon Gray

13 Growth continues despite marketturmoilBy Stuart Mauger, RBC

17 Fund industry ready to exploit crisisopportunitiesBy Neale Jehan, KPMG

19 Providers make the difference forstart-upsBy Tom Hadley, Fortis

21 Fund clients warm to Guernsey modelBy Bob Brown, Equity Fund Services

Special Report Editor: Simon Gray, [email protected]

Sales Manager: Simon Broch, [email protected]

Publisher/Editor-in-Chief: Sunil Gopalan, [email protected]

Marketing Director: Oliver Bradley, [email protected]

Graphic Design (Special Reports): Siobhan Brownlow at RSB Design

Photographs: Courtesy of Guernsey Tourist Board & Guernsey Finance

Published by: Hedgemedia Limited, 18 Hanover Square, London W1S 1HX

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Like other jurisdictions around the worldwhose fortunes depend to a degree on thehealth of the investment industry, Guernseyhas been watching the storms buffeting thefinancial world over the past year with someconcern, but so far at least there is little orno evidence that the island’s financialservices industry is suffering.

Earlier this month Lipper reported thatGuernsey’s fund servicing industry grew by20 per cent over the 12 months to the end ofJune to reach USD331.4bn (GBP166.5bn) innet assets. The industry regulator, theGuernsey Financial Services Commissionreported GBP207.2bn in fund assets undermanagement and administration in the island

in mid-2008, a difference that may beaccounted for by funds that are domiciledbut not serviced in Guernsey.

Either way, the various problems that havebeset private equity funds, funds of hedgefunds and property funds – in that order, themain constituents of Guernsey’s fundindustry – have at most slowed the island’ssteady growth, kick-started three years agowith the introduction of the QualifyingInvestor Fund regime and subsequentlybolstered by a series of reforms whoseblueprint was set out in spring 2006 by theHarwood Report.

The report was drawn up by a committeeheaded by distinguished Guernsey advocate

O V E R V I E W


Regulatory reformshelp fund industryspread its wings

By Simon Gray

➧ p6

Creation & advice for beautifully

CorporateEmploymentLitigationPrivate Client, Property & PlanningTrustsFamily

Guernsey has always been recognised as avery stable yet highly flexible offshorejurisdiction with good but not excessiveregulation. That means that despite blips inthe regional or global economy that mayresult in a slowdown in capital-raising, byvirtue of its versatility and its regimeGuernsey is always adaptable to any newtype of product that suits the changedeconomic environment.

It’s important to make the distinctionbetween the island and other offshorejurisdictions that have most of their eggs inthe same basket, and are particularlyvulnerable to the drying up of one particulararea of work, because they may not havethe infrastructure or adaptability to supportany other type of business. By contrast,Guernsey has historically been ready toaccommodate new types of structure oractivity provided that the Guernsey partiesinvolved are comfortable with it.

This position stems in part from thesituation around 20 years ago when weaccepted the alternative products and non-blue chip promoters that our maincompetitors were refusing. At that time, theretail market for offshore fund centres wasmuch larger than that for alternativeproducts, but Guernsey was ready andwilling to provide a home for this business.

Since then the offshore fund industry haslargely switched from retail to alternativeproducts, leaving Guernsey in prime position,thanks to the years of experience enjoyed byits law firms, auditors and fundadministrators, as well as by the GuernseyFinancial Services Commission, which is ascomfortable with exotic investment strategiesas it with the most conservative treasury-style authorised collective investmentscheme.

Other jurisdictions, of course, have also

embraced alternative investment funds, butGuernsey continues to enjoy the advantageof the flexibility it has developed in dealingwith new or unusual types of product. Forexample, the island was the first to introducethe protected cell company (PCC), astructure that has now been adopted bymost of its offshore competitors and agrowing number of onshore jurisdictions.

The PCC, widely used today for fundstructures as well as by the captiveinsurance industry, encapsulates theflexibility and foresight with which Guernseyhas over the year welcomed new types ofstructures and products. The island hasbeen quick to embrace vehicles such ascommodity funds, private equity funds andfunds of hedge funds – helping to spark theboom in permanent capital structures foralternative managers with the launch of KKRPrivate Equity Investors in 2006.

The onset of the credit crunch over thepast year has resulted in a reduction in thenumber of large fund IPOs and listings ofclosed-ended vehicles that have been ahallmark of Guernsey’s fund industry overthe past couple of years. By contrast, theisland is seeing a growing number ofstructures created to capitalise on turbulentmarket conditions, such as distressed debtfunds and private equity vehicles whosefocus has switched to a more venturecapital-style buy-and-build managementapproach.

This flexibility has over the years hasenabled Guernsey’s fund administrators tobuild up a wide range of expertise acrossthe alternatives sector and to develop areputation for creating innovative servicingsolutions for new types of product. Thinkingoutside the box has become a way of life forthe industry, one that continues to serve itwell. ■

O Z A N N E S


Flexibility wins out in achanging environment

By Gavin Farrell

Gavin Farrell is a partner withOzannes in Guernsey

Peter Harwood of Ozannes, based on inputfrom the financial services industry, theregulator and the political authorities. It setout a new philosophy for the regulation ofthe industry based on supervision of serviceproviders rather than of products, which alsomade it possible to launch products swiftlyto meet market needs instead of having towait for regulatory approval.

The changes, which are now all butcomplete, have made it easier for promotersand Guernsey service providers to reactrapidly to the new challenges thrown up bythe credit crunch and its shock waves,according to Peter Niven, chief executive ofGuernseyFinance. The promotionalorganisation, which recently staged its latestfund industry seminar in London, plays a keyrole in ensuring that Guernsey’s marketingmessage is effectively conveyed in financialcentres around the world.

Niven says some of the froth may havecome off the fund industry over the past 12months, but it remains in fundamentallyextremely solid shape. “We’re still seeing alot of business and hear that there is plentymore in the pipeline waiting to comethrough,” he says. “However, lawyers reportthat things are not as manic as in the headydays of mid-2007 – it’s retreated to moresensible levels. In one sense the marketproblems seem to have separated the wheatfrom the chaff. Those coming to market aretop-level promoters, and the average volumeof individual pieces of business is probablyhigher.”

He believes that in some respects thekind of business that comes to Guernseymay be intrinsically less affected by thecredit problems. “A lot of business now is atthe corporate end of the market, like closed-ended funds in often quite esoteric assetclasses,” Niven says. “Whether it’s privateequity and funds of hedge funds or assetssuch as timber, business is dominated bycorporate and pension fund money lookingfor a effective diversification for theirportfolios. Also, they are long-term investors,not quickly in and out.”

Roger Le Tissier, a partner in Guernseywith law firm Ogier, agrees that the island’sfund business continues to ride high.“Everyone’s talking about the credit crunch,but it’s not lessening business flows,” he

says. “We are up on all of our business fromlast year, except perhaps securitisation, andlast year was an extraordinary one. I don’tsee a detrimental effect on the kind ofbusiness we are doing. There are hedgefunds that are enjoying the volatility, it’ssomething they trade on.”

The Harwood reforms are scheduled to becompleted by a new package of legislationand regulation extending to open-endedfunds the benefits of the registered closed-ended fund regime introduced last year. Thenew Protection of Investors legislation thatwill encompass both types of fund has beenpassed by the States of Guernsey, theisland’s legislature, and awaits approval fromthe Privy Council in London in the final stageof the legislative process.

“The Commission has rewritten theregulations accompanying the new law, butthese largely reflect existing practice,” Nivensays, noting that the legislation will be ofparticular benefit to sectors that are used toopen ended-structures, like private equity.“Rather than going through the tortuousregulatory route, they can be registered andsigned off by the administrator, increasingspeed to market. A lot of funds fall by thewayside because they miss their window ofopportunity. Where promoters see anopportunity, they are desperate to get tomarket as quickly as possible. They can’twait three months, it will have gone.”

Ozannes partner Gavin Farrell argues thatthe island’s flexibility has already helped it togain business in an environment where the

O V E R V I E W


p3 ➧

ability to react quickly is if anything evenmore important. “We’ve been in a position toadapt quite quickly to the current trends andchanges in the financial services industryand in the economy,” he says.

“Obviously with the credit crunch thenumber of large closed-ended listings andpublic offerings has taken a bit of adownturn. However, a number of other typesof structure are being set up to takeadvantage of the market conditions, such asdistressed debt funds. In addition, privateequity firms seem to be returning to a moretraditional venture capital approach, andmany of these funds are being set up inGuernsey, probably because of our degreeof flexibility. We are very adaptable to newtrends in the type of business that comes toGuernsey. We can deal with pretty muchanything that walks through the door.”

Ben Morgan and Tom Carey at CareyOlsen, the island’s leading provider of legaladvice to the sector with 929 fund clients,according to Lipper, say they have seen ashift in the pattern of business since the firsthalf of 2007. In the months before the onsetof the credit crunch business flows weredominated by funds of hedge funds listed onLondon’s Alternative Investment Market,Euronext Amsterdam and the Channel IslandStock Exchange, as well as high-profileprivate equity funds, including listed vehiclesfrom leading US firms such as KKR andApollo, and property funds.

“There is now a lot of mid-market privateequity business, especially in markets suchas Germany,” Carey says, but the firm is alsoseeing plenty of work from fund of hedgefunds clients building their businesses. AddsMorgan: “In many cases they have protected

cell companies on the island and they arestill adding new cells to the PCCs. There is ahuge stable of existing clients or friends ofexisting clients using Guernsey, because ithas developed huge momentum in theindustry. It has established key niches andmade a name for itself.”

This is not just happenstance, says BobBrown, director of Equity Fund Services inGuernsey, but stems at least in part from thechoices made by the regulator. “The growthof Guernsey as a jurisdiction is partly downto the Financial Services Commission, in thatthey can identify a range of products forwhich they think the island will be bestsuited, and they can tailor the legislation andtheir own rules to suit those products,” hesays. “It’s easier to do closed-endedschemes in Guernsey than in Jersey, forexample, because the regulator is muchmore amenable to these vehicles.”

While Jersey is hoping that its UnregulatedFunds regime, introduced earlier this year,will prove a strong source of business in adifficult economic environment, members ofthe industry in Guernsey are more keen tostress the importance of the island’sreputation for strong regulation and its abilityto deliver the corporate governancerequirements increasingly required ofalternative funds.

Stuart Mauger, a senior manager withRoyal Bank of Canada in Guernsey and headof business development for RBC WealthManagement’s corporate and institutionalbusiness in the British Isles, says the bank’srole as a trustee of funds serviced by otheradministrators offers particular comfort toboth investors and promoters because itprovides an additional source of independentoversight of whether both the investmentmanager and the administrator are doingtheir jobs properly.

“This ties very well with the corporategovernance that we are promoting as one ofGuernsey’s biggest strengths,” Mauger says.“For a fund that receives administrationservices from a different provider where weact as the trustee, it gives the promoter andthe investors comfort that there are twoparties involved here, one keeping an eye onthe other, as well as the board of directors.”

Niven believes that corporate governancecould prove a trump card in the future to

O V E R V I E W


➧ p10

www.careyolsen.com

Funds and Private Equity Legal Advicein the Channel Islands

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47 Esplanade St Helier Jersey JE1 0BD

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Over the past three years Guernsey hasundertaken a wholesale restructuring of itsregulatory regime for investment funds,designed to make the jurisdiction moreattractive for promoters of alternativeinvestment vehicles by moving toward asystem of regulation of service providersrather than individual fund products.

These changes, which are designed tomake the process of fund establishment andapproval easier and significantly quickerwithout affecting Guernsey’s reputation forflexible yet effective regulation, are based ona blueprint produced by a committee chairedby Advocate Peter Harwood. The process ofturning the report’s recommendations intolaw is now almost concluded.

The key step that remains to be takeninvolves placing open-ended funds on thesame regulatory platform as closed-endedfunds, which are currently covered by theRegistered Funds regime introduced inFebruary last year and which enjoy a three-day turnaround for regulatory approval.Legislation that will offer open-ended fundsthe same ease of approval was passedearlier this year and the new regime is nowawaiting implementation of theaccompanying regulatory framework, whichshould be in place before year-end.

Once the new legislation is in force,Guernsey will offer promoters astraightforward choice between regulatedopen-ended and closed-ended funds, whichcan be marketed to the general public, andregistered open-ended or closed-endedfunds, which are aimed at the high net worthand institutional end of the market throughthe private placement route.

The new regime may complete theimplementation of the Harwood report’srecommendations, but Guernsey is not aboutto rest on its laurels and the government,regulator and industry members remain

ready to examine new ideas should theyappear beneficial both for the jurisdiction andfor financial sector participants.

For example, companies have discussedwith the Guernsey Financial ServicesCommission the possible benefits of aregime that would allow hedge funds to beestablished in Guernsey without undergoingsignificant regulation, similar to theUnregulated Funds structures introduced inJersey earlier this year. However, noconsensus has yet emerged on whether thistype of fund is necessary or desirable.

It’s extremely rare to encounter any kindof legal or regulatory problem in terms oftiming or structure that would prevent a fundbeing established in Guernsey, since theisland’s regulatory approach is already highlyflexible. And for many clients the fact that afund is regulated in Guernsey is an importantselling point.

The industry has also benefited from legalchanges in other areas. Its new companieslaw has moved away from the traditionalcapital maintenance model, with its centralfocus on authorised share capital andconstraints regarding distributable reserves, toa solvency model that makes it easier forcompanies to pay dividends or make otherkinds of distribution. This makes the Guernseycompany much more versatile and attractivefor the island’s financial sector and its clients.

The new law has also established amodern registry accessible via the web. Inpractical matters, this enables companiespotentially to be incorporated in Guernseywithin a couple of hours.

Today Guernsey has modern legislation,internationally compliant regulations andperhaps most important, a business-friendlyregulator that maintains an open-door policytoward the industry. We have everyconfidence the island will continue to deliversolutions to the fund industry. ■

C A R E Y O L S E N


Legal changes completenew fund regime

By Ben Morgan and Tom Carey

Ben Morgan and Tom Careyare partners with Carey Olsenin Guernsey

help it win more business from the CaymanIslands, currently home to most of theworld’s offshore hedge funds. He says: “Weare looking ahead potentially to attract morehedge fund business to the island – notgoing down the Cayman route, nor theJersey route – because we think we have abetter business model. It’s always seemedbizarre to me that London promoters go toCayman. They are finding that HM Revenue& Customs are going through thesestructures and deciding that mind andmanagement are here [in the UK].

“The other issue is the rejection by UScourts of Cayman as a forum for the BearStearns hedge fund bankruptcy, which puts adifferent complexion on the corporategovernance of these vehicles. We’ve longbeen banging on about corporategovernance, that we can demonstrate thatmind and management is here, and in thefuture I think it will be very telling.

“You can ally that to the opportunityperhaps to administer these fundssomewhere else – instead of a Caymandomicile and Dublin administration, why nota Guernsey domicile and Dublinadministration? If you wrap it up withcorporate governance – we have a greatcadre of non-executive directors, and a veryrobust structure that ticks all the boxes –there’s no earthly reason why promoters inLondon should be continuing beating a pathto Cayman.”

Niven says the industry in Guernsey isexamining the regulations governing hedgefunds in particular – although heacknowledges that defining a hedge fund is“like sticking a pin into blancmange” – andhopes that concrete proposals can beunveiled soon. “Corporate governance is themost important part, but we can also offer amore flexible structure,” he says. “It will havea lighter touch than the current regime, whichrequires local oversight over any outsourcedpart of the administration process, and bespecifically for funds with a high minimuminvestment threshold and expert investorswho know what they’re doing.”

Robin Fuller, chairman of Dominion Group(Guernsey), a manager of absolute returnfunds, says Guernsey has probably benefitedfrom its underdog status, particularly inrelation to its larger Channel Island

neighbour. “Guernsey has made significantadvances in the past five or six years, Ithink, because as a smaller jurisdiction thanmany of our rivals you realise you have towork harder,” he says.

“We’ve had to look at things that some ofour competitors haven’t. It means we cannever afford to be complacent. We knowwhat our constraints are in terms of the sizeof our workforce, so we have to work atthings like training. It’s come from goodplanning and the key stakeholders – thegovernment, regulator and industry – workingtogether. What we do better than many ofour competitors is that all three maintain avibrant discussion and consult on anychanges that will affect the industry.

“Guernsey has done a good job inreforming its regulatory structure, but theprocess never ends. There are some thingsyou do in order to be innovative, and thereare others that you have to do because yourcompetitors have done them. Takeincorporated cell companies – we thinkPCCs are the core product, but we’re notgoing to let anyone steal a march on us byhaving something that is slightly moreflexible, so we will always make sure thatour legislation is the best.”

Adds Niven: “In Guernsey we’re alwaysfocusing on what clients want. Thingschange, so we have to be looking for the nextchange and to be ahead of the game. Youdon’t get competitive advantage for too long,because everyone else piles in after you.” ■

O V E R V I E W


p7 ➧

Guernsey’s fund administration industry isthriving thanks to a flexible outsourcingregime that allows much of the labour-intensive but comparatively low-valuenumber-crunching work to be carried out inother jurisdictions, where skilled accountantsare more readily availably and costs arelower. Paradoxically, at the same time theranks of the sector are being swelled by thearrival of new firms, often spin-offs frombigger groups or new ventures from existingfinancial industry players such as trustcompanies.

However, together the two developmentsexplain why Guernsey is continuing to thrive

as a domicile and service centre foralternative funds. While bigger players canuse an international network of centres ofexpertise to carry out administrationfunctions in the most efficient way possible,the island is also home to niche, highlyspecialised providers that are better able todeal with funds that don’t fit easily into aglobal template.

Resources, human and otherwise, havelong been an issue in the Guernsey financialservices marketplace, and the issue washighlighted recently by a political declarationthat the island’s goal was zero populationgrowth. Although it’s not clear to what extent

I N D U S T R Y


➧ p14

Outsourcing modeleases island’s

resources constraintsBy Simon Gray

This advertisement is issued by Royal Bank of Canada (Channel Islands) Limited ("RBC CI") on behalf of RBC® companies that comprise the RBCWealthManagement Network in theBritish Isles ("the BI subsidiaries"). RBC CI is a Guernsey registered company - number 3295 - and is regulated by the Guernsey Financial Services Commission to carry on deposittaking and investment business and to act as a custodian/trustee of collective investment schemes in Guernsey and regulated by the Jersey Financial Services Commission in theconduct of deposit taking, fund services and investment business in Jersey. Registered office: POBox 48, Canada Court, St Peter Port, Guernsey, GY1 3BQ, Branch: POBox 194, 19/21Broad St, St. Helier, Jersey JE1 8PB. Details of the name and addresses of RBCWealthManagement'smain BI subsidiariesmay be obtained at the following addresshttp://www.rbcprivatebanking.com. Services outlinedmay be provided by a variety of subsidiaries and offices, either independently or acting together. Some of the services detailedin this advertisement are not offered in all jurisdictions andmay not be available to you. This advertisement does not constitute an invitation or solicitation to apply for any products orservices in any jurisdiction to any person towhom it is unlawful tomake such a solicitation in such jurisdiction. You should note that the applicable regulatory regime, including anyinvestor protection or depositor compensation arrangements,maywell be different from that of your home jurisdiction. This advertisement has to the extent required been approvedfor the purpose of the Financial Services andMarkets Act 2000 by Royal Bank of Canada InvestmentManagement (UK) Limitedwhich is authorised and regulated by the FinancialServices Authority. ®Registered trademark of Royal Bank of Canada. TMTrademark of Royal Bank of Canada. Used under license.

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Worldwide the hedge fund industry is feelingthe effects of the credit crunch, the demiseof stalwart Wall Street prime brokers, fallingequity markets, a flight to quality and a returnby investors to conservatism. But for RBC inGuernsey, while the growth of custodybusiness for traditional managed accountshas slowed over the past year, demand forits services from funds of hedge funds(FoHFs) is as strong as ever.

This may be down in part to that veryconservatism among investors seeking risk-adjusted returns. While FoHFs have alsostruggled to maintain performance levels, inthe current climate investors seem lessconfident about investing in single-managerfunds and some multistrategy funds havealso experienced considerable difficultiesover the past 12 months.

Although the listed FoHF sector declineddramatically as discount provisions wereeroded by funds’ liquidity during panicselling, it is important to remember that thesector has benefited from changes to UKcapital gains tax rules in 2008, with a surgein secondary offerings on the London StockExchange.

According to RBS, a total of GBP1.51bnwas raised for London-listed hedge fundsand FoHFs in the first seven months of thisyear, around half for follow-on issues,compared with GBP1.38bn in the sameperiod of 2007. However, consolidation orwind-down look inevitable.

The business has also been helped bytwo notable trends in Guernsey: the entryinto the fund services market of trustcompanies, and the increasing diversity ofalternative funds. Trust companies servicingfunds investing in areas such as films, musicrights and agricultural land are approachingRBC to act as custodian, a role required

under Guernsey’s fund rules. The island alsois domicile to two wine funds, and at leastone legal claims fund.

RBC benefits from its long pedigree as aservice provider in Guernsey, with around 15years as an administrator and more than 20in custody. Our reputation among FoHFsensures a steady flow of new business andmeans there is no temptation to ‘style drift’and take on other types of product outsidestaff’s core competences.

The group is increasingly benefiting fromits global network and broad range ofservices. For example, the Guernsey fundadministration unit can put managers lookingfor leverage in contact with the RBC capitalmarkets business.

Guernsey remains extremely competitivefor fund services because of its experienceand skills, geographical proximity to the UKand Europe, and the reassurance toinvestors of its highly-regarded regulatorystructure and high standards of corporategovernance. This is evidenced by enquiriesfrom Asian promoters reaching out toGuernsey at the request of Europeaninstitutional investor clients.

An important safeguard for variouscategories of fund is the role of thecustodian trustee, which monitors theactivities of the administrator and promoter,exercising fiduciary oversight over theservicing process and the valuation of funds,and ensuring that the manager is adheringto the fund’s investment parameters.

The RBC custodian trustee departmentoversees funds serviced both in-house andby third parties. It is basically good disciplineto have someone overseeing the servicingprocess with a dispassionate eye, and ithelps the fund’s board of directors to holdthe administrator to account. ■

R B C


Growth continuesdespite market turmoil

By Stuart Mauger

Stuart Mauger is a seniormanager with Royal Bank ofCanada (Channel Islands)Limited in Guernsey and headof business development forRBC Wealth Management’scorporate and institutionalbusiness in the British Isles

this is official policy, the issue did raise thequestion of how easily companies would beable to tap the skills they needed if theywere not available on the island – especiallyin the notoriously labour-intensive alternativefund administration business.

Peter Niven, chief executive of industrypromotional agency GuernseyFinance,believes the population question may haveattracted more attention than it reallydeserves. “We’ve got over this hurdle aboutover-population,” he says. “The aspiration iszero population growth, but it’s very difficultto monitor and manage, because you don’talways know when people are leaving.People have calmed down, looked at theiroperating models, and asked how they mightskin the cat in a different way.

“Everyone does it a different way, but inthe end it comes down to the outsourcingmodel. As long as oversight remains on theisland, the majority of work can beoutsourced. That might mean having acentre of excellence in India whereadministrators do the valuation for all theirfunds. The new niche players are looking atplaces like the UK, where in many respectsit’s cheaper, and it’s certainly easier to getaccountants at a reasonable remuneration.Some are setting up along the south coastwhere it is very easy to get back and forth,and technology helps immeasurably in takingon extra volume.”

Niven also points to the spate of trustcompanies entering the fund sector. “Trustcompanies see funds as a space they wantto be in, and many of them are going downthe administration route, like Praxis,” he says.“That’s not because the fiduciary business isnot buoyant – huge amounts of wealth arebeing created worldwide, all needing astructure and a home – but there’s quite acomplementarity of skills between managingtrusts and administering funds.

“It means promoters coming to the islandhave a choice of providers between the bigplayers like Northern Trust, Royal Bank ofCanada and Kleinwort Benson, and smallerfirms such as Heritage, Praxis and Augentiusthat in many cases offer a specialist focus ina particular market, like Augentius in privateequity. That attracts the London-basedpromoters, and generally after experiencing afund being set up in Guernsey, they willplough the same furrow again and again.”

In addition, says Mike Bane, a partnerwith Ernst & Young, an increasing number oflarge fund managers are setting up bespokeadministration businesses on the island toservice their own funds. “FRM started that afew years ago, and more firms havefollowed, in property and private equity aswell as in the hedge fund sector,” he says.

Robin Fuller, chairman of alternative fundmanager Dominion, says: “We decided fiveor six years ago that encouraging managersto come to Guernsey and move theirbusinesses here would be good for theeconomy, not just as a reaction to the recentuncertainty in the UK about non-domiciles.Most of these companies, like Dexion Capitaland FRM, have a fairly light footprint in termsof resources, so they are ideal for an island.But the UK’s tax issues have strengthenedour case as well.”

Adds Niven: “We are particularly looking atthe private equity and hedge fund sectors tosee if we can attract firms to put downoperational offshoots that constitute asubstantive presence in the island. Wealready have some offices set up by the bigLondon operations, which is a very usefulstart. In general they are very pleased withthe infrastructure we can provide. That givesus credibility, but also in the principals youhave people who will pay a lot of local tax.”

Bane says the Channel Islands are also

I N D U S T R Y


p11 ➧

seeing a degree of consolidation amongmajor players as firms start to figure outwhether they really want to be inadministration, either in Jersey and Guernseyor at all. And he adds that while outsourcingmay have come to the fore particularly in thepast year or two, it is a trend that has beenquietly underway for some time.

“There’s been a long-term move towardoutsourcing among the biggestadministrators here and in Jersey,” he says.“They tend to outsource anything that’sgenuinely scalable, and what remain are theelements of the business that establish thefund here, the non-executives, theintellectual capabilities, the high-levelstrategy that really establishes managementand control in the islands.”

Bane acknowledges that vehicles such asfunds of hedge funds and property fundstructures may not necessarily lendthemselves so well to scalability. “Funds offunds have their own peculiarities – theyaren’t very scalable, there isn’t muchvolume,” he says. “Property has its owndistinctive features. In some ways it needsgreater scale because of the whole processof rent collection, rent monitoring and so onis more intensive than for any equity or debtfund, and that process can’t be carried outeffectively far from the assets, but the top-end work is not immensely scalable and

requires a great amount of humanintervention.”

Although he agrees that the volume ofmore mundane accounting work carried outin Guernsey is shrinking as administratorsallocate their resources more efficiently,Bane believes that overall the amount ofadministration activity actually taking placeon the island is increasing. This is in part inresponse to the wave of legislative andregulatory changes over the past threeyears that have enhanced the role ofservice providers in conducting duediligence on new funds and promoters onthe regulator’s behalf.

“The administration market in bothislands is going through a period ofbedding down the new regulations thathave been coming through over the pasttwo or three years, and administrators areadjusting to the changes,” he says. “InGuernsey, the Harwood Report is largelyimplemented. A new Companies Act hascome in incorporating some Harwood-inspired changes, but it’s not a seismic shiftin the landscape.”

Bane also notes that the island’s availableresources in the corporate governance areahave also grown in recent years in responseto the changing environment andrequirements. “There’s a very strong pool ofnon-exec talent here,” he says. “There wereconcerns about whether that pool wasbecoming overstretched, but a number ofnew people have joined the group, which isvery valuable for the island. The ability ofadministration and other businesses to adaptto what’s coming has always been a realstrength of the jurisdiction, which has greatlychanged from three years ago and isunrecognisable from 10 years ago.”

Fuller says Guernsey has been successfulin cultivating its own talent pool, pointing tothe island’s training agency. “The agency hashad a very positive impact on our ability toprovide new skilled staff,” he says. “Butwe’ve been in this industry a long time, sowe have quite a pool of experience amongpeople like executive directors, lawyers andaccountants in the island, stretching rightback to the retail schemes that were here inthe 1970s, then the transition to institutionalbusiness and the broadening of the island’sproduct base.”

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©2008 KPMG Channel Islands Limited, a Channel Islands limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

KPMG’s European Hedge Fund team have been named “Best Provider of Transaction and Advisory Services” for the second consecutive year at The Hedge Fund Journal Awards.

With local and global multidisciplinary teams of experienced and highly-skilled professionals we can offer a range of services to meet the needs of your hedge fund business and its funds.

Local context in aglobal environment.

For more details of how we can help, contact:

Neale Jehan KPMG Channel Islands Ltd20 New Street, St Peter PortGuernsey GY1 4ANTelephone 01481 721000

www.kpmg.guernsey.gg

The challenges for Guernsey’s hedge fundindustry in the coming months and years areslowly emerging from the continued fog thatis the current banking and economic crisis.The opportunities that will result are equallyunclear, but many people are contemplatingwhat they may be. With markets at a five-year low and still extremely volatile, only timewill tell whether the fog is lifting or becomingthicker.

The hedge fund industry in Guernsey isdiversified across many different assetclasses but with a preponderance of fund ofhedge funds vehicles. There are certainlychallenges for some of these asset classes,particularly in the fixed-income and asset-backed securities arenas where fair valuesare under severe pressure and liquidity is thin.

There are also potential exposures totroubled counterparties that need to beswiftly identified and managed. The fund ofhedge funds sector is also encountering bothliquidity issues in underlying funds andincreased pressure on investor redemptions.We are having discussions with our clientson all of these issues, but it will take timebefore the outcome becomes clear for all ofthem. We may see increased use of side-pockets and redemption gates, but theemployment of these mechanisms remainsminimal among Guernsey funds for the timebeing.

These are issues that are common acrossall fund jurisdictions at the moment.Guernsey is not unique in having to tacklethe challenges posed by market conditions.It is clear that a few funds will struggle in theshort term, but the positive signal for theisland is that there are plenty which will not,while a range of new funds are being

launched to take advantage of the bottom ofthe market.

As convergence of asset styles acrossmarket players continues apace, plenty ofprivate equity houses are sitting on largeamounts of cash in their hedge fund-styledistressed debt funds. Notwithstanding this,we are still seeing funds preparing to cometo market in some of the supposedly out-of-favour asset classes such as property, againlooking to buy cheap assets from forcedsellers.

The key message from Guernsey is thatthe island is very much open for business,with a cross-asset class offering that enablesall managers to launch their products fromthe jurisdiction. The lack of any materialproblems to date may be considered asevidence of the benefits of the Guernseyfund regulatory model, which is largelyconsidered to be more robust than those ofmany of its competitors.

In fact, the fund industry on the island stillappears to be in good health, with the latestfigures from the Guernsey Financial ServicesCommission indicating substantial year-on-year growth. On the service provider side,now is when future reputations are made.Guernsey’s service providers are known forboth their flexibility and their ability to offerniche services.

In these difficult times, decisions will needto be made on whether it is time toreconsider business models for the future,and whether it’s the moment to invest forgrowth or simply maintain the status quo. IfGuernsey is largely isolated from the worst ofthe crisis by its diversified fund industry, asmany believe, it may be foolish not to seizethe opportunity to invest for the future. ■

K P M G


Fund industry ready toexploit crisisopportunities

By Neale Jehan

Neale Jehan leads KPMG’sservices to the alternativeinvestment sector in Guernseyand is a member of KPMG’sglobal alternative investmentleadership team

An example of the kind of resources theisland is keen to cultivate is Andrew Howat,managing director of Capita FinancialGroup’s new office in Guernsey, a local manwho returned to the island last year with awealth of experience acquired in theinternational financial industry. Capita, whichpreviously held a licence in Guernsey butdid not carry out administration activities onthe island, has perfected its outsourcingmodel with operations in Exeter and Dublinthat handle functions channelled from thegroup’s network of offshore offices, whichalso encompass Jersey, Gibraltar and theIsle of Man.

“Capita has spent a lot of time looking athow to develop its international business,”Howat says. “Most of the jurisdictions aresmall and demand for labour quite high,and there has been huge growth inbusiness over the past couple of years,prompted in part by taxation changes.We’ve come up with a very robust operatingmodel in line with the GFSC outsourcingguidelines and using very experiencedaccounting staff in Exeter.

“We’re also investing large sums ofmoney in the SunGard InvestOneaccounting platform. It means a lot of themechanics can be done outside the island,while client services, compliance andregulatory oversight and companysecretarial work is done in Guernsey. We’reusing the same model throughout theoffshore world to do hedge funds, funds offunds, property funds and GP/LP structuresfor private equity schemes.”

Stuart Mauger, the Guernsey-based headof business development for RBC WealthManagement’s corporate and institutionalbusiness in the British Isles, cautions thatthe regulator’s insistence that responsibility,control and supervision of outsourcedoperations must remain in the island is nota formality.

“Even in the outsourced model, mind andmanagement control must be here, theregulatory licence is here, and you aredealing with the regulator here,” he says.“You have to be absolutely sure that if youare asked to quote on a derivatives fund, youhave someone who actually understands it.You can’t just tell them to look at thebrochure. If the unthinkable happens and

you have to go to the regulator to explainwhat happened, you can’t say you wererelying on the outsourcing partner.”

That’s why, Mauger says, RBC examinesvery carefully the potential business thatcomes through the door, and closelymonitors the work it outsources to theoperations of affiliate firm RBC Dexia FundServices in Luxembourg or Toronto. “We’vemoved from a model where we used to dofull administration in Guernsey,” he says. “Wecan still do that for funds that wanteverything done in Guernsey, but for otherswe can piggyback of RBC Dexia’s platform.

“This means the quality of staff we havehere are no longer the nuts and boltspreparers, but people who have been in theindustry for 15 years or more, are qualifiedaccountants and review the output for qualitycontrol.” He says that as a result, the numberof lower-end jobs in Guernsey has beenthinned naturally, while the office has takenon more senior people with the experienceto fulfil an oversight role effectively.

Bob Brown, a director of Equity FundServices, says the responsibilities imposedby the regulator requires an effectivecompliance function in Guernsey. “Youactually need to visit these sites on a regularbasis and report to the regulator,” he says.“When I was doing it [for a different firm], wewould have to visit the back-office providersevery six months to make sure the recordswere kept in good order.

“When they provided us with valuations,they also had to provide all the supporting

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Whilst the much-documented credit crisismaintains a stranglehold on financialmarkets, the still relatively young alternativeinvestment industry continues to grow. Asassets under management increase, the levelof governance standards demanded by theindustry has augmented, posing the questionwhether greater institutional influence maybe creating barriers to entry that only brand-name managers can overcome.

Historically, a fund’s perceived ability togenerate future returns has been paramount.However, risk management, transparencyand infrastructure supported by largeoperational teams are steadily growing inimportance, adding to the costs of fund set-up and launch. Within these parameters it istherefore becoming increasingly difficult for asmaller fund with no track record to launchsuccessfully as institutional investors searchfor attractive risk-adjusted returns.

Heightened attention is also being paid tocounterparty risk. Ensuring that serviceproviders are of the highest quality is apriority not only for a fund’s manager but forinvestors who carry out their own thoroughdue diligence. In this environment, anymanager preparing for a launch needs tosecure a provider with a history of solid high-quality servicing. Any new entrant without abrand name would be wise to heed theadvice of their peers, since recommendationswill historically be based upon excellenceachieved via a thorough understanding of thecomplexity of the business. Therefore,confidence in a fund’s service providers maywell determine its attractiveness to investorsand thus its potential success.

Supporting a launch and maintaining afund through its life cycle presentschallenges to service providers too. Asinstitutional investors increasingly shape theindustry, they demand higher operational andreporting standards. Technology is central to

any top-tier offering, with web-based tools aswell as automatic reconciliation and pricingkey factors in a fund’s ability to boosts itsassets. As previously stated, as investorscarry out due diligence not only on a fund’sprincipals but on key service providers, theneed for proof of competence andrecognition becomes paramount.

In a difficult capital-raising environment,credit rating is also an important gauge ofcounterparty risk. From a financingperspective, price remains important as certainbanks shut their books to new prospects. Withliquidity tightening, new entrants should beprepared to pay more to a lender that canoffer future stability. Again, recognition from atop-brand financier is vital for a successfullaunch as it aids the capital-raising process bystrengthening investor confidence. With new,smaller funds already facing competition frombrand-name managers, it is critical that theirmanagers are able to demonstrate aninstitutionally robust infrastructure capable ofnavigating any market conditions.

To conclude, although markets remainfragile, the alternative investment industryhas continued to grow, bolstered by thehigher governance standards required by thenew wave of institutional investor. Both atlaunch and during a fund’s life cycle, brand-name managers currently hold an advantageon account of not only their establishedability to generate returns, but their expertisein areas such as industry knowledge,counterparty risk and operational excellence.

While at a disadvantage, new managerscan still launch funds successfully andcompete as long as they appreciate themarket and its machinations fully; especially ifthey prove themselves a top-quality prospectinspiring long-term investment. For the serviceprovider this presents a challenge, as scrutinyof their offering means that they stay aheadof the pack or stagnate to mediocrity. ■

F O R T I S


Providers make thedifference for start-ups

By Tom Hadley

Tom Hadley is seniorrelationship manager formerchant banking at FortisPrime Fund Solutions

Argentina, Aruba, Belgium, Bermuda, Brazil, British Virgin Islands, Cayman Islands, China, Cyprus, Germany, Guernsey, Hong Kong, Jersey, Labuan, Liechtenstein, Luxembourg, Malaysia, Malta, Mauritius, New York, New Zealand, Panama, Samoa, Singapore, Sweden, Switzerland, Taiwan, The Netherlands, The Netherlands Antilles, United Kingdom, Uruguay

● Hedge funds● Funds of funds● Real estate funds● Private equity funds

We offer specialist fund administration services:

Your expectations. We exceed.

A division of the Equity Trust Group

www.equityfundservices.com

Fund Services

By the nature of the island, its geographyand population, fund service providers inGuernsey have never been geared up tomass-market retail business, a sector nowdominated by big global players that havedeep pockets to fund costly IT systems andhundreds of employees spread acrossnetworks of offices around the world.

Instead, they have made a virtue out ofnecessity, eschewing the massive scale of theglobal giants to offer clients instead the benefitsof nimbleness and flexibility. The island’sadministrators are encountering increasingdemand from clients that seek a bespokeservice rather than a conveyor belt-like processthat embodies a one-size-fits-all approach, andin any case has increasingly little room forsmaller managers and their funds.

While the big international administratorsare fully geared up to handle plain vanillafunds quickly and efficiently, they struggle toaccommodate differences from the standardmodel, such as reporting to differentinvestors using different accountingstandards. They also have a tendency to telltheir asset manager clients what they need,rather than the other way round.

By contrast, Guernsey firms have a traditionof willingness to accommodate the needs oftheir clients, whether it means adopting newapproaches to valuation of exotic assets orcreating the customised reporting required fora disparate investor base, or adapting thetiming of the working day to the needs of acustomer in a different time zone.

The Guernsey administration model is insome respects the product of a single firm,Guernsey International Fund Managers, thepredecessor to today’s Northern Trust fundadministration business in Guernsey, whichover the years has been the starting point formany of the individuals that today run fundservices firms across the island.

The GIFM model that today predominates

in the Guernsey fund industry has dispensedwith the production-line approach of fundservices divided into separate teams carryingout functions such as share registry andaccounting. Instead teams are assembledwith a crossover of skills that equipmembers to cover for colleagues and to dealdirectly with the client.

Guernsey firm may not be able to competewith the global players on staff numbers andsystems, so instead they aim to be moreresponsive and adaptive to the clients’ needs.The single team approach ensures that bothinvestors and fund managers know withwhom they are dealing, as opposed to thecall centre-style arrangements put in place bythe largest players.

However, this does not require providersto be limited in scope or geography. EquityFund Services and Custom HouseAdministration, which merged earlier thisyear, both espouse a philosophy thatcombines an international presence with theflexibility and personal touch of bespokeservice providers.

Custom House has developed a‘superhighway’ approach that enables it toproduce daily NAVs by drawing on theresources of its offices in Chicago andSingapore as well as its headquarters inDublin. Equity offers fund promoters a wide-ranging structuring ability through its officesin jurisdictions including Luxembourg, Cyprus,Mauritius and the Netherlands Antilles.

Other Guernsey administrators are lookingto maximise the value added to fundservicing through their offices on the islandwhile taking advantages of processingcapabilities elsewhere, either within theirown group or through ‘best friend’arrangements with service providers in otherjurisdictions, in order to uphold servicestandards while benefiting from the lowercost structure of other jurisdictions. ■

E Q U I T Y F U N D S E R V I C E S


Fund clients warm toGuernsey model

By Bob Brown

Bob Brown is director ofEquity Fund Services Guernsey

documents so that we could cross-checkthe information. We would also have toverify the valuations to make sure thenumbers they were using were correct, andfor the first six months we had to shadowtheir books. It was quite onerous becausethe regulator was very keen to ensure it wasdone properly when it was outsourced to athird party.

“In recent years a number ofadministrators have outsourced it to anothergroup office, which has got round that issue.However, the regulator has now tightened upand has gone back to the old systemwhereby you have to shadow the books inthe jurisdiction. Even when you are back-officing into an office in another jurisdiction,they now require you to treat thatrelationship as though it was with a third-party administrator.”

Like RBC, Equity Fund Services – whichmerged earlier this year with Dublin-basedCustom House Administration – prides itselfon turning away any business if it has anydoubts that it has the right capabilities tohandle it. “We are quite ready to tell a clientthat we know what they want, but we can’tdo it,” he says. “Far too many people wouldtake it on. You’ve got to be big enough towalk away if you know you can’t do the job.You do yourself, the fund manager and theinvestors no favours if you take it on.”

Ozannes partner Gavin Farrell says thegrowing range of specialist administrators isan important strength for Guernsey in amarket where funds are becoming morespecialised, too. “A number of fundadministrators have had the opportunity tospecialise in certain types of products andtherefore to develop a body of expertise overthe years, which has put Guernsey in aposition to be able to offer solutions for newproducts,” he says. “The perfect example isin private equity, where over the past 10years a number of specialised fundadministrators have been set up and helpedto put Guernsey on the map as a privateequity offshore platform.

“Where we’ve been quite fortunate is inhaving pragmatic outsourcing guidance fromthe regulator. What Guernsey cannotoutsource is intellectual capital, and it issomething it does not want to outsourcebecause the island has sufficient expertise

and experience. Very often the actualnumber-crunching will be outsourced eitherwithin a larger group or to third-partyorganisations.”

Farrell divides the fund administrationindustry in Guernsey into three groups.“You’ve got the big blue-chip internationalnames at the top, in the second tier you’vegot the very large truly independent fundadministrators. In the third tier you havemuch smaller fund administration playersthat are either start-ups or trust companies,or some of the accountancy practices thathave set up a fund administration branch.”

“What this means is that if someonebrings a fund to Guernsey, if the fund doesnot fit the business model of the first-tierplayers, it gets sent down the food chain.That deals to a certain extent with theresource issue because the work is not allconcentrated in the hands of a few players.It spreads the load, which means that eachfund administrator has more capacity to dealwith incoming work. Obviously this alsogives more choice to promoters. There aremore players to deal with a particular type ofbusiness by virtue of the crumbs fallingdown the food chain, as well as through theoutsourcing policy.” ■

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