Jan 6, 2025
KEY TAKEAWAYS
Of those assets there is a wide range, including hedge funds, private equity, debt and real estate funds.
The advantages of Guernsey as a fund jurisdiction include:
Guernsey companies are a classic structure used to establish a Guernsey fund, whereby investors purchase shares in the company. Investments in the company are governed by the terms of the memorandum and articles of incorporation of the company and the scheme particulars (offering document) that are prepared for the company.
Guernsey companies can issue different share classes, which can be used to give particular investors special rights in the fund, or to create sub-funds of investors within the same company.
Guernsey pioneered the concept of the cellular company and has been instrumental in establishing these innovative vehicles as internationally recognised corporate entities. Both PCCs and ICCs have proved very popular with promoters of investment funds established in Guernsey for a number of reasons. In particular, the PCC structure allows a fund manager to establish a PCC to which additional sub-funds can be added easily over time. The sub-funds are added as cells within the PCC through a simplified approval procedure, as and when the fund manager decides to add, for example, different asset classes. This feature has made the PCC structure particularly popular. ICCs are of considerable benefit if there is a desire to treat cells as separate legal entities at any stage of the life of the fund.
A PCC is a single legal entity, but the company is made up of a core and a number of ring-fenced protected cells. It is a way of creating different portfolios of assets within one company.
Traditional "umbrella funds" have been popular in Guernsey and elsewhere for many years, but practitioners had always recognised the potential risk of "contagion" between sub-funds. This potential risk is removed by the PCC structure because, in the absence of a recourse agreement, in the event of insolvency of a cell the assets of one cell will not be available to creditors of other cells due to the statutory ring-fencing protections.
PCCs have both core capital (in the case of an investment fund, usually the shares held by the management company) and cellular capital, which is the capital invested in individual cells (via the issue of shares to investors).
Investment funds established as PCCs have a number of benefits:
PCCs can be approved by the GFSC for use as authorised or registered investment funds (see below).
It should be noted that if a PCC is authorised as a particular class of a fund (for example as an authorised Class B open-ended fund - see below) then all cells of that PCC have to be of the same class of authorisation.
A cell of a PCC can be converted into a stand-alone company, using a process set out in Guernsey's companies law. A number of criteria must be met before a conversion can take place (including obtaining the consent of the GFSC and the approval of the cell's shareholders). However, this gives a PCC additional flexibility for structuring and growing funds.
An ICC has cells like a PCC, but in the case of an ICC each cell is a separately incorporated, distinct legal entity. The ICC and its cells all have the same registered office but the legislation specifically states that incorporated cells are not subsidiaries of the ICC. Unlike a PCC, a cell of an ICC will have a separate memorandum and articles of incorporation to another cell in the same ICC.
In terms of directors, provided that there is at least one director in common with the ICC, the cells of an ICC may have different directors from the ICC or other cells.
This structure allows incorporated cells to exploit their status as independent legal entities, with the ability to contract amongst themselves and directly with third parties.
The advantages of an ICC are:
Limited partnerships tend to be used by private equity fund managers given their familiarity in the PE market and because they are usually treated as being tax transparent vehicles outside of Guernsey. Investors hold interests in the limited partnership as limited partners so they have limited liability. They are then usually taxed on their share of the partnership assets or profits as if they were holding those assets or profits directly in their home domicile.
The legislation governing limited partnerships is the Limited Partnerships (Guernsey) Law, 1995 (as amended) (the "LP Law"). A limited partnership is not a legal entity in its own right but (at the time of registration) can elect to have legal personality under the LP Law. This election for legal personality does not affect a limited partnership's tax transparent status in Guernsey. The rules of the fund are contained in the limited partnership agreement, and also the offering memorandum sent to investors and normally a subscription agreement signed by investors.
Every limited partnership must have one or more general partners who are responsible for the management of the business of the limited partnership and its liabilities. The LP Law provides that the conduct or management of the business of the limited partnership must not be carried out by the limited partners (subject to certain safe-harbours) otherwise they will lose their limited liability. Therefore, the management of the fund is carried out by the general partner (usually a limited liability company), although often in consultation with an investment committee made up of representatives from key investors. In order to carry out these activities the general partner will need to be licensed by the GFSC under the Protection of Investors (Bailiwick of Guernsey) Law, 2020 (the "POI Law") to act as a general partner. Management of the fund is via the board of directors of the corporate general partner. As this is a licensed company it must have at least one Guernsey resident director and be locally audited.
Day-to-day administration of the fund and the general partner is delegated to a locally licensed administrator (this is a requirement for any Guernsey fund). A custodian is not normally required (because the fund is normally closed-ended).
Unit trusts are a type of trust that can be declared in Guernsey. A trust is an arrangement whereby a person, called the trustee, holds property as its legal owner on behalf of one or more beneficiaries. In Guernsey, unit trusts are governed by the Trusts (Guernsey) Law, 2007 (as amended) (the "Trusts Law").
Unlike other types of trusts, a unit trust must be established by an instrument in writing (ie a trust instrument). The trust instrument will normally be executed by the custodian, as trustee, and the investment manager of the fund. The investment manager is normally a limited liability company which will need to be licensed by the GFSC under the POI Law to act as investment manager.
In a unit trust, the investment manager receives money from investors to form a single fund, which is divided up into units that are owned by the investors (similar to shares in a company). The fund assets are held by the trustee and the investment manager directs the trustee as to investment decisions for the fund. The interests of the investors, the terms governing the types of investments that can be made by the trust and the obligations of the investment manager and the trustee are laid out in the trust instrument.
Many Guernsey funds are listed on the Official List or the Alternative Investment Market of the London Stock Exchange. Local practitioners and service providers are experienced in these types of listed funds and their operation.
For fund managers looking to list their fund on a "recognised exchange" in order to attract self-invested personal pensions ("SIPP") and small self-administered schemes ("SSAS") investors, or to qualify for real estate investment trust ("REIT") status but in a cost-effective and efficient manner, the TISE provides the ideal forum. Walkers Capital Markets Limited is a listing sponsor for the TISE, and we would therefore be very happy to assist with any TISE listing enquiries.
In order to launch a fund in Guernsey, the promoter will need approval from the GFSC and, in the case of listed funds, the appropriate market authority. Different approvals are required depending on whether the fund is to be an "authorised" fund or a "registered" fund, whether the fund is open-ended or closed-ended, the type(s) of investor which the fund is aimed at, and whether the fund is a private investment fund ("PIF") or not. A separate licence may also be required for any manager or general partner entity to be established in connection with the fund. All regulatory approvals are issued and administered by the GFSC through its authority under the POI Law.
Both open-ended and closed-ended funds can be approved in Guernsey, as either authorised or registered funds under the POI Law. The main differences between authorised and registered funds are:
In the case of an authorised fund, the GFSC undertakes the necessary due diligence on the fund promoter, unless the fund is a "qualifying investor fund" ("QIF"). For registered funds (which includes PIFs) and QIFs, the Guernsey administrator carries out the due diligence required and provides declarations as to the suitability of the promoter to the GFSC.
Approval of an authorised fund can take as little as several weeks, or up to several months if the fund is not a QIF, but usually towards the lower end of that range. Registered funds and QIFs are approved within three working days of completed documents being submitted to the GFSC and resolution of any issues arising. PIFs are approved within one working day of completed documents being submitted to the GFSC.
In general terms, the rules set out stricter requirements for open-ended funds than for closed-ended funds. Likewise, in general terms the rules for authorised funds are slightly stricter than those for registered funds.
In our recent experience, the majority of funds tend to be established as registered funds, and we therefore cover these first.
Registered funds (whether open or closed-ended) are governed by either (1) the Registered Collective Investment Scheme Rules and Guidance, 2021 and the Prospectus Rules and Guidance, 2021; or (2) the Private Investment Fund Rules and Guidance (2), 2021 (see below under the heading "Private Investment Funds" for further information on the latter).
The main advantage of a registered fund lies in the three working days, "fast track" approval time, without the "Qualifying Investors" restrictions. It should be remembered that the three working days only begins once all due diligence and information particulars have been completed - see further below.
The Rules require that a registered open-ended scheme must appoint a designated administrator and either a designated trustee or a designated custodian, who are licensed under the POI Law. For a registered closed-ended scheme, only a designated administrator is required.
The Rules require each registered fund to prepare information particulars which contain (at a minimum) the matters set out in the Prospectus Rules and Guidance, 2021. The ongoing notification requirements under the Rules are not as extensive as those for an authorised scheme.
The Private Investment Fund Rules and Guidance (2), 2021 (the "PIF Rules") create a new class of private fund which may be registered with the GFSC under the POI Law. PIFs may be either open or closed-ended and are aimed at the situation where a manager has a close working relationship with a small group of investors. In this situation a more informal and flexible regulatory regime may be appropriate for the fund and its investors.
There are now three "routes" available to register a PIF. There are subtle differences in the requirements between the three, but the common features are:
For more information on PIFs, please see our separate Advisory, Guernsey Expands Private Investment Funds Regime.
Authorised open-ended funds are governed by the rules of the class under which they are authorised (known as Class B and Class Q).
The rules relating to Class B funds have been developed with more flexibility in mind. Class B funds range from retail funds through to institutional and private funds.
Class Q funds are only to be sold to a strictly defined class of "qualifying professional investors", with rules which are correspondingly less prescriptive.
Class B and Q funds can all be authorised using the QIF regime if they are limited to "Qualifying Investors". This reduces the authorisation time. However, the "Qualifying Investor" restriction means that in practice usually only Class B funds or Class Q funds are authorised in this way.
"Qualifying Investors" are those who are "professional", "experienced" and/or "knowledgeable", as defined by the GFSC guidelines on QIFs.
Authorised open-ended funds generally require the appointment of a Guernsey licensed custodian, although there is a flexible regime for hedge funds constituted as Class B or Q funds allowing for typical prime-broker arrangements with a non-Guernsey entity to be put in place.It is worth noting that there is no requirement for an authorised closed-ended fund to have an appointed Guernsey custodian, and either the Guernsey administrator or a non-Guernsey based custodian may provide safekeeping services, provided that the arrangements are approved by the GFSC.
Authorised closed-ended funds can also be authorised under the "fast track" QIF regime if they are restricted to "Qualifying Investors".
Funds which are approved as QIFs must have in place measures to ensure that they are only available to investors who fall within the above definitions. Offering documents for QIFs need to contain various disclaimers and the administrator needs to provide the GFSC with a warranty certifying that the promoter is fit and proper.
Once the local administrator and manager have provided the necessary declarations to the GFSC, approval will be forthcoming within one working day of the GFSC's receipt of all the necessary documentation and the resolution of any issues raised by the GFSC. The Guernsey manager of the PIF (if any) will be licensed under the POI Law at the same time.
If the promoter of an authorised fund is new to Guernsey, it will need to complete a "new promoter checklist" and be pre-vetted by the GFSC. The new promoter checklist must set out the track record of the principals of the promoter in the establishment and/or management of investment funds in order to satisfy the GFSC that it is fit and proper, will carry on business with integrity and skill and in a prudent manner. The promoter will also need to be able to show that it has adequate financial resources and that its business will be carried out by at least two experienced individuals.
If the promoter is already known to the GFSC, this step is not necessary.
Funds which proceed along the normal authorisation route then follow three levels of GFSC approval: outline, interim and formal authorisation. The draft offering document for the fund must be submitted and reviewed by the GFSC at the interim stage once outline consent has been obtained for the fund. Certified copies of all final documentation must be filed with the GFSC when an application is made for final consent, although the documentation is not reviewed by the GFSC at this stage and consent is usually given within 48 hours. A fund must not be launched until final authorisation is granted.Guernsey is not part of the United Kingdom or the European Union. Therefore, Guernsey is not subject to the EU directives on financial services unless it chooses to adopt them (or measures equivalent to them) and as such Guernsey is not subject to MiFID.
The Alternative Investment Fund Managers Directive (Directive 2011/61/EU) ("AIFM Directive") came into force across the EU on 22 July 2013, implementing new rules in the EU that aim to harmonise the authorisation, monitoring and supervision of managers of alternative investment funds ("AIFMs"), which manage and/or market alternative investment funds ("AIFs") in the various member state countries of the EU.
In order to clarify the requirements under the AIFM Directive the EU also implemented the Commission Delegated Regulation (EU) No. 231/2013 (the "Level 2 Regulation") to supplement the AIFM Directive. The Level 2 Regulation came into force in each member state of the EU on 22 July 2013.
Importantly, EU AIFMs are now required to fulfil all of the requirements under the AIFM Directive (subject to any exemptions and transitional provisions) whilst non-EU AIFMs wishing to market non-EU AIFs in the EU fall under separate, lighter touch, national private placement regimes.
A large part of the debate in respect of the AIFM Directive regarded the intended new passport regime for non-EU AIFMs (the "Passport Regime"), which will enable non-EU AIFMs to market AIFs across the EU on a single authorisation. In July 2015 and July 2016 the European Securities and Markets Authority ("ESMA") published advice, which was sent to the European Commission, Parliament and Council for their consideration on whether to activate the Passport Regime for Guernsey, that confirmed that no significant obstacles exist to the extension of the Passport Regime to Guernsey.
In accordance with the AIFM Directive, the European Commission has the power to approve the Passport Regime by way of a delegated act and the AIFM Directive specifies that it should do so within three months of receiving positive advice from ESMA. This positive advice was delayed in light of the UK's impending exit from the EU (which occurred on 31 January 2020), and then further delayed until the expiration of the transition period (which expired on 31 December 2020). It is still the case at the time of writing that this positive advice remains awaited despite the publication of the two sets of advice above, and the UK's exit from the EU.
Until the Passport Regime has been implemented and the European Commission has determined to withdraw EU member states' national private placement regimes (the "NPP Regimes"), Guernsey AIFMs will be permitted to continue to market Guernsey AIFs in the EU pursuant to the various NPP Regimes, subject to additional regulatory requirements (see below).
Further, there are transitional provisions that apply exempt AIFMs from the AIFM Directive if the AIFs they manage are closed-ended and made no further investments after the transposition date of the AIFM Directive of 22 July 2013.
Guernsey AIFMs who want to use the Passport Regime when it becomes available will need to opt-in to Guernsey's equivalent AIFMD regime under the AIFMD Rules and Guidance, 2021 (the "Guernsey AIFMD Rules"). In essence, the Guernsey AIFMD Rules require Guernsey AIFMs to apply to the GFSC for approval and they must comply with the full requirements of the AIFM Directive and the Level 2 Regulation.
The AIFM Directive does not apply to Guernsey funds and managers which only distribute funds outside of the EU.In order to meet the requirements imposed by the AIFM Directive in respect Guernsey AIFMs, the GFSC has agreed a Memorandum of Understanding (the "MoU") with ESMA, which represented the regulatory authorities of the 27 EU member states, as well as in Croatia, Iceland, Liechtenstein and Norway.
The MoU leads the way for bi-lateral co-operation agreements to be agreed and entered into between the GFSC and each of the regulators of the EU/EEA member states (excluding Spain, Italy, Slovenia and Croatia).
Therefore, it is important that Guernsey AIFMs keep themselves updated in respect of any changes that may be made to EU member states' NPP Regimes under which they market, or intend to market, Guernsey AIFs, particularly as a result of the implementation of the AIFM Directive and any stricter rules that EU member states may impose on Guernsey AIFMs.
Key Contacts
Managing Partner
Guernsey
