It would be impossible to discuss the trends and developments we have seen in 2020 in the alternative funds sector without considering the impact of the COVID-19 pandemic.
When COVID-19 hit our shores, the response was very much "business as usual" from a Guernsey funds and financial services perspective. The island has capitalised on its historically strong financial services industry and its well-trained, experienced work force who have shown resilience whilst working from home and, more recently, the island has received favourable attention for being seen as virus-free. New funds are still being raised and new promoters are still interested in bringing their business to Guernsey.
Guernsey remains a leading choice for investment business and the island is committed to continuing to deliver its high standard of financial services. Undeniably there have been, and we will continue to see, casualties of this crisis; however Guernsey, with its pragmatic and reliable regulatory environment, is well placed to remain at the forefront.
Whilst the 2020 fundraising environment has proved challenging for small or first-time managers, the large established managers have continued to dominate the market. The best in class are still successfully closing funds, and the Mourant funds team in Guernsey has been involved in a number of billion-US dollar closings, including iCON Infrastructure Partners V which closed at USD1.9 billion in March 2020 only three months after commencing fundraising.
Whilst concern surrounds the impact of continued Brexit uncertainty, Guernsey has proved to be well placed (already outside of the EU) to continue to offer a stable funds environment for managers looking to raise funds.
Guernsey has seen a growth in private capital as a source for PE funds including club deals, co-investments and funds of one. As economic uncertainty increases, the use of these structures allows investors to pool capital and market expertise, which allows for innovative collaboration and expansion into different sectors with lower financial risk. Guernsey’s Private Investment Fund (PIF), launched in 2016, is proving an ideal vehicle for private capital to invest in private equity and its popularity continues to grow. Eligible for investment by no more than 50 persons whom the manager is satisfied are able to sustain the loss of their investment, the PIF offers a more lightly regulated product (no requirement to prepare a private placement memorandum) which is registered by the Guernsey regulator, the Guernsey Financial Services Commission (GFSC), in one business day.
We have also seen continued investor interest in environmental, social and governance (ESG) funds, as witnessed by the successful USD1 billion fundraise for the Generation IM Sustainable Solutions Fund III. Arguably, investment in PE is more aligned to ESG due to the longer holding periods and control over investments than one might find in shorter investment horizon fund styles. We expect this trend to be accelerated by COVID-19.
The Guernsey Green Fund, launched in 2018, has continued to attract interest offering a platform for various green initiatives. Investors in a Guernsey Green Fund are able to rely on the Guernsey Green Fund designation, provided through compliance with the Guernsey Green Fund Rules, to represent a scheme that meets strict eligibility criteria of green investing and has the objective of a net positive outcome on the planet's environment. Guernsey continues to see growth in this area, with green funds holding a total net asset value in the region of USD4 billion within the total for Guernsey funds by the end of Q1 2020.
Migration of limited partnerships to and from Guernsey: new regulations
New regulations have been passed that amend the Limited Partnerships (Guernsey) Law, 1995, providing an express statutory route for the migration of limited partnerships into and out of Guernsey (Migration Regulations).
An overseas limited partnership is now eligible to be registered as a Guernsey limited partnership on application to the Guernsey Registry, provided it is able to do so under the law of its current registration and has complied with any requirements of that relevant foreign law and its limited partnership agreement (including any limited partner consents). Any application to migrate out of Guernsey must also comply with the provisions of the partnership agreement in relation to the approval of its limited partners. As with Guernsey company migrations, to be eligible to migrate in or out of Guernsey, a limited partnership must be solvent and not in liquidation. Supervised limited partnerships (including funds) can only migrate in or out of Guernsey with GFSC consent.
The Migration Regulations expressly provide that the migration in or out of a limited partnership does not create a new person nor prejudice the continuity of the limited partnership, and the property and rights to which the limited partnership and its partners were entitled immediately prior to the migration remain unaffected. Furthermore, Guernsey law already provides for the migration of overseas companies into Guernsey, so promoters wishing to migrate their limited partnerships into Guernsey can very easily migrate their general partner companies into Guernsey as part of the same process.
New fast-track application regime for managers of overseas funds
In June 2020 the GFSC announced a new fast-track application regime for managers of overseas collective investment schemes in response to increased interest from managers wishing to redomicile to Guernsey and a desire to streamline the regulatory application process for them. The fast-track application regime combines GFSC consent to the migration of a manager into Guernsey with the granting of an investment management licence within an overall 10-day review period. Alternatively, where a manager is not migrating, the regime enables the licensing of a newly incorporated Guernsey entity within 10 days. The regime follows previous fast-track application regimes, such as those for PIFs and registered funds, which place reliance on declarations made by the applicant's Guernsey licensed administrator, enabling an expedited application process.
Given the success of the fast-track application regimes previously introduced, we expect this to be a popular option for overseas managers looking to redomicile, enabling further certainty on both the timing and overall regulatory approval process.
Mandatory Disclosure Rules
The Income Tax (Approved International Agreements) (Implementation) (Mandatory Disclosure Rules) Regulations, 2020 (MDR Regulations) are expected to take effect in Q4 of 2020.
The institution of the MDR Regulations implements the commitment made by Guernsey to the EU Code of Conduct Group to introduce a mandatory disclosure regime. It follows the OECD's "Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures" and is based on Action 12 of the OECD's Action Plan on Base Erosion and Profit Shifting (BEPS).
The MDR Regulations create an obligation to report certain information about Common Reporting Standard (CRS) avoidance arrangements and opaque offshore structures (Reportable Arrangements) to the Guernsey Revenue Service. Any information reported to the Guernsey Revenue Service may be exchanged with tax authorities in other jurisdictions. The obligation to provide information primarily applies to promoters and service providers (such as those responsible for the design or marketing of a Reportable Arrangement as well as lawyers, accountants and tax advisers), although there are circumstances where end-users will have the responsibility to report.
A CRS avoidance arrangement is any arrangement which it is reasonable to conclude is designed to circumvent, or is marketed as, or has the effect of, circumventing CRS Regulations. An opaque offshore structure is a passive offshore vehicle that is held through an opaque structure and encompasses a structure which, it is reasonable to conclude, is designed to have, is marketed as having or has the effect of allowing a natural person to be a beneficial owner of a passive offshore vehicle without accurate determination of the identity of the natural person.
AIFMD – national private placement rules
The EU marketing passport introduced by the Alternative Investment Fund Managers Directive (AIFMD) remains unavailable to non-EU entities. Sponsors wishing to market Guernsey funds to prospective European investors have therefore done so under the pre-existing national private placement regimes (NPPRs). When the AIFMD was introduced, the expectation was that the marketing passport would, in time, be opened up to non-EU entities and the NPPRs would be gradually phased out.
As required by the AIFMD, the European Commission published a report addressed to the European Parliament and Council on 10 June 2020 assessing the application and scope of the AIFMD (the Report). The European Commission noted that it was unable to assess the functioning of the passport in respect of non-EU entities on the basis it has not yet been activated. The Report also presented mixed views on the current operation of the NPPRs with no consensus on how marketing by non-EU entities should be carried out in future. As a result, it appears that marketing under the NPPRs is set to continue in its current form for some time.
Guernsey implemented the Income Tax (Substance Requirements) (Implementation) Regulations, 2018 (Substance Regulations) to address the concerns of the EU Code of Conduct Group that certain Guernsey companies could be used to artificially attract profits that are not commensurate with economic activities and substantial economic presence in Guernsey. EU finance ministers signalled their approval of the Substance Regulations by "whitelisting" Guernsey on 12 March 2019. More recently, the OECD has endorsed Guernsey's domestic legal framework as being in line with the relevant standard and therefore "not harmful" – a positive endorsement for Guernsey.
The Substance Regulations impose economic substance requirements on companies that:
Essentially, a company which is in-scope of the Substance Regulations will have to demonstrate that it has adequate substance in Guernsey by:
Collective investment schemes regulated by the GFSC under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 other than "self-managed funds" (ie, collective investment schemes with no other person or body conducting fund management in respect of the investment activities), are out-of-scope. However, any Guernsey tax-exempt subsidiary of a fund (which is not itself regulated), will be in-scope.
Overcoming COVID-19-related challenges
The spread of COVID-19 and the subsequent containment measures, including quarantine, lockdown and travel restrictions, have created an unprecedented set of challenges globally. As a result, our fund clients have been faced with a number of potential obstacles to closing transactions and conducting business generally during these disrupted times; however, by taking some simple practical measures, they have been able to successfully mitigate the impact on their transactions and working practices and very much continue "business as usual". Set out below are some of those measures:
Holdings board/shareholder meetings
A key benefit of Guernsey law has been the flexibility, subject to a company's constitutional documents and any economic substance requirements (if applicable), of having no restrictions on where a meeting of the board or shareholders can be held. Furthermore, with travel restrictions and imposed remote working becoming more prevalent in the last six months, face-to-face meetings have not always been possible. Guernsey law permits meetings of directors or shareholders to be held by telephone or by other electronic means – as long as all persons attending can hear each other communicate (eg, conference calls, Skype, WebEx or Zoom calls).
Where it has not been possible to conduct meetings by telephone or video conference, for example, in circumstances where constitutional documents require a majority of directors to physically attend a board meeting in Guernsey to form the necessary quorum, it has been necessary to consider alternative solutions, such as:
For shareholder meetings, subject to constitutional documents, the ability for shareholders of Guernsey companies to pass written resolutions or to appoint a local proxy or a corporate representative has been of assistance to those unable to travel, attend or vote at a shareholder meeting convened in Guernsey.
The ability to use electronic signatures in Guernsey has played a significant role in enabling businesses to operate as usual where access to printing facilities has been limited, and we are seeing an increasing number of transactions completed using electronic signatures. The Electronic Transactions (Guernsey) Law, 2000 recognises electronic signatures as legally valid, binding and enforceable where the signatory signs a relevant document with intent to authenticate it. Note that it is still important to check constitutional documents to ensure they are not inconsistent with the use of electronic signatures and to determine where special care must be taken with certain documents, such as powers of attorney, trusts and conveyances of real property.
Complying with Substance Requirements
In light of COVID-19, a key message in applying Guernsey's economic substance legislation has been that companies should maintain and retain relevant records that show what their policies are in respect of restrictions on travel for the company officers and the period of time for which that policy was in place. This will ensure that companies can demonstrate where COVID-19 restriction measures prohibited the company from holding an adequate number of board meetings in Guernsey or temporarily required meetings to be held virtually. Normal protocols for such meetings should be observed, as far as possible, in applying Guernsey's economic substance legislation.
When lockdown was imposed in Guernsey in March 2020 the GFSC, mindful of impending deadlines for submission of financial returns and the operational issues being faced by many businesses including licensees, immediately made a number of adjustments to its requirements in order to accommodate the changing working environment. These adjustments included extending submission deadlines and allowing returns requiring auditing in the usual course to be submitted in unaudited form without special concession, with the audited versions to be provided at the end of October 2020 at the earliest. This pragmatic approach was welcomed by the industry. The GFSC subsequently commended the resilience of Guernsey's finance sector including the widespread ability to work from home effectively, noting that by the end of May 2020, approximately half of all returns had been received in line with the original reporting deadlines.