Comfort in an uncertain environment
By Gavin Farrell – Guernsey has developed as a platform for the private equity world over the past two decades since it first stole a march on rival jurisdictions by offering a welcome to alternative investment products. In the intervening years the island has built up its experience and expertise in specialist private equity administration, but also a legal and regulatory environment for private equity funds, which continue to grow strongly despite the onset of the financial crisis.
In retrospect, private equity funds that had acquired commitments from investors immediately before the crisis and had closed their fundraising process seemed to be in the best position when the downturn arrived, because they could capitalise on their available liquidity – subject to the ability of investors to meet cash calls – to buy assets that fitted their investment strategy but that were now undervalued.
Today new business is strongest from private equity houses that have allocated most of the capital from their existing funds and can now focus on successor vehicles, backed by cornerstone investors satisfied with the managers’ prior performance. In addition, various well-established financial institutions wishing to launch a private equity strategy are setting up their first Guernsey funds.
The fundraising environment is more difficult for new managers seeking to raise their first fund if they lack a private equity track record. The golden age is gone when individuals could spin off from investment banks to set up their own operations and immediately tap into the liquidity enjoyed by investing institutions.
In some cases managers are setting up funds in a two-stage process, starting with perhaps GBP10m in capital from existing clients, colleagues or contacts to make a few investments and build up a track record. In a second phase, the manager can use the track record achieved investing the cornerstone funds to seek third-party capital.
Where does this leave Guernsey? In a strong position, thanks to the island’s robust but flexible and structure-friendly regulatory and legal environment, and the expertise of its service providers – factors that have become more important as investors demand greater reassurance about all aspects of a fund’s regulation, governance and operations before they agree to commit capital.
Guernsey’s limited partnership law – to which further refinements are currently under consideration – is based on English legislation but offers flexibility in terms of what limited partners can and cannot do without encroaching on, or breaching the sanctity of, the managerial role and function of the general partner. The island’s regulator is also well versed in its understanding of private equity structures and their requirements.
But perhaps most important is the depth of knowledge of fund administrators in structuring, support and developing the necessary support tools for private equity structures including IT. Over the years a number of firms have been set up in Guernsey by private equity specialists previously with large administration businesses. Today these niche firms are often expanding into other jurisdictions, for example establishing EU-based offices to set up and service asset holding structures.
Still, Guernsey remains the favoured choice for the private equity fund structures, and it is also the focus of intellectual capital on the part of service providers and private equity houses alike. An example is the establishment of substantive operations in the island by firms including Terra Firma and Apax Partners as an alternative to outsourcing solutions. In today’s environment, that provides the comfort many investors are insisting upon.
Gavin Farrell is a partner and head of funds in Guernsey with Mourant Ozannes
Please click here to download a copy of the Private Equity Wire special report: Guernsey Private Equity 2011
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