New updates to the Private Investment Funds (PIF) regime in Guernsey

In this article, David Crosland and Andrew Tually reflect on the recent updates to the Private Investment Fund regime, Economic Substance requirements and the emergence of innovative funds and structures driving growth in Guernsey.

As competition between fund services domiciles continues to grow, incumbent jurisdictions such as Guernsey are driving innovative regulation and structures in order to retain their position on the financial services stage. Domiciles cannot rely on traditional and established managers alone to drive growth; they instead must adapt to the evolving needs of investors.

Recent updates to the PIF regime

The introduction of the Private Investment Funds (PIF) regime in 2016 was a landmark initiative, which opened up possibilities for new managers, encouraging a new crop of managers to domicile in Guernsey.

The PIF has proved extremely successful and popular – particularly with start-up managers who are attracted to the PIF as a less rigid, more cost-effective route to market for a new fund. PIFs have their regulatory registration issued in one business day by the Guernsey Financial Services Commission (GFSC) and there are no requirements for full information particulars (such as a prospectus) to be prepared or submitted to the GFSC.

While the PIF regime has been successful, the GFSC has demonstrated its commitment to constant innovation by incorporating changes to make it more attractive for fund managers and family offices, while retaining protections to safeguard less sophisticated investors.

The new Private Investment Fund Rules 2021 introduce two new routes to PIF registration that, critically, do not require the PIF to appoint a locally licensed manager (though it may still elect to do so). The two new options, the "Qualifying Private Investor PIF" and the "Family Relationship PIF", are subject to investor eligibility criteria. Qualifying Investor PIFs are available to investors who can evaluate the risks and strategy of investing in a PIF and bear the consequences of investment; Family Relationship PIFs are available to investors who share a family relationship or are an employee of the family.

Streamlining the PIF regime and offering options which do not require the appointment of a locally licensed manager have been well received by managers and investors alike and are prime examples of Guernsey's ability to mix innovation with strong investor protections.

Economic Substance

Economic substance is an area where all offshore jurisdictions are under increasing pressure to prove that they are not merely a rubber-stamping jurisdiction. Fortunately, the track record and sophisticated nature of the Guernsey funds sector lends itself to these challenges. Guernsey's deep pools of experienced directors, many of whom have asset-specific expertise, and capable service providers mean Guernsey has always been a jurisdiction of substance. Technology has also played a crucial role in meeting economic substance requirements, such as maintaining substance registers for recording Core Income Generating Activities, which has in turn made the preparation of the enhanced tax returns much more straightforward.

In November 2020, the Guernsey Revenue Service issued guidance to supersede the March 2020 guidance issued by the Guernsey International Business Association. The announcement clarified that the official Revenue Service guidance on economic substance has not changed as a result of COVID-19, but that the Revenue Service will take a pragmatic approach when assessing whether the substance requirements have been met by a company during periods when government imposed restrictions (in Guernsey or elsewhere) are in place. It is expected that COVID-19 measures will only impact on the ability of companies to comply with the directed and managed test of the Economic Substance Requirements. It is acknowledged that the temporary framework outlined in this guidance above will need to be in place while travel restrictions continue.

Emerging trends and regulatory horizon

There continues to be a strong desire by large, private investors to participate in co-investment opportunities and to invest in alternative private capital structures including single investor mandate vehicles and club deals – which, depending on their circumstances, are well suited to the flexible and nimble PIF regime. Also, fund managers are raising concurrent funds simultaneously rather than raising and investing one fund at a time.

Interest in ESG initiatives continues with Guernsey's "Green Fund" regime, launched in 2018 as a world first, providing manager's with a good tool to help demonstrate their green credentials.

Outlook

Guernsey's funds sector is expected to further flourish this year as large, established managers continue to close funds and new managers drive growth in this sector. Sensible and pragmatic regulation also helps to attract new participants – including, for example, (i) the aforementioned changes to the PIF regime, (ii) the introduction of a fast-track migration and licensing regime for overseas fund managers to encourage them to set up shop in Guernsey, and (iii) the repeal of the non-Guernsey scheme regime and associated rules, which imposed restrictions on the management of non-Guernsey schemes.
By continuing to foster new developments, drive innovation and provide an effective regulatory regime, Guernsey will retain its reputation as an attractive domicile and continue to compete on the international funds stage.

Please note this article provides a general overview of the matters to which it relates. It is not intended as legal advice and should not be relied on as such.

David Crosland and Andrew Tually co-authored this article with Patrick Cummins, managing director of Apex Guernsey. An original version of this article was first published by Thomson Reuters, June 2021.

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