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Welcome to the Guernsey Finance podcast page.
Our podcasts bring you all the latest news and insight from Guernsey, the global finance specialist, as well as audio from some of our online events.
Rosie 0:05
Hello and welcome to the latest We Are Guernsey podcast. For those of you who don't know Guernsey is a leading global finance center of substance stability and security committed to the cause of green and sustainable finance. My name is Rosie Allsop I'm communications director here at We Are Guernsey, the brand under which Guernsey finance promotes the island of Guernsey's specialist financial services sector in its respective chosen markets. today's podcast forms part of a series that's leading up to the guarantee fund from 2021. It's titled 'Building Tomorrow', and the forum will explore the question of how to create a better future. The event promises to provide insightful discussion around current trends, including the view of policymakers and experts from across the financial services spectrum. I am delighted to introduce my guest today it's David Crosland. David's a partner at Carey Olsen. And he's here to discuss the latest trends relating to density funds. Welcome, David. Thanks for joining me today.
david 1:15
Thanks for having me, Rosie.
Rosie 1:17
Well, before we start, I thought it might be helpful for listeners to learn a little bit more about you and your backstory. Sure.
david 1:26
So I am a I'm a partner at Carey Olsen in the corporate practice here in Guernsey. I have spent my life It seems going backwards and forwards from Guernsey to London and back again. I was born in London, moved to Guernsey when I was fairly young, moved back to London for a time moved back to Guernsey and, and ever since I've been back in Guernsey I've been going back and forth to London several times a year. But I'm one of those things in London, I did all my training and qualified as a as a lawyer in the private funds practice at Clifford chance, which at the time was one of the one of the two tier one funds practices in London. There I was really focusing on advising private fund managers in the launch primarily of private equity funds, some alternative assets in there as well. I've been very lucky since moving back to the island in 2007, to continue that. So that's continues to be the focus for my practice. And to be honest, most of what we do at that carry also as well.
Rosie 2:37
That's great, thank you. So let's start with some numbers. The June quarter investment statistics released by the Guernsey Financial Services Commission shows that net asset values of guarantee funds now stand at 318 billion, that's a 20% year on year growth. Do you have any comment on those statistics? And maybe why Guernsey is doing so well as a funds domiciled.
david 3:02
I mean, if anything, I think those numbers are probably slightly understated I say slightly what they don't what they only reflect is the the assets that are contained in our regulated fund structures. What they don't include, of course, is the huge amounts of capital that now appear in unregulated investment holding structures. And whether those are for private investors or whether they are co investment vehicles or single investor mandate vehicles, which can contain huge sums. I mean that the I wouldn't be surprised if in aggregate, they were north of 100 billion on the island. And we've got several of them we've seen even this year that have been over a billion in size. So I'd say if anything, those numbers are slightly understated. And, you know, if you are looking at comparisons in other jurisdictions, other jurisdictions will include those other vague other vehicles that we don't within their numbers. So actually, that number understates if anything. And, you know, why are we doing so? Well? Well, the truth is that for the last 25 years, perhaps Guernsey has been fairly specialized in its servicing of particularly private alternative asset vehicles. And, you know, globally we've just seen in the last few years, a massive growth in the appetite of investors to put money into those strategies. So, you know, we've seen huge amounts of money flowing into that sector generally. And, you know, as they say, a rising tide lifts all boats and Guernsey certainly benefited from that. You know, we can talk a bit more later about specific reasons why guernseys in particular, it's a popular but I'd say it's important to understand that there is this you know, global groundswell behind that move.
Rosie 4:58
Yes. Great. Thank you. Thanks for putting that into context. So turning to the fundraising environment at present, we've seen Guernsey facilitating a number of managers during lockdown. Do you think the trends continuing or are there new managers entering the market post pandemic, and with the travel restrictions now starting to ease?
david 5:18
I think what we saw in lockdown was surprising. But perhaps not that surprising when you think of with some, you think back in history, particularly to the financial crisis. So after the financial crisis, a lot of investors, you know, they were very worried about liquidity. And they were very worried about investing into funds that generally are illiquid, and lock your money up for a long period of time. And we saw a collective pause, if you like in fundraising in 2008/2009, some funds were getting away, but it was generally seen as a very tough time for fundraising. Those funds that that did get away proved to be some of the best performing funds there have ever been, you know, they were buying assets at a low point in the cycle, and making huge amounts for their investors that that held their nerve and continue to deploy capital in less environment. I think this time around, there was a, there was definitely a brief pause. But it was a matter of weeks. And as much as anything, I think it was, it was a pause as a result of both managers and investors adjusting from an environment where you could, you know, go on a road show, press the flash and see investors face to face without any difficulty, to one where it was all having to be done digitally, digitally, or virtually. But the you know, there was no seeming less up in the appetite for the asset class. So we didn't seem to say, pull back from investors. You know, some timelines got got pushed out a bit, but ultimately, everybody, everybody raised and we saw some very significant fundraisers take place take place almost entirely, virtually. So yeah, so we've seen that you know, that the fundraising market at the moment continues to be very strong for good quality managers of all different sizes. And as I think we're going to come on to a bit later, what we've what we've been really pleased about in the last couple of years, is the sort of reemergence of those first time managers, people who perhaps have worked in in larger houses have decided to spin out and do it for themselves, that's always been a cornerstone of, of, against his client base, you know, hugely important one was such a good jurisdiction issue of setting up a new fund for the first time. And that's what we've seen be a continuing trend. And we were worried when the pandemic hit, you know, with those managers, you know, we've all found it's quite easy to keep in touch with people that you've already know. So if you're a manager, that's investors, you already know, but it's quite difficult to make new friends over a zoom call. So we were worried that you know, first time managers, how are they going to fare you know, going out and raising money for the first time? Well, saving me. Not bad at all. You know, we launched Queen's Park equity, their first fund in the teeth of the first lockdown back in 2020 and they raised, in fact, they exceeded their hard cap for their first fund raising, I think it was about 175 million pounds. almost entirely, virtually, you know, over zoom calls and data rooms and the like. So yeah, it was, it was worrying for a time but the Ireland ended up being busier than ever, I think last year.
Rosie 8:56
That's really good to hear. I know what you mean that there was a few weeks, so everybody just seemed to pause and hold their breath. And then everyone seems to have adapted to this to this different environment incredibly quickly. So let's talk about size. Globally, we're seeing deals getting bigger, is that something that you and your colleagues or Carrie Olson seen for guarantee funds as well?
david 9:19
Yeah, so I think at the top end of the market, just general inflation and to say that, you know, the sizes of funds have been getting bigger as I say there's this huge appetite amongst investors to put money into the asset class. So if you as a manager can deploy more capital, then you've done very well and generally we've seen our larger clients or by larger clients, I mean those raising larger funds, the mega buyout funds have raised bigger funds. You know, they've added 234 billion euros sometimes to the top of their, of their fund caps. And of course, with bigger funds comes bigger deals. Plus, there's more competition in the market, but I from other big funds, but also from trade buyers and the like. So, yes, we've seen, we've seen bigger deals being done, we've seen a reemergence of, of funds, doing syndicated deals, co investing alongside each other. And another thing that's been really positive for Guernsey as a as a servicing jurisdiction is the huge growth in CO investment. So you know, funds that will, that will stump up the first X percent of the deal. And then they will offer their investors another slice of the same deal, if they put extra money in. And those you know, those deals then are quite heavily structured and negotiated. And we've done a lot of experience of looking after those. So yes, I would say, we've definitely seen bigger deals. But at the same time, we still do an awful lot of, you know, pretty modest sized stuff, you know, because of because of gains is experienced and, and cost efficiency. It's generally suitable for anybody raising a first time fund to do small deals right up to, you know, the mega funds that are going to have dozens and dozens of vehicles to look after so. So yeah, I would say we've seen bigger deals, but it's not this little we do.
Rosie 11:18
That's good to know. So Guernsey has we were talking about this a minute ago, excelled in innovation. Are you seeing more innovative structures being used in Guernsey? And if so can you give me an example?
david 11:31
Hmm, the problem with excelling in innovation, as he puts it, is that you're tending to look at new things all the time. So you don't always know that something is innovative until somebody that you know, some third party tells you that it's later or that sounds like a funny thing to say. But we've actually won awards for some of our deals for innovation that we didn't even know, we rented for because we didn't think of it in those terms, because we're constantly talking to clients about about what they want to do, we're very solutions focused. So I would say, you know, in innovation, we see, we see new managers with new innovative fund strategies. So whether that's in the sustainability space, or whether that's in the crypto space, or whether it's in, you know, innovative ways of, you know, providing services to fairly vanilla, traditional funds and structures. So, for example, we worked with more than trusting unigestion, when they introduced the world's first blockchain solution for fund administration. So that was very innovative. But for us, that's kind of part of our day to day job. So we don't always see it in those terms. I guess we're seeing a constant. clients, and their advisors in London are constantly adapting to new legal and regulatory demands elsewhere that, you know, they are subject to. So we see a lot of our stuff. Again, it's very, very flexible jurisdiction. It's designed to be we have a very intelligent, open minded regulator, who understands what they need to do to protect investors. But doesn't have a straight jacket on and says you can only do it this way or that way. You know, they're focused on the outcome, not on the, on the way that you get there. So I think all of these ingredients mean that we're constantly doing new things all the time, and I'd say now, more than ever, it's necessary to have that flexibility. And that, that way of thinking that allows you to do new things.
Rosie 13:54
Yeah, I would very much agree and just being slightly ahead of the curve in many different areas. So so far, David, we've covered a lot about the highlights that we've seen in Guernsey this year. But I want to ask you, in your view, what makes Guernsey such an attractive jurisdiction for funds?
david 14:17
What a big question. And there's, lots of different layers to it. I think you've got to have some basics, if you're going to be a funds jurisdiction. If you're going to set out your shop as a funds jurisdiction, which Guernsey did, as I said, 25 maybe even more years ago, you know, they really focused on this market, you need to have some basics in place. And the rest then follows from that. But first of all, you need to have structures, structures, legal structures, legal forms that people are familiar with, that they're comfortable with, that they are fit for purpose. So you know we've seen recently in the law last couple of years, you know, jurisdictions say like Ireland or Hong Kong introduce Limited Partnerships legislation. You know, we introduced a, or even in the UK, in fact, a couple of years ago, they introduced this concept of a private fund Limited Partnership, you know, we had our equivalent in 1995. So we've been, you know, we've had those structures in place for a long time. The other thing you need to have is, so you can set up your fund or your vehicles, you've got the veh-, you know, you've got all the vehicles you might possibly need. And we're constantly introducing new ones, you know, we have, we have vehicles that other people don't yet have in terms of our, you know, PCs and iccs cellular companies, which we're seeing very popular at the moment, we're also introducing new ones. So, you know, llps, were recent LLCs are coming soon, which were the, you know, which are modeled really on the US model, to be designed to be attractive to us clients. So we've got those building blocks in place, and then you need, I think you need to have experience as a jurisdiction. So as I say, we've been doing this for a long time. And we've got an ecosystem on the island of service providers, who are very, very used to dealing with private funds, and the associated assets that they invest into. So you know, you think about the number of people, the number of administrators, the number of audit firms, the number of law firms, just the sheer number of people who are doing this day in day out on the island and have been doing it for their whole careers. That, you know, that ecosystem we hear quite often, we've had funds come to us or even move to us from other jurisdictions, because we get it, you know, we understand the industry, we've been long supportive of the industry. So, so I think you need to have those, those two things. What follows from that you need to have, it's no good having the best fund structure in the world, the best service providers, if you can't go and sell it, so you need to have market access. There's two parts of that one is regulatory well, guarantees on has long had a policy of being on every ride as they possibly can. And to be honest, you know, sometimes in the past, it's held us back or not held us back, but we have lost business to lower cost, lower regulated, frankly, lower quality jurisdictions, because they were just cheaper and easier, they didn't have the same standards that we did, I think now actually are focused on regulation and going for those whitelist is really paying off the world has turned, investors are worried about reputation, they're worried about white lists, they don't want to be invested into a fund that's on a blacklist or a grey list, which we see some of our competitive jurisdictions are at the moment and are suffering for it. So you need to have that those regulatory sort of stamp of approval. We also have fantastic reputa relationships with our European counterparts. So you know, the the private placement rates into many markets are available for us, and where those jurisdictions we're seeing recently have started to increase their standards, and their requirements for accessing their markets. currency is very, very able to meet those. And we have a regulator who we'll talk about in a minute, who's just fantastically cooperative, and has a great partnership with those regulators. And then you just you need to have, so that's the sort of regulatory side and then you need to have recognition in the market. So people out there need to
think what I'm getting into against the fund. That's just that's a box tips. I understand the jurisdiction, you know, it's very strong, it's very stable, has incredible respect for the rule of law. So we know that investing into those funds will be easy for us, we don't have to do any research. Nobody's trying to do anything new. So we have those benefits, which come from the fact that we've been doing this for the keep going back to 25 to 30 years, since really the birth of the industry in Europe. So you've got all of those sorts of ingredients, and then you get some soft stuff that comes in it's the fact like, okay, a lot of the funds market in Europe certainly is based in or advised from or run out of London, or the UK or near European Western European countries. You know, we're an English speaking jurisdiction. From a timezone perspective, we're on the same as London's there's no differences there. And from an international perspective, we sit neatly in the middle, you know, we have Australian phone clients who haven't, ie us investors, and they have Guernsey funds. So it's a very, we sit in the middle, between those two time zones, and it's very convenient for people. And we are 35 minutes away from London flight time. Very, very easy for clients to come and visit. You know, we're not in some of our jurisdictions are 1012 hour flight times away. So it's just, you know, if you think from an operational perspective, this is very convenient there. So I told you, it was a big, big question with at the moment. So with lots of different layers of flavours.
Rosie 20:49
Yeah, absolutely. I think if, if you had to summarize it, you could say that guns is a bit of a Goldilocks jurisdiction really is just right, in many different areas. So I wanted to go back to what you're saying about the regulatory environment and the, the open mindedness of our regulator, and the role that they have and what your experience has been when dealing with the GFSC?
david 21:17
Yeah, I mean, they, we, the GFSC is fantastic. In my eyes, we talk about them being open minded, really, I don't want to, I don't want to make out like that there. Anything other than a proper prudent regulator, I really am very focused on the protection of investors, you know, they have statutory mandate, which they take very seriously. What I would, what their real strength is, is that they understand our industries said they understand the private funds market, they understand structures, they understand that our funds are primarily targeted at heavily advised professional investors. So they also understand about things that are important to those clients like speed to market, you know, the ability to have vehicles in place in a timely way. You know, to allow them to be marketed to these investors. And they understand that this as an industry is very innovative. So new structures, new asset classes, new ways of doing business, they've proven themselves to be adaptable. So they're not rigid in their thinking. They understand that, you know, that. There's any, there's any business for that, but it's better that business being Guernsey, regulated by them, than not come to Guernsey at all, because they won't even talk about it, or think about it. So that's where I see them. So our relationship with them has just been so positive over the years, because we're always very straight with them. We're always very proper in our dealings. But we always get a good reception in return, they will talk to us, they will tell us where what we're proposing, or what a client is proposing, is outside of their risk appetite. But at the same time, you know, they will often work with us to allay the concerns that they have. And I think that has to be one of the benefits, if you're a small jurisdiction, like us, is a regulator that you can talk to you like that so often, you know, we will have conversations with people in London or Luxembourg, or wherever, where our rules really aren't not different to the rules that are in place with the FCA or the European regulators, but because we can actually talk to our regulator, have a dialogue with them. Both sides can get to the place where they're happy, and that avenues just not open to those people. So yeah, they've been a huge part of our success. Absolutely.
Rosie 24:14
That's great to hear you say that in that open and honest dialogue. And now anybody who's been involved in financial services, can't have failed to see the latest investment megatrend, which has been ESG and sustainable finance, and Guernsey. We're very, very proud to be a global leader in sustainable finance initiatives. One of those was the flagship initiative, the Guernsey Green Fund, which for those of you who don't know, is the world's first regulated green fundraising. David, can you talk us through that a little bit and some of the funds that have received the kitemark?
david 24:56
Yeah, sure. I mean, I thought this was a fantastic idea. I'm slightly surprised that we Well, first, because it seems so obvious, in hindsight, like all good ideas, I suppose. So what the Green Fund is, is essentially any funds that ought to be a Green Fund. And if you do make that election, and you want to qualify and have the kite mark, if you like, then your fund has to be invested in line with a set of principles that are not Guernsey invented, or GFSC derived. They have been formulated by a group of deifies and global multinational institutions like the World Bank, EBRD, you know, the African bank for development. So they set forward a set of criteria effectively are a set of asset classes, or objectives that you could invest into and to be considered sustainable. It's a live list. So as new taxonomies are developed over time, like we will be using at the moment, then they will be added or can be added to that criteria. And really what it does is it it offers a protection against greenwashing. Every fund now is saying, Oh, you know, we operate in a sustainable way, you know, all of our investments have ESG at their heart, and what have you, I think it's very difficult for investors to see wood, the wood for the trees, so that they're just being bombarded with all these sound bites, and they don't actually know the truth. So I think having a vehicle and a regime, which actually offers a certification, as against and a constant assessment against these criteria, is going to be really valuable. You know, we're seeing it now investors are having to come up with their own reporting metrics to try and understand what it is that a manager is doing. And their investments are doing. You know, we're seeing new initiatives all the time, I think having a regulatory standard is is going to be really helpful in terms of the funds that have taken advantage? Well, it's, it's been interesting, it's evolving over time. Some, you know, they they fell into it before it was even invented. If you've got a fund that invests in solar energy, for example, the generation of solar energy. I mean, it's it's a fairly, you it'll surprise Neyland to hear that they fall squarely within the, the protocols we're talking about. So they are, we've had a few of those elect to become, take the Green Fund designation. And some funds, frankly, hoo, hoo, some existing funds who, who invested in very similar things have chosen not to, because they felt that they didn't, their investors didn't need that additional certification to get them comfortable, because they, you know, they had their own process in place. What we're seeing now is some really interesting ones. One, which I can't name, but I think we're still in the process of fundraising, but they're, they're about halfway along, which is a effectively a food tech fund. So it's investing in meat substitutes. You know, the principles behind it a very successful track record and investing in things like beyond meat, you know, these sort of plant based synthetic meats, which are going to which we're seeing as a huge growth area, generally as in society, and which this fund is really going to seek targets investments in that asset class, they have gone to the Green Fund designation. It's that's a really interesting use of the of the designation. So we're seeing new and interesting ones all the time. It's really exciting.
Rosie 28:50
It's great. Now, the US introduced sustainable finance disclosure rules, and the Financial Stability Board created the Task Force on climate related disclosure. Do you think requirements to disclose have an impact on guarantee funds? And have you seen firms preparing for those disclosures?
david 29:12
Yes, and yes. So you know, so much, the global regulation will impact on our Guernsey funds. indirectly. So quite often. Now. If you want to, you know, for example, the ease sfdr will apply to guarantee funds, when they are marketing into the EU, like a lot of our funds do. So, yes, of course, they will have an impact. What do we see clients preparing? Well, clients, clients are, frankly reacting. At the moment. A lot of these things are very new. They're trying to understand what it is that they have to report. Firstly, whether they call them whether they have to report and then lastly, it's like well, how do we get the information out to our portfolio companies to be able to provide those disclosures, you know, what is it we can do, it's palatable to us and then at the same time, you've got investor groups. We saw on last week, there's a consortium of big investors led by, and managers led by Carlyle, I think, who are trying to come up with a sort of single standardized reporting format for investors. So frankly, clients are just reacting at the moment they are trying to. They're trying to deal with all of these competing regulations and investor demands for more reporting on the subject, which can only be a good thing, but at the moment is sopping up huge amounts of managed management time. Yeah,
Rosie 30:45
very much. So everyone's just sort of casting around seeing what what the best thing to do is. So finally, David, what's your outlook for the fund industry here in Guernsey?
david 30:56
But honestly, it's more positive now that have been for a number of years? Why? Of course, I would say that well, I think, I think we've seen, you know, a few years ago, there was a trend for investors were looking to seek to streamline the number of relationships that they had with external managers. So you have to understand that a lot of these big institutional investors, they're only investing a very small proportion of their overall portfolios in, in the sort of alternative asset funds that Guernsey loves, and specializes in, you know, maybe less than 10%. So if you think about the teams that those investors focusing on this, we're really small, and they're often quite complex and negotiated deals. So just in order to save during sanity, a lot of them were seeking to minimize the number of relationships they had to have. So for those managers that could offer the ability to deploy very large sums of capital. So the very large funds, they did very well, they were very attractive. And we saw sort of consolidation if you like it into those larger managers, he went from being single products, monocline, private equity providers, say all of a sudden they've become multi strategy, asset managers. So they lost credit businesses, real estate, businesses, CLO businesses, all sorts of offshoots. And they'd hire in teams to do that. So that was great. If you were one of those managers, that was also great. If you had a relationship with those managers, and you looked after or struck, you know, the structures, one of those managers, and we had plenty of those things could be wrong, but what that was doing in the market generally was squeezing out those emerging managers, the first timers, that gains he loves to have come through its door, and really is such a fantastic jurisdiction for So, you know, you get you speak to people locally, and you know, everybody does the dance and says, Yeah, I'm really busy, you're busy, I'm really busy. And then you get that question time. And again, well, how much new new stuff are you doing? How much new new stuff? And the true answer was? Not that much. because there wasn't that much around in the industry. Generally, this wasn't just again, the thing. So a few years ago, you know, we were we were doing well, we were growing, but we were growing, doing more and more business for a smaller number of clients. What we see in the last few years, just the sheer weight of interest in the asset classes, and the proliferation of asset classes, has meant that, you know, investors now are realizing they can't just focus all on these mega fund managers, which are, you know, they're still doing incredibly well. But to generate alpha, a true alpha, you know, they need to put some money into new innovative first time managers. And there's been loads of research out as well, which actually shows that first and second time funds in the smaller and medium sized space generally outperform later vintage funds. So you need to be putting money into first time managers. So that's been very helpful. So we've seen an emergence in the last few years of first time managers, often based in London, and as I say, Guernsey is such a fantastic jurisdiction for them that we're a well regulated, respected jurisdiction, but the financial barriers to entry, like the friction costs are relatively low and very low against some of our big European capacitors. So the other thing we've seen, which is getting a bit techie, but you know, we've seen a proliferation have structures and you no longer have, you won't have a fund that only has a single vehicle anymore. You'll have a whole bunch of parallel vehicles that have some co investment vehicles that we financing coming in all sorts of innovative structures that were very well placed to deal with. And that is definitely an important part of my optimism going forward.
Rosie 35:27
That's great to hear. And you know, long me that optimism continue. That's all we have time for today. I'm afraid I would like to thank my guest, David Crosland, and I'd also like to thank you for tuning into the podcast. If you'd like to find out more about Guernsey's fund sector, you can attend our annual Guernsey Funds Forum event. It takes place this year on the 29th of November in London. And you can find out more about that, including how you can join us through our website, weareguernsey.com. You can also find everything there from the latest news to informative literature. We've also got a catalogue of interviews and panel discussions on the We Are Guernsey podcast channel, and you can discover why we are a leading center of green and sustainable finance via our sister podcast, the Guernsey Green Finance podcast, which was recently rated in the top 10 most useful green podcasts by the green finance guide. You can check them both out by searching for them wherever you get your podcasts. And if you think Guernsey is the jurisdiction for you, you can find guarantee based fund service providers in the business directory on our website or by contacting a member of our business development team. Finally, we'd love to hear your feedback you can get in touch with us on Twitter at @WEAREGUERNSEY we will have links to David alongside Carey Olsen's social media in the show notes. So check those out to him or from them. That's all for now. We'll be back soon with another edition of the We Are Guernsey podcasts. But for now it's goodbye from Guernsey.
Transcribed by https://otter.ai