Types of Fund Structures
There are various types of fund structures available depending on the requirements of the investment manager and potential investors. Midshore are able to assist with all of the following.
For further information, please contact us.
There are three types of Corporate structure that may be used for funds:
- Non-cellular (standard) company
- Protected Cell Company
- Incorporated Cell Company
All of these company types are incorporated under the Companies (Guernsey) Law 2008 (as amended) and are subject both to the Companies Law and to whatever has been stated in their memorandum and articles of incorporation. Companies may have a stated or unstated share capital and have shares of par or no par value. Where a non-cellular company is used to form an open-ended fund it is referred to as an Open-Ended Investment Company (OEIC).
In a Protected Cell Company (PCC) the assets are segregated into cellular and non-cellular assets with cellular assets, share capital and reserves being attributable to one or more cells and non-cellular assets, share capital and reserves held for the “core” of the company. The assets and liabilities of each cell are segregated from each other cell and creditors can only have claim to the assets of the relevant cell. There is still only a single legal personality – the PCC company itself.
In an Incorporated Cell Company (ICC) each cell is incorporated with separate legal personality. Each Incorporate Cell (IC) is not a subsidiary of the ICC but must contract in its own names. Whilst both the ICC and each IC has a board of directors they will be common across the entire structure. An IC can be spun off from the ICC.
Laws regarding conversions are flexible and allow a non-cellular company to convert to a PCC or ICC and vice versa. Similarly a PCC can be converted to an ICC and vice versa.
Unit Trusts (UTs)
A unit trust is not a legal entity, but is created via an instrument of trust (normally between a manage and a trustee) and is subject to the Trusts (Guernsey) Law, 2007 (as amended). The trustee will hold legal title to the assets on trust for the benefit of the unitholders. One of the significant differences between a unit trust and a trust created for private wealth reasons is that the unit trust is subdivided into units, being similar to shares in a company.
The Limited Partnerships (Guernsey) Law, 1995 (as amended) provides the framework for LPs in Guernsey. Typically a Guernsey Limited Partnership does is not a legal entity, although it can elect to have legal personality. The main parties to the Limited Partnership are the General Partner (GP) who manages the assets of the fund (often with the advice of one or more investment advisors) and the Limited Partners (LPs). Each LP has liability limited to their contributions to the Limited Partnership, whilst the GP typically has unlimited liability.
Open- and Closed-Ended Funds
Funds in Guernsey are either open-ended or closed-ended. This is typically dependent on the types of assets being invested into, although it may also depend on the distribution method.
Open-ended funds give investors right to redeem their shares by selling them back to the manager (who normally acts as principal). That is not to say there is unlimited liquidity on a fund; typically there will be a maximum amount or percentage of the fund that may be redeemed on each dealing day and there may be a notice period for redemptions.
Typically open-ended funds will invest in readily-tradeable instruments (shares in companies, liquid bonds and money market instruments. Open-ended funds are less appropriate for less liquid assets, as has been seen with many open-ended property funds.
Closed-ended funds give no rights to redeem the shares, units or partnership interest. Holdings may be sold to other holders or, if a listed/traded fund, on the secondary market of the relevant stock exchange.
In addition to less liquid assets, closed-ended funds are appropriate where a fund is listing and trading on the main market of the London Stock Exchange or a similar trading exchange.
Authorised or Registered?
Guernsey has both authorised and registered fund rules. Generally, the registered fund rules are “lighter” touch and require the administrator to make various representations/warranties to the regulator. Authorised funds have a higher level of regulatory oversight and as a result quite popular amongst investors who want a “quality” product.
Guernsey open-ended authorised schemes are further divided:
- “A” scheme – broadly equivalent to UCITS III regulation; quality retail product; recognised for retail registration in various jurisdictions
- “B” scheme – more flexible than the “A” scheme; may be aimed at the retail market or institutions; retail registration more difficult
- “Q” scheme – aimed at Qualified Professional investors
Additional fund rules, guidelines and processes
Fast track registration – registered funds, being based largely on representations made by the administrator, can be approved by the regulator in 3 business days
Flexible hedge fund policy – authorised open-ended funds normally require a local custodian, however for hedge funds a non-Guernsey prime broker may be more appropriate as allowed for under this policy
Manager Led Product (MLP) – a recent innovation, this allows a top-level manager operating under the AIFMD rules (with possibility of derogations) to launch both subsidiary general partner structures and registered funds with one-day notification to the regulator
Private Investment Fund (PIF) – allows the launch of a private investment fund, subject to certain restrictions, as a registered fund with one-day notification to the regulator
The last two structures were covered in more detail in our December 2016 article covering regulatory changes.
Merging & Migrating
The process of merger is taking two distinct funds, which may be separate structures or sub-funds of the same umbrella, and merging them into one. Whilst the process is relatively simple a vote of shareholders or unitholders at extraordinary general meeting (EGM) is required. Midshore have experience of fund mergers within Guernsey as well as cross-border mergers involving the UK, Luxembourg, Ireland, Jersey and the Cayman Islands.
A migration is very different to a merger. Here an existing fund is “re-domiciled” from one jurisdiction to another. The legal status of the fund remains unchanged, albeit subject to law and regulation in a new jurisdiction and operated by new contracting parties. Midshore have experience of fund migrations involving Guernsey, Jersey, Ireland and Luxembourg.