This article was first published in the Financial Times.
VC performance is reportedly stabilising despite facing a rollercoaster of economic headwinds and global uncertainty over the last few years, and fundraising conditions are expected to improve. Investor appetite for innovation and entrepreneurial investments is increasing, with AI, technology and health assets giving the sector a boost.
Guernsey remains the premier jurisdiction for European venture capital (VC) funds, with twice as many funds raised in Guernsey during 2022-2023 as compared to the next most-popular jurisdiction.
As the legal adviser to more than 81% of the Guernsey-domiciled fund market by assets under management, we summarise recent trends in fund structuring and highlight the appeal of Guernsey as a domicile for VC promoters and investors.
ESG investing
We continue to field enquiries and establish funds investing in climate-aligned and "impact" strategies designed to create positive environmental and social change as well as profit, despite some headlines suggesting a drop in ESG investing.
Guernsey is home to two world-first regulated sustainable fund regimes: the Guernsey Green Fund and the Natural Capital Fund designations. More than £5 billion has been channelled into green funds focusing on wind, solar and forestry and a similar amount into wider sustainable finance investments.
In 2022, foodtech and alternative protein investor Synthesis Capital launched its debut fund as a Guernsey Green Fund, securing commitments in excess of US$300 million. It is believed to be the largest ever fund raised in the foodtech sector and was advised by Carey Olsen's investment funds team in Guernsey.
Synthesis is a perfect example of a first-time manager coming to Guernsey and utilising the jurisdiction's expertise, infrastructure and well-understood regulatory regime. By investing in sustainable funds via Guernsey, investors can take comfort that their investments will be monitored for compliance with a range of internationally recognised criteria such as The United Nations Sustainable Development Goals.
Deal-by-deal SPVs
An increasing share of promoters are offering investors deal-by deal opportunities and/or co-investments alongside regulated fund structures. Such opportunities are typically structured through SPVs holding a single asset or acquiring a pre-defined portfolio of assets – permitting expedited turnaround times for fundraising and deployment. Typically cheaper to set-up and administer due to reduced regulatory, compliance and audit requirements, these Guernsey structures support the key considerations in VC structuring: speed to market and cost minimisation.
Speed to market
A significant part of Guernsey's appeal is its ability to establish fully regulated funds quickly, which has led to recent innovation and increased popularity for Guernsey funds, for example:
- we are establishing Guernsey funds to act as warehouses for onshore funds, admitting investors early to enable seed investments to be made ahead of launching onshore products (which have substantial lead times for licensing and launch); and
- the rise of GP-led secondaries activity in tough M&A and IPO markets, which has fuelled an increase demand for proportionately regulated Guernsey continuation funds for the purposes of providing runway for single/star assets or as an efficient end-of-life solution.
Private Investment Funds (PIFs)
Perhaps the "go to" fund option for VC managers in Guernsey, PIFs were introduced in 2016 to provide a fast-track route to market for first-time fund managers and managers with a closer connection to their investors. The PIF is a cost-effective, fast-to-launch and flexible fund structure used by asset managers and family offices with a professional, sophisticated or family investor base of up to 50 investors (subject to exceptions). Regulatory approval can be granted in one business day, there is no minimum subscription amount and, if the number of investors should exceed 50 after setting up a PIF, the regulatory status of the fund can be converted easily to allow participation by further investors.
Guernsey (still) an alternative to Luxembourg
Guernsey's competitive edge was recently reinforced in a report by the Corvus Group, which compared Guernsey and Luxembourg funds in their cost effectiveness for raising European capital. The report showed that the purported benefits associated with a "fully passported" structure within the EU (e.g. Luxembourg) are largely outweighed by existing distribution pathways for Guernsey funds, with only 3% of EU-domiciled/managed funds being registered for sale in more than a handful of EU member states.
Why choose Guernsey?
Guernsey maintains a proportionate, flexible and competitive funds regulatory regime, adopting a risk-based approach to ensure that appropriate levels of investor protection are maintained, while at the same time avoiding unnecessarily complex or burdensome regulation.
Further, Guernsey funds boast a broad international appeal and familiarity, being promoted or sponsored in more than 55 jurisdictions globally (including in North America, UK, EU, Asia, Middle East and South Africa). The AIFMD has no application to Guernsey funds or fund managers unless they are marketed into the UK/EU, but national private placement regimes, which typically require only partial adherence to the provisions of the AIFMD - resulting in lower running costs and, consequently, higher investor returns – are frequently utilised.
