This article was originally published by We Are Guernsey
Business Advisory Director Steve Desmond explains that structuring through Guernsey works for a range of investment vehicles, which can be attractive for Asian business.
Guernsey does provide a truly global offering for structuring investment products.
We have seen the appeal of the Guernsey insurance market in Asia with the development of a Chinese commercial reinsurance company in the island and continued growth in captives. The island was also named the best Non-Asian Domicile at the 2018 Asia Captive Review Awards.
In the investment sectors, there is still work to be done to promote the benefits of choosing Guernsey to domicile investment companies. But it is a proven path already taken by many international private equity managers such as Permira, Apax Partners, Cinven, Macquarie, Partners Group and Inflexion.
Despite fears over rising policy tensions between the USA and China under the Trump administration, US private equity firms are investing more into China in 2018 than in the previous year. There were some 150 private equity transactions amounting to $25.8 billion from January to mid-August 2018, compared to just $5.2 billion for the similar period in 2017. On the flipside, Chinese outward investment into the USA has fallen 50% to $4.7 billion from the $9.4 billion seen during the same period in 2017.
Europe appears to be a winner, with an overall increase in Chinese foreign direct investment at $22 billion by the mid-point of the year, far outstripping that of the USA.
The PE giant KKR sees these trade tensions as a ‘significant’ opportunity for ‘outsized’ returns in China amid the trade war, citing the burgeoning millennial consumer market in China driving appetite for the latest in technology and apparel trends. Disruptor companies such as Baidu, Alibaba and Tencent (known as BAT) are key to this change moving from an export-based economy, accelerated by the US administration’s move to levy large tariffs against Chinese imports.
The millennial demographic only makes up some 25% of the Chinese population, some 351 million individuals, this number exceeds the total population of the USA and dwarfs the US millennial population of 73 million.
China is also seeing a raft of new general partners whose principals have a proven track record with previous firms such as Dehong Capital Partners, led by former KKR executives David Liu and Julian Wolhardt; Centurium Capital, led by David Li, the former head of China at Warburg Pincus; C-Bridge Capital, founded by ex-Temasek Wei Fu; Rivendell Partners, founded by Alex Ying, a former managing director at Carlyle Group; and Nexus Point Partners by the former MBK Partners KC Kung. These GP’s have a truly global investor base from the US, Asia, Middle East and Europe, with a focus on inward investment into China.
Structuring of these investments is key and this is where a jurisdiction such as Guernsey can come to the fore. Guernsey has a leading and well-established private equity industry (almost 60% of closed-ended structures being private equity structures) with internationally-recognised funds located in a stable (yet innovative), well-developed and regulated tax-transparent domicile. This enables cross-border transactions during a period when the world is going through such uncertainty and change.
While there are a number of investment vehicles available in Guernsey, a common entity used for private equity and venture capital investing is the limited partnership.
The principal attraction of the limited partnership is its tax transparency for partners. Profits and losses of the limited partnership are attributed to the partners in their own place of tax residence with, usually, the added benefit of any losses set off against the profits from other investments attributed to them in the same partnership. Additionally, those same profits and losses may be treated as arising in the country in which the investment of the LP occurs.
The limited partnership vehicle is neither a person nor a company and as such is not subject to any Guernsey tax. Nor will any non-Guernsey resident partner be subject to tax on their share of profits in Guernsey, unless there is Guernsey source income.
Limited partnerships are formed, registered and operated under the provisions of the Limited Partnerships (Guernsey) Law, 1995. A limited partnership exists following the signing of a written limited partnership agreement (LPA) and registration of the partners on the register of the LP.
For each LP there is one or more general partners (GP) who are jointly and severally liable for all debts of the limited partnership without limitation. There would also be one or more limited partner(s) who contribute or commit an investment sum to the capital of the limited partnership, but unlike the GP are only liable to the extent of their contribution (or commitment). Both the GP and LPs can be body corporates or individual persons.
The prize for Guernsey is not only making sure Chinese general partners are familiar with the benefits of domiciling their limited partnership in Guernsey, but also we must consider that the investors, the limited partners themselves, have a major influence in selecting the domicile. The marketing focus must target both the GPs and the LPs to have any impact.
The BDO network has established a China Advisory Services Team in London, and a European China Desk which works with BDO member firms across Europe and China. The China Advisory Services Group and the BDO offices in China, Hong Kong and Taiwan have a network of excellent local connections, and are available to support companies with aspirations in other South East Asian countries.