HFMWeek - Gibraltar: delivering solutions for Hong Kong-based managers.

HONG KONG 2015

GIBRALTAR: DELIVERING EU SOLUTIONS FOR HONG KONG-BASED MANAGERS PHILIP CANESSA OF GIBRALTAR FINANCE OUTLINES WHAT THE JURISDICTION CAN OFFER ASIAN FUND MANAGERS LOOKING TO RAISE CAPITAL IN EUROPE

G Philip Canessa

is a senior executive with Gibraltar Finance and focuses on the development of the funds and asset management sectors in Gibraltar. He has more than 30 years of experience in financial services and for 11 years was managing director of a specialist investment firm managing portfolios of hedge funds.

ibraltar is a self-governing and self-financing parliamentary democracy within the European Union (EU). A British overseas territory, Gibraltar’s economy is prosperous and highly-diversified including financial services, egaming, shipping and tourism.

Given its status within the EU, Gibraltar-licensed banks, investment services firms, Ucits, insurance companies, reinsurance companies and insurance mediation firms benefit from access to the single European market and therefore a potential client base of more than 500 million people.

Gibraltar’s legal system is based on English common law. Its investment firms are well supported by industry professionals with the ‘big four’ audit firms, international banks, lawyers and fund administrators all having established operations on the Rock. The Financial Services Commission (FSC) is responsible for authorising and regulating investment firms.

ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE The Alternative Investment Fund Managers Directive (AIFMD), a European Union directive, was transposed into Gibraltar law on the 22 July 2013 and imposes harmonised conditions and requirements on the structure and operation of alternative investment fund managers (AIFMs). In return, AIFMs are able to market alternative investment funds (AIFs) to professional investors across the EU. Small AIFMs (those who manage open-ended AIFs of less than €100m, or manage unleveraged closedended AIFs of less than €500m), are out of scope of the AIFMD. Small AIFMs can market to professional investors across the EU on a member state-by- state basis via the respective EU private placement regimes.

Hong Kong managers wishing to raise capital in the EU must seek solutions to enable them to market their funds there, and Gibraltar can provide these solutions. Marketing, as de-

fined in the AIFMD, means a direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares of an AIF it manages to investors domiciled or with a registered office in the EU. Marketing options available under AIFMD are: • National private placement regimes (NPPRs): This involves marketing in a specific member state via respective member state NPPRs and is applicable to small AIFMs and non-EU AIFMs. Mangers need to undertake careful due diligence as marketing regimes are not fully harmonised. These regimes, under current recommendations, will be phased out by 2018.

• Passporting: This is the compliant, safest and most efficient option for in scope AIFMs affording the ability for EU wide marketing, via passporting, to professional investors in all 28 EU member states.

Reverse solicitation is not marketing, nor should it be considered a marketing strategy, but reflects the situation whereby a professional investor in the EU may invest in AIFs on their own initiative irrespective of where the AIFM and/or the AIF is established.

The Financial Times on 10 May this year reported that more than 550 private equity and hedge fund managers from outside the EU had registered with the UK’s Financial Conduct Authority (FCA) to market their funds in the UK in accordance with the UK’s national private placement regime. Of these, 263 were from the US and just 14 from Hong Kong and Singapore each. This seems to imply that managers throughout the world are marketing in the UK via reverse solicitation.

The AIFMD does not set out specific penalties or sanctions for breach of the marketing restrictions but it is left for individual member states to determine what punishments are appropriate; these could be regulatory, civil or criminal.

HONG KONG MANAGERS WISHING TO RAISE CAPITAL IN THE EU MUST SEEK SOLUTIONS TO ENABLE THEM TO MARKET THEIR FUNDS THERE, AND GIBRALTAR CAN PROVIDE THESE

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As an example, in the UK, when an AIFM unlawfully markets an AIF such unlawful marketing qualifies as a criminal offence. Additionally there is a risk of civil actions from investors who may claim that the AIFM engaged in unlawful marketing which may result in the investor rescinding the contract of investment in the respective fund.

THE GIBRALTAR OPTION Hong Kong-based managers need to assess the effects of AIFMD and their options for marketing to professional investors in the EU. One option available is for a Hong Kong manager to set up an investment management firm in Gibraltar which would manage a Gibraltar fund. Under the AIFMD (subject to certain conditions), the Gibraltar AIFM could then delegate the portfolio management function to its Hong Kong-based investment management firm while retaining the risk management function (and vice versa).

A second option could be to use a Gibraltar AIFM service provider for the Gibraltar fund. The Gibraltar AIFM service provider could then delegate the portfolio management function to the Hong Kong based manager. This option provides a good working solution for accessing the EU marketing passport.

GIBRALTAR’S FUNDS REGIME Gibraltar’s funds regime encompasses experienced investor funds (EIFs), private funds, Ucits funds and non-Ucits retail funds. EIFs are available to ‘experienced investors’ as defined in the regulations, with the minimum investment amount being €100,000 or €50,000 if the investor is professionally advised. EIFs have a number of advan-

tages including the quickest time to market in the EU, a pre-authorisation launch option, ability to opt into the AIFM regime (even if below AIFMD scope), tax neutrality and competitive costs. In addition, post the submission of relevant documentation to the Financial Services Commission along with the passporting notices, an EIF can be marketed throughout the EU via the EU marketing passport after 20 business days.

GIBRALTAR STOCK EXCHANGE (GSX) GSX is an EU regulated exchange licensed by Gibraltar’s Financial Services Commission. It is currently authorised to act as a technical listing exchange for open-ended funds with plans to extend its exchange services in 2015 to include closed-ended funds and securitisation.

GSX can be a passive route to Europe for funds by affording visibility and connectivity between investors and managers. Investors can search for a fund by several specific characteristics – for example asset class, currency, geography or manager – and following registration and signing of a disclaimer, the investor can be connected with the fund’s manager for investment in the fund. Hong Kong managers wishing to benefit from this visibility and connectivity can list their funds (EU and non-EU alike) through GSX’s cost-effective, six-to-eight-week listing process.

Gibraltar is well equipped to provide EU solutions for Hong Kong managers; it is well regulated, cost effective and has the quickest time to market in the EU. Gibraltar is the gateway to the EU. For further information, email: philip.canessa@financecentre. gov.gi or visit: gibraltarfinance.gi. n H F M W E E K . C O M 21

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