28th March 2017
1st February 2017 marked the 20th anniversary of the introduction of Guernsey’s world leading Protected Cell Company (“PCC”). The Protected Cell Companies Ordinance 1997 was initially targeted at Guernsey’s captive insurance sector and was the first cell company legislation of its kind anywhere in the world. The concept underpinning the structure is that the PCC is one separate legal entity with a core at the top responsible for the management of the structure, including the Board of Directors. Underneath the core lie a series of cells each with segregated assets and liabilities. The assets of each cell are ring-fenced, protecting the investors of other cells should one go into liquidation.
Closed ended listed protected cell companies
The London Stock Exchange (“LSE”) is home to many closed ended investment companies. A number of these are constituted as PCCs, benefiting from the fact that a cell can be easily established. This is beneficial when launching a successor fund to a previous cell and is quicker and more cost effective than launching a new legal entity.
Another feature of PCCs is the ability to list the core on the Main Market of the LSE and simultaneously listing one cell on the Specialist Fund Market. There is also the ability to have some but not all cells listed.
Other entities have followed a similar route by utilising a Channel Islands Securities Exchange listing for both the core and one cell, instead of a LSE listing. The core shares are listed containing the bulk of the portfolio of the fund, but one particular asset may be held within the cell of the PCC so that it has a different group of investors and is segregated from the rest of the assets.
Private equity and real estate ‘deal by deal’ protected cell company structures
Since the credit crisis it’s been difficult to raise funds for traditional ‘blind pool’ investment funds, even for established fund managers. As a result, some managers have responded by launching co-investment vehicles, separately managed accounts or club deals. In many instances they have retained the structure of a limited partnership as the co-investment vehicle with a general partner as the manager.
Increasingly, however, clients are utilising a PCC for these non-fund structures in particular for a ‘deal-by-deal’ structure; a series of transactions where potential investors have an option as to whether or not to invest in any given opportunity. The core private placement memorandum and terms remain constant with the variation for each investment set out in a cellular appendix.
We have observed a marked increase in the popularity of PCCs being used as vehicles to structure a series of distinct private equity or real estate transactions. In this way, investors may conduct their own due diligence on each and every transaction rather than rely entirely upon a fund manager. Alternatively, the investors may wish to opt out of sectors, geographies or deal sizes, or vary their potential commitment based on their current risk appetite or cash flow.
If a potential client intends to make more than two distinct investments or sub funds, a PCC will be more cost effective than launching three separate co-investment vehicles or stand-alone fund structures.
PCCs are clearly a very useful legal form for the investment management sector. This applies for both open and closed ended investment funds, for listed or non listed cells as well as being a cost effective structure for a series of investments.
Dominic Wheatley, Chief Executive of Guernsey Finance, said: “The fact Guernsey’s cell company concept has been copied by finance domiciles across the world, with thousands of PCCs and cells employed across the insurance, funds and private wealth sectors, is a tribute to the genius simple idea.”
“Innovation is at the heart of Guernsey’s financial services offering and the PCC is a perfect example of how Guernsey contributes on a global scale. It was hailed as one of the most innovative insurance solutions to be introduced to the captive and alternative risk transfer markets and cemented our position as Europe’s leading captive insurance domicile, but the structure is now an accepted mainstream option across all areas of the global finance industry.”
If you would like to discuss this or any other matter, please contact:
Jon Young - Head of Guernsey
T. +44 1481 731 750
M. +44 77 8116 4521
Marie Fitzpatrick - Business Development Director
T. +44 20 3597 7909
M. +44 78 2793 1648