British Virgin Islands: Offshore Mutual Funds- Example Of The British Virgin Islands

By Andrew Keuls

Originally published in January 2001

The growth of the mutual fund industry has been a phenomenon of the global financial services industry in recent years. The niche for the British Virgin Islands ("BVI") in this field has been in the registration of private and professional investor mutual funds, particularly for the hedge and alternative investment mutual fund industry and for family office fund of funds. Family office, hedge and alternative investment funds are not customarily available for retail investors and are usually only available to professional or accredited investors, who must establish minimum net asset worth and such funds can be restricted or even be closed to third party investors.

The BVI has been and continues to be a popular jurisdiction for the domicile of offshore mutual funds. It is now well established as a Mutual Fund domicile in that more than 1,600 mutual funds are presently registered representing total mutual fund assets estimated in excess of US$60 billion. The BVI has certain advantages as an offshore mutual fund domicile: a British Overseas Territory, it adopts the English legal system, it has as its currency the US Dollar, it has no exchange controls and it provides for prudent regulation of offshore mutual funds. Offshore mutual funds are statutorily exempt from all forms of BVI taxation and the BVI license fees for mutual fund registration are fixed and nominal.

The Mutual Funds Act 1996 provides for three main categories of Mutual Funds:

• Public Mutual Funds
• Private Mutual Funds
• Professional Mutual Funds

Essentially a BVI Mutual Fund to be approved or recognised must be designated to fall into one of these three broad categories, the requirements for each category being somewhat different. The legal structure of the mutual fund can be quite diverse: it can be established as a partnership or unit trust or an investment fund company.

According to the Mutual Funds Act the key requirement for the licensing of a mutual fund manager or administrator is that they must prove to be of a "fit and proper" standard. This regulation is prudent, straightforward and the cost implications of compliance are minimal. A further benefit of the regulation is that certain Stock Exchanges will accept BVI registered Mutual Funds for listing (for instance the Irish and Bermuda Stock Exchanges are popular for this purpose).

In summary, the BVI may be considered as an attractive jurisdiction for an offshore mutual fund because - although well regulated through the offices of the BVI Registrar of Mutual Funds - it is not expensive and very flexible at the same time. The BVI provides the usual tax exemption and confidentiality practices that you would expect and it is possible to set up the Mutual Fund structure in a very secure manner working at all times with substantive and quality service providers including a member of the Big Five accountants as auditor. There is also considerable flexibility as to where management, administration, paying bank and custodianship services for a BVI mutual fund are located (ie: these can be onshore or offshore). Mutual fund services can be mandated using BVI service providers, which are fairly comprehensive as to the range of services that are currently offered and available from the BVI, or using external service providers, or a mix of the two. The BVI has anti-money laundering legislation in the form of the Proceeds of Criminal Conduct Act, 1996 and the BVI's Anti Money Laundering Code of Practice and Guidance Notes are on the same model as those of the United Kingdom.

Turning to some example structures of mutual funds, this may be helpful in explaining the different parties involved in a typical BVI Mutual Fund as follows:

The most common structure for a BVI Mutual Fund it is for a BVI International Business Company to be established as the Mutual Fund legal entity. The company usually has a split share capital of voting non-participating ordinary shares held by the Promotor and non-voting participating redeemable preference shares for the investors. The parties to the mutual fund consist of the Board of Directors, the Investment Manager (may be a company controlled by the Mutual Fund Promotor), the Administrator (usually an independent trust company to handle subscriptions and redemptions by the investors, periodic net asset value pricing and publication of this, shareholder communications and reporting), the Custodian (if one is appointed this is usually an established bank or prime broker), the Fund Auditor and the Fund Legal Advisor (both of whom are recommended parties in any fund structure seeking third party investors).

It is practical when creating a Family of Mutual Funds to establish just one legal entity with several share classes to represent different investment holdings and investment objectives (for instance for a bond portfolio in one share class and for an equities portfolio in another share class). Care must be taken if any one share class can be leveraged or will invest in derivatives, since any one share class could technically be liable for recourse (there are structures available to circumvent this and it is recommended that legal advice be taken if there is any prospect of a recourse beyond capital employed in any one class of shares). Obviously the advantage of an Umbrella Fund is that a range of sub-funds can be created without establishing new legal mutual fund entities with each new share class.

The BVI Mutual Fund can have a Prime Brokerage Custodian Structure where the de facto custodian is an established brokerage firm in the particular market of investment. This structure may be expedient and saves on any master custodian fees, alternatively the BVI Mutual Fund can have a Clearing House Custodian Structure employing the services of a Master Custodian which is usually an established bank under which individual brokerage accounts can be established. This does entail another tier of fees but may have advantages for stock lending, margin finance and certain trading efficiencies. From an investor's viewpoint if an established bank is the Mutual Fund custodian there is a considerable comfort level that assets are held in safe custody.

Some case examples illustrate circumstances where the establishment of a BVI mutual fund was utilised to meet the clients' objectives and what was the time frame and expense incurred against the mutual fund business income then secured.

Example I: The Venture Capital Mutual Fund- a successful venture capitalist was under pressure from some of his business relationships to give them the opportunity to participate in his deal flow. The practical problem was that the client could not accomodate individual participations in his deals of less than US$10 million. The solution was to create a BVI professional open-ended mutual fund, with a minimum investment of US$100,000 per investor; in view of illiquidity of the fund an early redemption penalty applied for the first three years of investment but this was mitigated by a bank standby loan facility of 50% of investor's shareholding at the latest NAV share price (ie: investors could borrow against their shareholding rather than redeem). The client set a time frame of three and a half weeks to have the mutual fund structured and all documentation including the Private Offering Prospectus finalised. This deadline was met and the total BVI mutual fund set up costs, including the drafting of all documentation and legal review, were around US$15,000. The present management and performance fees generated are around US$400,000 per annum as income for the client as investment adviser of the fund. The primary objective of having a vehicle to enable some of the client's relationships to have a small participation was achieved and the fund was launched in a short time frame and for reasonable costs.

Example II: The Private Investor Mutual Fund- an established industrialist, who managed much of his private wealth, required a regulated structure through which he could legitimately invest part of his retained earnings from his private manufacturing businesses, the business climate being such that he did not wish to reinvest at this time back into the same manufacturing businesses. Additionally some of his business associates had always been impressed with his investment acumen and wanted the opportunity for him to select investments for them. The solution was to create a BVI "Fund of Funds" open-ended private mutual fund available for subscription by a limited number of up to 50 investors. The time frame for set up was about six weeks including all fund documentation. The fund was registered with Telekurs so that the price could be tracked by private banks which had been instructed by the client's business associates to buy shares in the mutual fund. Total mutual fund set up costs were around US$12,000. Present projected management and manager's front load fees generated are around US$200,000 per annum as income for the client as the fund's promotor. The primary objective of having a regulated audited structure to enable the client to have a vehicle to invest his businesses' retained earnings in a pool of his own personal savings with some limited third party investor participation was achieved and the fund was launched in a short time frame and for reasonable costs.

Example III: Bank's Fund of Funds- a L.American Bank was previously buying third party mutual funds for clients of the Bank, under the terms for which the Bank received commissions and trail fees. The management of the Bank decided that in the future it wanted clients of the Bank to be sold the Bank's own proprietary mutual fund product so that the clients were not effectively referred to a third party products. The Bank itself did not have international investment management capabilities but had historically relied on major international investment management houses. The solution was to create an Umbrella Fund of Funds professional mutual fund, which offered clients of the Bank varied choices of investment classes (eg: conservative -balanced-aggressive investment classes) investing into an underlying range of offshore mutual funds with established track records and on concessionary terms. Total mutual fund set up costs were around US$20,000. The management and manager's front load charges are around US$750,000 per annum as income for the Bank. The primary objective of having a regulated audited structure to enable the Bank's clients to invest in the Bank's own proprietary product was achieved.

These examples illustrate some of the benefits of a mutual fund business and the benefits of using the BVI as the fund domicile. Other reasons for the establishment of a BVI mutual fund include for family succession planning, tax planning in certain circumstances and investment in special asset classes such as real estate, media/entertainment investments, deriviatives and so on.

In conclusion, it is recommended to select good and reputable parties to work with on a mutual fund project, who will add credibility to the structure and be able to deliver quality services. This is a long term business so you should look to establish long term relationships with your service providers and select an established mutual fund domicile. There is quality out there if you care to find it and the BVI can certainly be considered as a good option for mutual fund domicile.