Michael Gagie, Andrew Wood, Ruairi Bourke and Joanna Russell provide expert legal commentary and analysis on the key developments and trends in private equity in British Virgin Island.

Their contribution formed part of the 2022 Private Equity guide published by Chambers and Partners in October 2022.

Chambers Global Practice Guide to Private Equity 2022: BVI Download

1. Transaction Activity

1.1 M&A Transactions and Deals

The British Virgin Islands (BVI) has long been a favoured jurisdiction for asset holding and transaction structuring among private equity sponsors given the jurisdiction's tax neutrality, robust legal system and ease of use and entity set-up. For so long as these attractions remain, we expect the jurisdiction's popularity to continue and for BVI entities to retain a significant presence in M&A activity around the world.

1.2 Market Activity

While other jurisdictions including the Cayman Islands have been dominant in the world of offshore investment funds, the BVI continues to gain increasing popularity in the closed-ended sector of the industry. More and more single investor or single investment funds and "club deals" are being structured through the BVI, in addition to co-investment vehicles set up to hold a single investment for one or more investors within the framework of an existing closed-ended fund structure.

2. Private Equity Developments

2.1 Impact on Funds and Transactions

The rise in BVI investment fund activity has been driven in part by certain differences in regulation of closed-ended funds between the Cayman Islands and BVI, which are discussed elsewhere below.

Limited Partnership Act (As Revised) (the "LP Act")

In addition to such regulatory arbitrage, the introduction in the BVI in 2017 of refreshed partnership legislation in the form of the LP Act has also attracted new users to the jurisdiction. The LP Act replaced the somewhat under-utilised international limited partnership regime, and offers managers an extremely flexible and modern structuring tool for closed-ended investment funds.

The LP Act draws significant influence from the limited partnership regimes of other jurisdictions. BVI limited partnerships now share many of the features of those other offerings, including broad freedom of contract and the ability to limit the liability of passive investors.

BVI limited partnership general partners are also subject to substantially the same unlimited liability for limited partnership debts and liabilities, and statutory duties at all times to act in good faith and (subject to any express provisions to the contrary in the limited partnership agreement) in the interests of the limited partnership.

The BVI limited partnership regime demonstrates a handful of technical refinements over and above those of certain other popular jurisdictions in the investment fund industry. For example, while it is not uncommon for limited partnership legislation to permit the use of non-domestic entities as general partners, under the LP Act a non-BVI entity does not need to first register as a foreign company in the BVI to be eligible to act as general partner of a BVI limited partnership.

BVI limited partnerships may also be formed with a separate legal personality – an option that is not available in all other competitor jurisdictions. While this does not constitute them as separate bodies corporate, it does permit any charge created over an asset of a BVI limited partnership that is then registered with the Registrar of Limited Partnerships in the BVI (the "Registrar") to then have priority over any other charge over the same asset that is either unregistered or registered subsequently.

The registration process for BVI limited partnerships is straightforward and requires only submission to the Registrar of a registration statement (signed by each general partner) containing certain prescribed limited partnership information, a letter of consent from the limited partnership's proposed registered agent in the BVI, and confirmation of whether the limited partnership is to be formed with separate legal personality, together with the payment of the requisite USD750 government registration fee. Registration will usually take up to four working days.

3. Regulatory Framework

3.1 Primary Regulators and Regulatory Issues

Securities and Investment Business Act (As Revised) (SIBA)

BVI funds are subject to regulation under SIBA if they constitute "private investment funds". A private investment fund is defined under SIBA as a company, partnership, unit trust or any other body that:

  • collects and pools investor funds for the purpose of collective investment and diversification of portfolio risk; and
  • issues fund interests that entitle the holder to receive an amount computed by reference to the value of a proportionate interest in the whole or in a part of the net assets of the company, partnership, unit trust or other body.

Accordingly, where there is no collective investment or diversification of portfolio risk, a fund will not technically constitute a private investment fund and accordingly will not be subject to regulation under SIBA. This is a notable driver behind the increased use of the BVI for single investor or single investment funds, club deals and co-investment vehicles as mentioned above – particularly where time is of the essence in deal structuring and execution.

SIBA imposes a general prohibition (with limited carve-outs) on the promotion of private investment funds and their carrying on of business unless and until recognised formally as such by the BVI Financial Services Commission (FSC).

In order to be eligible for recognition, the constitutional documents of a private investment fund must:

  • specify that the offer of fund interests to investors must be made on a "private basis" only;
  • restrict the number of shareholders or investors to 50; and
  • restrict the offer to "professional investors" and a minimum initial investment of USD100,000 for each such investor.

The application process for recognition requires the payment of application fees and the submission to the FSC of a completed application form together with a number of supporting documents including the fund's constitutional documents, offering documentation, if any – if none, then an explanation for the lack of it must be provided – and valuation policy. The recognition process will typically take between five and seven working days following the submission of all required documents.

Private investment funds are subject to various ongoing obligations following recognition, including the retention of:

  • a suitably qualified person – known as an "appointed person" – to take responsibility for undertaking the management, valuation and safekeeping of fund property;
  • an auditor (although this need not be a local auditor based in the BVI), together with the submission to the FSC of annual audited accounts unless exempted under certain limited circumstances; and
  • an authorised representative based in the BVI empowered to liaise with the FSC on a fund's behalf.

Any change to any of the foregoing personnel must be notified to the FSC within certain prescribed timeframes specified under SIBA.

Anti-money Laundering

The business of being a private investment fund constitutes "relevant business" for the purposes of the BVI Anti-Money Laundering (AML) Regulations (As Revised), and as a result private investment funds are subject to the BVI AML regime. In addition to the regime's know-your-client (KYC) investor onboarding requirements, a private investment fund must also appoint a suitably qualified money laundering reporting officer.

The officer, who may be internal or appointed externally, will act as the liaison with the BVI Financial Investigation Agency in relation to AML compliance matters, and will have responsibility for ensuring compliance by the fund's staff with AML law and regulation, and any internal reporting protocols and compliance procedures the fund may have adopted.

A BVI investment fund that does not constitute a private investment fund under SIBA and is not otherwise regulated in the BVI will not technically be subject to the jurisdiction's AML regime. However, it is both recommended and accepted market practice for unregulated funds of this nature to conduct investor onboarding KYC and due diligence as if subject to the regime.

US Foreign Account Tax Compliance Act (FATCA) and the OECD's Common Reporting Standard (CRS)

BVI funds, whether recognised as private investment funds or not, will also constitute "(foreign) financial institutions" under FATCA and CRS (as each is extended to the BVI). Accordingly, such investment funds are subject to the regimes' registrations, account due diligence and account reporting requirements.

4. Due Diligence

4.1 General Information

It is uncommon for substantive activity to be undertaken by BVI entities within the territory itself, so BVI due diligence will typically be limited to an entity's constitution and books and records and its compliance with applicable local law and regulation.

4.2 Vendor Due Diligence

It is not uncommon for a buyer to rely on vendor due diligence provided the transaction does not have any specific BVI regulatory or complex financial aspects where the buyer may prefer their own due diligence report to address these issues.

Chambers Global Practice Guide to Private Equity 2022: BVI Download

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