Singapore's Variable Capital Company ("VCC") is
now in its third year and gaining market traction, with
considerable financial incentives for qualifying managers. Having
overcome the challenge of launching the new fund structure during
the pandemic, the Monetary Authority of Singapore ("MAS")
has demonstrated its commitment to the VCC through consultation
with market participants to enhance the regime and broaden
participation as market confidence in the VCC builds.
With the objective of developing Singapore's capability and
competitiveness as a hub for asset management in the Asia Pacific
region and leveraging the jurisdiction's reputation as a
premier international financial centre, the VCC was launched in
January 2020. Suited to both open and closed-ended funds across
traditional and alternative strategies, the VCC vehicle mirrors key
concepts, such as separate legal personality and the option for
sub-funds, from successful global fund centres.
The emphasis has been on introducing greater operational
flexibility in terms of share capital and distributions and more
efficiency to the domestic framework, where a Singapore private
company has frequently been used as an SPV for investment funds
under an offshore fund entity. It also creates a route for the
redomiciliation of existing funds incorporated as comparable
vehicles in other jurisdictions. Redomiciliations have generally
been from smaller fund jurisdictions, such as Mauritius, the
Bahamas and the Cook Islands, but there have been some
redomiciliations of standalone open-ended Cayman Islands
funds.
In addition to tax incentives to encourage development and industry
take-up of the VCC, MAS introduced a grant scheme which co-funds
70% of the qualifying set up costs for managers incorporating a VCC
or redomiciling a foreign entity as a VCC. The grant, capped at
S$150,000 per VCC for up to three VCCs, covers legal and tax
services as well as administration or regulatory compliance costs.
An extension to the grant scheme is being reviewed but otherwise it
will lapse on 15 January 2023.
For Singapore-based investment managers there are benefits to
structuring a fund within their domestic time zone, particularly
where there is an Asian investor base, leveraging on the strengths
of Singapore's highly regarded regulatory system.
According to AIMA, by the mid-point of 2022 over 540 VCCs had been
established in Singapore. The figures indicate around a third being
closed ended private equity / venture capital funds. It also shows
20% as hedge funds, 28% for Multi Family Office (MFO)/ External
Asset Manager (EAM) and 14% traditional long only, In addition
there were 15 redomiciliations, as asset managers in the region
explore its potential.
Building Momentum
To date, many of the new VCCs have been set up by local start-ups
or small managers based in South East Asia, with assets also
located there, although larger asset managers are now beginning to
show greater interest in the VCC as it becomes more established in
the market. As enhancements to the model are brought in, it is
expected to gain momentum and VCCs may be increasingly incorporated
into international fund structures.
As the VCC provides a unique entry point for domestic managers in
Singapore, its potential in combination with Cayman Islands
entities, which have a high degree of investor familiarity in Asia,
in a global structure has been an interesting development. Where
such structures are being implemented, often Cayman Islands
entities are the main investor facing fund with Singapore master
and downstream entities for both closed-ended and open-ended funds.
As the domestic market develops further, there is the potential for
that to be a popular option, in particular for funds targeting
investors outside of Singapore.
Regulatory and Governance Perspectives
One notable difference evident from a fund governance perspective,
compared with more mature hedge fund centres such as the Cayman
Islands, is that few open-ended VCCs are engaging independent
directors. This is most likely driven by the small number of US and
European institutional investors who often demand independent
directors as well as the cost impact on performance of hiring
independent directors when many VCCs have been small. While it is
not typically mandatory for independent directors to be on the
board of a hedge fund in these jurisdictions, best practice and
strong demand from investors for governance has made it the global
norm for a majority of the board to be independent. This
independence acts as a check and balance on the manager and
provides oversight of the fund's activities by the board. Going
forward, as VCC funds get larger and more institutional investors
begin to invest in them, the expectation is that investors and due
diligence firms will start to push more strongly for independent
directors. Additionally, as a newer product, there are regulatory
requirements for VCCs which differ from those for other Singapore
private companies. For example:
- AML / CFT – The MAS stipulates the
actions required to comply with AML / CFT obligations, with certain
customer due diligence ("CDD") measures to be undertaken,
including maintaining a register of beneficial owners and a
register of nominee directors, while engaging an eligible financial
institution to conduct the due diligence checks.
- CDD – The maintenance of the VCC's
registers of beneficial owners and nominee directors and other such
CDD measures are typically delegated to, and performed by, the
VCC's fund administrator. For other Singapore private
companies, this is usually carried out by the company
secretary.
- Directors – At least one member of the
board of directors must be a director or representative of the fund
manager. Each VCC director's consent to act (Form VCR6) is more
extensive than that used for a Singapore private company.
- Company Secretarial – Separate
segregated statements must be filed for each sub-fund with the
consolidated annual returns of the VCC.
- Accounting and Corporate Regulatory Authority ("ACRA") Fees – It is also worth highlighting that the fees payable to Singapore's ACRA to incorporate and file annual returns are different to those typically associated with a private Singapore company. Whilst the fees are higher, this reflects the fact that the VCC is a relatively complex product used by sophisticated funds professionals.
Some early adopters experienced challenges when setting-up a VCC
which was often more time consuming and costly than other existing
products. These were not regulatory hurdles so much as the issues
of industry participants dealing with a new product where there was
no established familiarity with the operational features of the
VCC. However, as the funds industry has become more familiar with
the new structure, service providers are already increasingly
better equipped to service VCCs in areas from incorporation to fund
administration. The MAS is also consistently reviewing the VCC to
ensure it works as well as it can for the Singapore funds market.
As the VCC initiative has developed through its initial stages, the
benefits of selecting a VCC partner with expertise in both umbrella
and standalone structures, in addition to a full suite of fund
services, have become clear.
The MAS has demonstrated its intent to widen the appeal of the VCC
by enhancing the framework to suit the needs of more participants
in the funds sector, with the regulator's report on its
industry consultation for VCC 2.0 expected shortly. This could
potentially see Singapore's burgeoning family office sector
– currently excluded without a Singapore asset management
license – brought into the fold, as well as conversion from
unit trusts. With the industry already anticipating what VCC 3.0
might look like, the focus in Singapore is likely to remain on
expanding the offering of VCCs to encourage even greater
adoption.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
