Why set up a single-investment fund?
When investment managers identify a time-sensitive opportunity such as a specific project, or deal with limited availability or an investment requiring swift execution, the ability to act quickly is crucial. Establishing a regulated investment fund, however, can be time-consuming and take weeks or even months to complete due to licensing and compliance requirements.
To bypass this hurdle, many managers turn to the British Virgin Islands' single-investment fund structure. If designed as a closed-ended vehicle, these funds may fall outside regulatory definitions under the Securities and Investment Business Act ("SIBA") of the British Virgin Islands ("BVI"), allowing for a streamlined and cost-effective setup.
Single-Investment Fund Classification
Under the SIBA, an entity must not carry on, or hold itself out as carrying on, business as a mutual fund in or from within the BVI unless it is duly licensed by the BVI Financial Services Commission ("FSC") or is otherwise exempted as provided in the SIBA. Further, an entity must not carry on, or hold itself out as carrying on, business as a private investment fund in or from within the BVI unless it is recognised by the FSC or is otherwise exempted as provided in the SIBA or the Private Investment Funds Regulations.
A "mutual fund" is defined as "a company or any other body, a partnership or a unit trust that is incorporated, formed or organised, whether under the laws of the Virgin Islands or the laws of any other country, which:
- collects and pools investor funds for the purpose of collective investment; and
- issues fund interests that entitles the holder to receive on demand or within a specified period after demand 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 or other body, partnership or unit trust, as the case may be..."
A "private investment fund" is defined as "a company, a partnership, a unit trust, or other body that is incorporated, registered, formed or organised, whether under the laws of the Virgin Islands as or the laws of any other country, which:
- collects and pools investor funds for the purpose of collective investment and diversification of portfolio risk; and
- issues fund interests , which 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."
An open-ended single-investment fund which falls within the definition of a mutual fund must be duly licensed by the FSC (notwithstanding the single-investment aspect).
In contrast, a closed-ended single-investment fund will generally be exempt from licensing requirements under SIBA for the following reasons:
- It would not be a mutual fund as defined, as investors would not have a right to demand a redemption/withdrawal of their fund interests.
- It would not qualify as a private investment fund as defined, due to the absence of diversification of portfolio risk.
The term "diversification of portfolio risk" is not defined under the SIBA, and interpretations vary across the industry. Where the fund holds a single investment such as a specific project, real estate, or equity in a single company, it is clear that there is no diversification of portfolio risk. However, in more complex scenarios, a closer examination of the underlying investment portfolio structure would be required to assess any diversification of portfolio risk and related licensing requirements in the BVI.
Regulatory Compliance
A BVI single-investment fund may be formed as a company or a partnership.
Open-ended single-investment funds which fall within the definition of "mutual funds" will have to be regulated under the SIBA. Depending on factors such as assets under management, number of investors, investor qualification requirements, minimum initial investment amount per investor, term/duration of the fund, etc., such a mutual fund may be licenced as an incubator fund, an approved fund, a private fund or a professional fund, and each such category of mutual funds will have different regulatory requirements. Except for an incubator fund, all regulated mutual funds will have mandatory service provider requirements.
In contrast, as outlined above, closed-ended single-investment funds are generally exempt from FSC licensing requirements and are generally unregulated. As such, they will benefit from significant structural flexibility as there would be:
- no restriction on the number or qualification of investors
- no minimum initial investment amount per investor
- no maximum cap on assets under management
- no mandatory service provider requirements
- no audit obligations
- no licensing application requirements with the FSC
This makes them both time- and cost-efficient to establish and operate.
A closed-ended single-investment fund will however generally still be subject to certain investor AML/KYC requirements as well as FATCA/CRS registration and reporting requirements (notwithstanding its unregulated status), and the sponsor may wish to appoint a fund administrator to handle such functions (albeit this is not mandatory under SIBA given its unregulated status).
How Conyers Can Help
Conyers provides end-to-end support for BVI single-investment fund setup, including:
- regulatory analysis and advice
- incorporation of a BVI company or establishment of a BVI limited partnership
- drafting bespoke fund documents and compliance documents (if required) tailored to your structure
- for single-investment mutual funds, assisting with licencing with the FSC
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.
