Singapore was not alone; this year has seen other hubs, such as Hong Kong and Luxembourg, introduce similar corporate structures to tempt fund managers away from the Cayman Islands. This article looks at the ways in which the recent VCC legislation has shifted fund domiciliation away from traditionally popular jurisdictions, and analyses the implications of the new corporate structure for fund managers.
Background to the VCC
The Cayman Islands currently have the lion's share of offshore fund domiciles, but in recent years the jurisdiction's popularity has begun to lessen, especially as more onshore options have become available. Since the introduction of economic substance legislation in January 2019 there has been a shift away from the Cayman Islands. According to recent research carried out by the Apex Group, of which the author is managing director, 71% of fund managers in the Asia-Pacific region believe this trend will continue and that Cayman will be a less popular choice for fund domiciliation in the next five years.
Apex has begun to see this trend among its clients, some of whom, given the economic substance requirements and the subsequent cost and reporting requirements, have begun to explore other options. There is clear evidence that the more onerous requirements associated with running a Cayman fund, both financial and administrative, are making onshore jurisdictions more attractive.
What is the VCC?
The VCC is a new corporate entity structure under which several collective investment schemes (whether open-end or closed-end) can be gathered under the umbrella of a single corporate entity and yet remain ring-fenced from each other. The corporate entity structure gives funds an alternative to other existing fund structures available in Singapore, such as limited partnerships, limited liability partnerships and companies.
It is similar to the open-ended investment company structure in the UK and protected cell company or segregated portfolio company structures in Guernsey or the Cayman Islands.
The VCC is a crucial component of Singapore's efforts to position itself as a full-service fund management and fund domiciliation hub. Singapore has always been highly regarded by international investors, and as they become more familiar with the VCC, and other structures around the region, it becomes a very strong option.
The benefits of VCC for fund managers
The VCC gives Singapore-based managers more options. In the past, they have mainly used offshore structures, and now they have a versatile option in the same jurisdiction.
Primarily, the VCC benefits those fund managers with a business interest in the Asia-Pacific region — funds which have a broad Asian investor base or invest in Asia and can take advantage of the double tax treaties accessible in Singapore.
There is also a significant financial incentive: as part of the launch of the VCC, the Monetary Authority of Singapore (MAS) introduced a grant scheme to encourage adoption and conversions to VCC. This grant covers 70% of eligible expenses (capped at 150,000 Singapore dollars per VCC, and up to three VCCs per fund manager) paid to Singapore-based service providers for work done in Singapore in relation to the incorporation and registration of VCCs and their sub-funds. This includes legal fees, tax adviser fees, fund administration fees toward set up and regulatory compliance consulting fees.
The speed and simplicity of incorporation is another, perhaps unique, benefit. It takes between 14 days (for the most straightforward structure) and 60 days to get approval. The process is accelerated because, unlike in Hong Kong, there is no pre-approval process by the regulator.
Adoption and outlook of the VCC
The VCC found immediate popularity upon launch: it went live on January 15, 2020 and 20 VCCs were launched on the same day. Data shows that more than 50 VCCs were incorporated in the first four months after launch, and more than 70 VCCs in the first sixmonths of the year. As intended, a wide range of fund types have adopted the structure, with traditional funds, private equity, venture capital, as well as environmental, social and governance strategies all participating in the pilot programme.
The structure offers significant flexibility as it can be used to incorporate new funds or redomicile existing comparable overseas investment funds. It can also be used for both closed-ended and open-ended funds, unlike structures offered in other jurisdictions. This flexibility is proving to be one of the main reasons for the popularity of the VCC, and will be central to its success.
