Research Reports » BNP Paribas Jan 2020

Interview: VCC: An all-weather investment fund structure?

Gillian_Tan_MASGillian Tan, executive director, financial markets development department at the Monetary Authority of Singapore, explains how it studied and adapted the best-in-class features from leading fund domiciles to cater to the needs of the city-state’s fund managers.

The Singapore Variable Capital Company (VCC) is a new investment fund structure, introduced in January this year. What are its key features and why is it suited for raising investor capital compared to other existing fund structures in Singapore?
The VCC is a corporate structure incorporated under the VCC Act, and it is tailored for use as an investment fund vehicle. The VCC framework has features that are on par with leading fund structures globally and provides greater operational flexibility and an additional structuring option for Singapore-based fund managers who would like to set up a new investment fund in Singapore. It may be used for both open-ended or closed-end funds and caters to managers in both the traditional and alternative sectors.

One of the key features of the VCC framework is that VCCs are able to vary their share capital without having to seek shareholders’ approval. This provides greater flexibility to investors to enter into and exit from their investments as and when they wish to. In addition, VCCs can also pay dividends using its capital. Unlike unit trusts and limited partnerships which do not have legal personality, VCCs will also be able to avail themselves of Singapore’s competitive tax regime.

What has the Monetary Authority of Singapore (MAS) considered when developing the VCC framework, and how did these considerations shape the design of the VCC framework?
While Singapore is recognised as an international fund management centre, we wanted to support the next phase of growth and strengthen Singapore’s value proposition as a full-service international fund management and domiciliation hub. We know that operational flexibility, cost-efficiency and investor familiarity are some of the key factors in determining the venue for fund domiciliation and fund management. In designing the VCC framework, we studied the best-in-class features from leading fund domiciles and adapted these features to cater to the needs of investors and Singapore-based fund managers.

For example, we used a cellular structure to allow fund managers to set up VCC as umbrella investment funds to enjoy economies of scale, while ensuring its assets and liabilities of each sub-fund under the same umbrella are legislatively segregated, especially during insolvency. The umbrella structure will also allow for economies of scale as sub-funds are added on, as sub-funds are allowed to share a single board of directors and use a single set of service providers.

To cater to the needs of global investors, VCCs will be allowed to prepare their financial statements using not just Singapore accounting standards and principles but also internationally recognised standards, namely the International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (US GAAP).

In terms of operations, how will the VCC improve efficiency and reduce compliance burdens on fund managers?
A fund manager who wishes to use the VCC structure will be able to locate its fund management operations and fund activities in a single jurisdiction under one registration and regulatory regime. This will allow fund managers to demonstrate substance around their structures and deliver greater transparency and protection to investors. The use of a single layer of local service providers in Singapore will bring about greater operational efficiencies and cost savings. From the tax perspective, a VCC will be treated as a company and a single entity for tax purposes. This means that for ease of compliance, an umbrella VCC will only need to file a single corporate income tax return with IRAS, regardless of the number of sub-funds in the VCC.

Which types of products are best suited to VCCs?
The VCC is strategy and asset-agnostic. There are no limitations on the number or types of different investment strategies and assets that a VCC can hold. On the day we launched the VCC framework, fund managers incorporated or redomiciled 20 investment funds as VCCs. These investment funds comprise venture capital, private equity, hedge fund and environmental, social, and governance (ESG) strategies, demonstrating the viability of the VCC framework across diverse use cases.

How will the introduction of the VCC framework support the development of Singapore as the leading fund management hub in Asia? How will it support the growth of the alternatives sector?
Today, Singapore is a leading fund management hub with close to 900 registered and licensed fund managers, collectively managing more than US$2.5 trillion of assets. In fact, we have been seeing strong growth in Singapore, in particular in the alternatives sector. Over the past five years, Singapore’s private equity and venture capital assets under management grew strongly at a CAGR of 24% to reach S$219 billion (as at end 2018), outpacing traditional sector growth at 11%.

We introduced the VCC framework to make it attractive for fund managers to domicile their investment funds in Singapore, across traditional and alternative strategies. Given the flexibility, cost efficiencies and co-location benefits that the VCC offers, the VCC framework will serve as an enabler for fund managers to manage and grow their business out of Singapore. In particular, some emerging alternative fund managers may choose to anchor their fund management operations and co-locate their investment fund with their fund management activities via the VCC structure to offer bespoke alternative strategies to their non-retail clients. This could also support the growth of the alternatives sector locally.

Is the VCC part of a wider trend of asset managers looking to domicile their funds in Asia?
We note there are also other fund jurisdictions in the region, such as Hong Kong and Australia, which have launched, or are launching, similar structures. The VCC seeks to complement and expand the existing suite of fund structures available for use, thereby providing a comprehensive range of investment fund vehicles and structures to support fund managers and investors’ needs.

However, we recognise that there could be switching costs involved as part of the due diligence and evaluation process for the new VCC framework. To catalyse early adoption, the MAS has also launched a VCC Grant Scheme to defray the set-up costs involved in incorporating or registering a VCC. This will help fund managers defray part of their qualifying set-up expenses involved in the setting up of new VCCs or redomiciliation of their existing foreign investment funds into Singapore as VCC as well.

If we extrapolate – what does this say about the investment landscape and opportunities in Asia over the next ten years?
About two-thirds of the assets under management in Singapore is reinvested within the Asia- Pacific region. Given Singapore’s position as a leading Asian fund management hub and gateway for fund managers and investors to tap on the region’s growth opportunities, our hope is that the VCC framework will encourage fund managers to set up new funds in Singapore and facilitate the redomiciliation of foreign funds here. This will grow Singapore’s fund servicing ecosystem and create opportunities for fund servicing professionals based here, such as fund administrators, directors, custodians, accountants, lawyers and tax professionals.

The VCC framework is a good start, but we are already looking for ways to improve it. For example, we know that there are Singapore-based fund managers who would like to convert their funds, currently structured as companies or unit trusts, to VCCs and we will be studying how to allow for such conversions in the next phase of the development of the VCC framework. We look forward to working closely with the industry and other stakeholders on this.

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