Singapore enjoys an established position as a globally reputable investment hub with its finger firmly on the pulse of the Asia-Pacific region’s growth opportunities. The annual industry survey of the Monetary Authority of Singapore (MAS), published in September 2019, showed that Singapore’s assets under management (AUM) increased by 5.4% to S$3.44 trillion from 2017 to 2018, even in the face of an otherwise challenging year for global financial markets.
This growth in AUM was largely thanks to a 15% surge in alternative assets to S$646 billion last year, supported by strong inflows and continued valuation gains across private market asset classes including private equity and venture capital.
Laying down the red carpet for international players
With three quarters of AUM sourced from outside the city-state in 2018, Singapore finds itself serving as the global gateway to Asia for asset managers and investors (both private and institutional) looking to tap the region’s growth opportunities.
However, even as the potential for a sustained rise in AUM looks positive, there is no room for complacency in the face of tough competition from other global fund centres. Sophisticated investors pick investment hubs based on the availability of optimal structures that allow for inflow and outflow of capital, as well as balanced regulatory and tax regimes, political stability and robust infrastructure.
Which is why, back in March 2017, the MAS rightly identified that Singapore needed to do more if it is to keep attracting international players to domicile their funds in the jurisdiction. It launched a consultation on a framework for a new structure to be known as the Singapore Variable Capital Company (now described as the VCC). Drawing inspiration from the laws and practices in Luxembourg, Ireland, the UK, Australia, Mauritius and Hong Kong among others, the VCC would enhance the country’s competitiveness as a domicile for investment funds.
The VCC framework has now been made operational and in this article I will discuss what this exciting development means for the Singapore investment landscape.
What are the key features of the VCC?
The VCC’s legal framework is such that the structure has broad appeal – well suited not only to fund/asset managers but also wealthy families and their family offices’ own investments.
Within the funds sphere, it can be broadly applied across both alternative and traditional investment funds operating across either closed- or open-ended strategies. Open-ended funds allow investors to both invest into and redeem their shares at any time, typical of hedge funds, while close-ended funds are structured with a fixed number of shares and restrict an investor’s ability to redeem their investments during the fund’s lifetime, as is generally seen in private equity funds.
Another one of the VCC’s key features is that it can be set up as a stand-alone single fund or as an umbrella entity with multiple sub-funds that have diverse investment objectives and investors. Assets and liabilities of each sub-fund are segregated providing safeguards. In contrast, traditional fund structures often face obstacles in diversification as they are constrained by one specific investment objective.
Further, tax exemption incentives available in Singapore under sections 13R (Resident fund scheme) and 13X (Enhanced tier fund scheme) of the Income Tax Act will be extended to VCCs. These incentives allow tax exemption for specific income derived by a prescribed person from funds managed in Singapore by any fund manager, provided the income is derived from designated investments.
Finally, the governance framework of the VCC mirrors other global fund centres as it only requires one locally resident director and does not mandate the need for independent directors for alternative funds marketed to non-retail investors. However, the VCC needs to have at least one director or a qualified representative of the VCC’s fund management company on the corporate board. Also, a key differentiator of the Singapore VCC regime is the requirement that the fund manager be located in Singapore.
What’s good about it?
The Singapore VCC:
- Enhances shareholder flexibility and privacy
As its very name suggests, a variable capital company can vary its capital structure easily by redemption of its shares and payment of dividends out of its capital. The capital of a VCC will always be equal to its net assets value (NAV), thereby providing flexibility in the distribution and reduction of capital. Furthermore, there is a guaranteed level of privacy as the shareholders will not be made public. These are important features for investment funds, which need to have the flexibility for investors to exit and be able to pay regular returns to their investors.
- Caters for diverse fund categories and investor needs
The VCC can issue both shares and debt instruments and represents a huge step forward for the jurisdiction in catering to all categories of funds – be it traditional hedge funds, private equity, mutual funds or venture capital funds. The structure also allows fund managers to list funds as information listing and for trading purposes. Crucially, it can be used as a pooling and investing vehicle, thereby dispensing with multi-tiered fund structures.
- Is cost effective
The VCC has inherent appeal in its facilitation of an umbrella structure with a number of sub-funds, which can each pursue their own investment strategy and segregate investments among different pools of investors. An umbrella entity housing sub-funds would potentially lead to economies of scale stemming from the sharing of a board of directors and service providers. A tangible cost saving also arises from the tax exemption awarded to the fund vehicle, which eliminates the need to file multiple tax returns for sub-funds.
- Lends itself to substance requirements
The VCC not only requires the fund manager to be regulated or exempted by the MAS, but also that the entity has a resident director, a resident company secretary, a resident auditor and a registered office in Singapore. Thus, the structure is in a robust position to satisfy the drive for economic substance and international transparency.
- Allows for re-domiciliation of foreign fund structures
Foreign corporate fund structures that are domiciled in other jurisdictions, may re-domicile as a VCC subject to meeting the qualifying conditions.
What could be improved?
While the VCC may appear to be a panacea to all investor pains, a few challenges and question marks remain. Current drawbacks include:
- Excludes fund managers investing only in real estate
The legislation requires the structure to be managed by a fund manager either regulated or exempted by MAS, to ensure that a high standard of governance and oversight is maintained. However, currently this does not include managers who rely on the licensing exemptions for managing funds investing only in real estate and managing assets on behalf of their related corporations. It is hoped that these exempt fund managers may be permitted to manage VCCs in the future, broadening the investment ecosystem.
- Certain features remain to be tested
As US investors make up a significant portion of the global investor base, a key competitive feature would be for the investment fund to have “check-the-box” election under the US IRS code, akin to Ireland, Mauritius and the Cayman Islands. However, while the VCC appears to have the necessary elements in place to avail of this election, it is a matter for further testing considering that the legislation only took effect this year.
Is the introduction of the VCC really such a huge leap forward for Singapore? It is clear that the legislation leans heavily on existing frameworks from jurisdictions such as Luxembourg, Mauritius, Ireland and the UK, which have been operating such structures successfully for many years. Thus, in some ways, it is easy to dismiss the new framework as doing nothing more than place Singapore on par with other global fund centres.
At the same time, it is notable that the city-state is going out of its way to woo international managers and investors with an appealing structure that meets all of their requirements – from operational ease to privacy, to cost effectiveness. Interestingly, the MAS has also launched a VCC grant scheme to co-fund up to 70% of eligible expenses (capped at S$150,000) paid to Singapore-based service providers for work done in Singapore in relation to the incorporation or registration of a VCC. As a result, during the period of the grant, it will be considerably cheaper to set up a VCC.
With the Republic showing an undiluted willingness to transform its investment landscape to accommodate international investors and sway their preference for fund domiciliation to its shores, Singapore appears well poised to become not just a regional but indeed a global force to reckon with in the asset management space.
Contact: Jimmy Leong