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Singapore’s new structure to rival Cayman funds

Will Singapore's new corporate structure for traditional and alternative managers grow at the expense of Cayman Island-domiciled funds?

The regulations for the new structure, the Singapore Variable Capital Company (S-VACC), are expected to be in place at the beginning of next year. What the S-VACC offers is a variable capital structure for a company, as opposed to current structures, such as limited partnerships and unit trusts, which have a fixed capital structure, said Eric Roose, Singapore-based partner at law firm Withers KhattarWong.

“You usually have what we call fixed capital here, and you can’t have these variable capital structures, which allow investors in an investment product to come in and out of the fund more easily,” he said.

“With the S-VACC, you will see the flexibility that you would normally see in a Luxembourg-structured fund.”

Cayman impact

Roose said managers who are already offering Ucits funds in Singapore will have the option to “re-domicile” their funds and adapt to the S-VACC structure, according to Roose.

Having an S-VACC structure may have tax incentives, Roose said. However, the industry has not received any clarity on tax regulation for the new structure.

He does not expect a mad rush from fund managers to set-up or convert to an S-VACC until the structure and any “wrinkles” are fully understood.

However, he expects that it will have an immediate impact on Cayman Islands-domiciled funds, which are usually products set up by private equity and hedge fund managers. Cayman regulations are more flexible when compared to Luxembourg-domiciled Ucits funds.

“The S-VACC will initially hurt Cayman funds, which are already having some issues because European investors generally will not go into a Cayman investment structure.”

He explained that a number of institutional investors in Europe, such as pension funds, have investment policy guidelines that prohibit them from investing in Cayman-structured products.

Roose added that he is beginning to see other investors increasingly resistant to Cayman funds, but said it could be for a number of reasons. “I don’t know whether it is the Panama Papers. I still think Cayman is an excellent jurisdiction.”

Cayman Islands is one of the UK’s Overseas Territories popular for secrecy practices. However, those practices are now under scrutiny, with the UK government supporting an amendment that will introduce public ownership registers, as reported by sister publication International Adviser.

The amendment means that the British Overseas Territories, which include Cayman, the British Virgin Islands and Bermuda, would have to disclose who owns assets in companies registered in the jurisdiction.

In response, the Cayman Islands Government entered into a dialogue with the UK in May to change parts of its constitution, as it aims to prevent Britain from imposing legislation on the jurisdiction, according to another International Adviser report.

Hong Kong structure

Offshore funds, especially Ucits, are still expected to grow in Asia despite regulators’ determination to grow an onshore industry by developing local fund structures, according to a recent report published by Cerulli Associates. In Asia, Ucits account for 65% of the combined AUM of funds in Hong Kong, Singapore and Taiwan.

Like Singapore, Hong Kong is also expected to put in place later this year a variable fund structure, the open-ended fund company (OFC).

“Both locally-domiciled and Ucits products will have a complementary role to play in offering investors their choice of products with exposure to relevant investment strategies,” Leena Dagade, associate director at Ceruli, said in the report.

In Hong Kong, assets in Luxembourg-domiciled funds were up 6% in March 2017 to $910.35bn compared to March 2016, according to data from the Securities and Futures Commission. The AUM of Bermuda- and Cayman Islands-domiciled funds was down 26% and 24% respectively.




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