The numbers tell the story.
Singapore has, since the establishment of the variable capital company (VCC) fund structure, reported a total of 969 VCCs — both umbrella and standalone — representing 1,995 sub-funds being incorporated or re-domiciled in Singapore.
Yet challenges remain as Asian fund managers look to integrate domestic structures with those in other jurisdictions.
Ensuring regulatory compliance in respective jurisdictions, the appropriate level of substance to benefit from tax-efficient rulings, as well as overall cost of managing increasing structures, are some of the key challenges being faced by fund managers, said Singapore-based Tervinder Chal, managing director at law firm Ogier, to AsianInvestor.
Urvii Guglani, associate for strategic initiatives at Silverdale Capital, a fixed-income and fund management company headquartered in Singapore, added, “Being in its nascent structure, the VCC has several challenges.
"For instance, a VCC is not considered a registered fund in several jurisdictions. There is no provision for a management company (ManCo), as is required by the European Union’s regulatory framework of UCITS, making back-office and middle-office management challenging.”
Guglani added, “Due to expensive service providers in Singapore, particularly limited options for audits, legal support, and banking, it has become too costly to establish multiple sub-funds under the VCC framework. Hence, an alternative intermediate structure is sometimes necessary for practical and cost-related reasons.”
“Given a short track record of four years, many foreign investors regard Singapore’s VCC structure as still relatively new and untested as compared to traditional jurisdictions, such as the Cayman Islands”, said Hogi Hyun, founder and managing director of Abacus Capital, a fund management and advisory group headquartered in Singapore.
The cross-border structuring of funds also remains a challenge.
As Guglani noted, “More jurisdictions are benign for re-domiciling a fund, but prohibit or make it onerous to migrate out.”
Licensing, as well as the necessary approvals to market funds to investors, are key — and Asian managers often use third-party AIFMs or management companies in Europe to raise capital.
Maintaining a presence on-site and collaborating with local partners in operating jurisdictions is also essential.
A NEED FOR CHANGE?
Investment managers that are not based in Singapore or do not have an MAS-licensed fund management regulated status, including single-family offices, cannot operate a VCC.
The billion-dollar money laundering incident in August 2023 in Singapore has added fresh impetus to regulatory scrutiny for family offices in the country.
“As an alternative to the single-family office regime, the VCC fund structure has been a popular and beneficial vehicle in the wealth management space, especially for families who may want to start small and stay nimble. We have noticed a growing demand from families across Asia for the VCC vehicle to serve a range of objectives like tax incentives, significant cost savings, and professional management and oversight from an experienced investment manager,” noted Hyun.
“Families might opt to restructure the ownership of their businesses from legacy structures to institutional holding structures in Singapore. This provides access to numerous international taxation and bilateral investment treaties and free trade agreements, along with a government-offered tax exemption leading to a zero effective tax rate on investment income and capital gains.”
Singapore enables access to 100 double taxation treaties, 38 bilateral investment treaties, and 22 free trade agreements with different countries around the world.
The Monetary Authority of Singapore (MAS) is gathering feedback from practitioners and is expected to introduce changes to the VCC framework in 2024 or 2025, with the goal of increasing its efficiency and usage as a fund vehicle where investors can invest directly.
Abacus Capital’s Hyun shared a possible future feature based on industry feedback: “[MAS is considering] amending the existing legislation to allow fund managers who wish to convert their existing funds, currently structured as companies or unit trusts, to VCCs. Once this is passed, we expect more interest and use cases for the Singapore VCC as a wealth management vehicle for clients to domicile their assets in the region.”
“Going beyond Singapore depends on the ability to use the fund management licence in other places [also known as passporting], and mutual agreements. Progress is happening steadily in this regard,” stated Guglani.