Wider Adoption Greater Goal for Singapore VCC

Singapore’s Variable Capital Company (“VCC”) is now in its third year and gaining market traction, with considerable financial incentives for qualifying managers.  Having overcome the challenge of launching the new fund structure during the pandemic, the Monetary Authority of Singapore (“MAS”) has demonstrated its commitment to the VCC through consultation with market participants to enhance the regime and broaden participation as market confidence in the VCC builds.

With the objective of developing Singapore’s capability and competitiveness as a hub for asset management in the Asia Pacific region and leveraging the jurisdiction’s reputation as a premier international financial centre, the VCC was launched in January 2020.  Suited to both open and closed-ended funds across traditional and alternative strategies, the VCC vehicle mirrors key concepts, such as separate legal personality and the option for sub-funds, from successful global fund centres.

The emphasis has been on introducing greater operational flexibility in terms of share capital and distributions and more efficiency to the domestic framework, where a Singapore private company has frequently been used as an SPV for investment funds under an offshore fund entity.  It also creates a route for the redomiciliation of existing funds incorporated as comparable vehicles in other jurisdictions.

Redomiciliations have generally been from smaller fund jurisdictions, such as Mauritius, the Bahamas and the Cook Islands, but there have been some redomiciliations of standalone open-ended Cayman Islands funds.

In addition to tax incentives to encourage development and industry take-up of the VCC, MAS introduced a grant scheme.  The original terms of the scheme afforded co-funding 70% of the qualifying set up costs for managers incorporating a VCC or redomiciling a foreign entity as a VCC.  The grant, capped at S$150,000 per VCC for up to three VCCs, covered legal and tax services as well as administration or regulatory compliance costs.

With the original grant scheme lapsing on 15 January 2023, MAS has extended the VCC grant scheme for another two years until 15 January 2025 and has changed the terms.  With effect from 16 January 2023, the Financial Sector Development Fund will co-fund 30% of qualifying expenses incurred by Singapore-based service providers for advisory work performed in Singapore in connection with the incorporation or registration of a VCC.  There is also a new grant cap of S$30,000 per application.
To qualify for the updated grant scheme, fund managers must not have previously incorporated a VCC and must not have previously made an application under the grant scheme.

Another change under the updated grant scheme is that VCCs which are awarded a grant are required to remain operational for at least one year from the relevant registration date.  In the event that a VCC is wound up within the first year from the registration date, the qualifying manager must inform the MAS as soon as practicable and no later than one week from the date of the application for the winding up, or the passing of a resolution for a voluntary winding up.

In the event that a VCC is wound up within its first year, the MAS now has the right to claw back the grant awarded.  This is also the case where the fund manager fails to notify the MAS of winding up within the required timeframe.  It is too early to say whether this power will be used but it serves as an incentive to encourage the funds sector to fully utilise its VCCs after a more cautious 2022 across the industry where macro events delayed the launch of a number of funds.

The extended VCC grant scheme demonstrates the MAS’s continued commitment to the VCC whilst entering a transition period with reduced government incentives for a market, which is more familiar with VCCs and where the benefits of using the VCC structure will speak for themselves.

Building Momentum

For Singapore-based investment managers there are benefits to structuring a fund within their domestic time zone, particularly where there is an Asian investor base, leveraging on the strengths of Singapore’s highly regarded regulatory system.

According to AIMA, by the mid-point of 2022 over 540 VCCs had been established in Singapore.  The figures indicate around a third being closed ended private equity/venture capital funds.  It also shows 20% as hedge funds, 28% for Multi Family Office (“MFO”) / External Asset Manager (“EAM”) and 14% traditional long only.  In addition, there were 15 redomiciliations, as asset managers in the region explore its potential.

To date, many of the new VCCs have been set up by local start-ups or small managers based in South East Asia, with assets also located there, although larger asset managers are now beginning to show greater interest in the VCC as it becomes more established in the market.  As enhancements to the model are brought in, it is expected to gain momentum and VCCs may be increasingly incorporated into international fund structures.

As the VCC provides a unique entry point for domestic managers in Singapore, its potential in combination with Cayman Islands entities, which have a high degree of investor familiarity in Asia, in a global structure has been an interesting development.  Where such structures are being implemented, often Cayman Islands entities are the main investor facing fund with Singapore master and downstream entities for both closed-ended and open-ended funds.  As the domestic market develops further, there is the potential for that to be a popular option, in particular for funds targeting investors outside of Singapore.

Regulatory and Governance Perspectives

One notable difference evident from a fund governance perspective, compared with more mature hedge fund centres such as the Cayman Islands, is that few open- ended VCCs are engaging independent directors.  This is most likely driven by the small number of United States and European institutional investors who often demand independent directors as well as the cost impact on performance of hiring independent directors when many VCCs have been small.  While it is not typically mandatory for independent directors to be on the board of a hedge fund in these jurisdictions, best practice and strong demand from investors for governance has made it the global norm for a majority of the board to be independent.  This independence acts as a check and balance on the manager and provides oversight of the fund’s activities by the board.  Going forward, as VCC funds get larger and more institutional investors begin to invest in them, the expectation is that investors and due diligence firms will start to push more strongly for independent directors.

Additionally, as a newer product, there are regulatory requirements for VCCs which differ from those for other Singapore private companies.  For example:

• AML / CFT – The MAS stipulates the actions required to comply with AML / CFT obligations, with certain customer due diligence (“CDD”) measures to be undertaken, including maintaining a register of beneficial owners and a register of nominee directors, while engaging an eligible financial institution to conduct the due diligence checks.
• CDD – The maintenance of the VCC’s registers of beneficial owners and nominee directors and other such CDD measures are typically delegated to, and performed by, the VCC’s fund administrator.  For other Singapore private companies, this is usually carried out by the company secretary.
• Directors – At least one member of the board of directors must be a director or representative of the fund manager.  Each VCC director’s consent to act (Form VCR6) is more extensive than that used for a Singapore private company.
• Company Secretarial – Separate segregated statements must be filed for each sub-fund with the consolidated annual returns of the VCC.
• Accounting and Corporate Regulatory Authority (“ACRA”) Fees – It is also worth highlighting that the fees payable to Singapore’s ACRA to incorporate and file annual returns are different to those typically associated with a private Singapore company.  Whilst the fees are higher, this reflects the fact that the VCC is a relatively complex product used by sophisticated funds professionals.

Some early adopters experienced challenges when setting-up a VCC which was often more time consuming and costly than other existing products.  These were not regulatory hurdles so much as the issues of industry participants dealing with a new product where there was no established familiarity with the operational features of the VCC.  However, as the funds industry has become more familiar with the new structure, service providers are already increasingly better equipped to service VCCs in areas from incorporation to fund administration.  The MAS is also consistently reviewing the VCC to ensure it works as well as it can for the Singapore funds market.  As the VCC initiative has developed through its initial stages, the benefits of selecting a VCC partner with expertise in both umbrella and standalone structures, in addition to a full suite of fund services, have become clear.

The MAS has demonstrated its intent to widen the appeal of the VCC by enhancing the framework to suit the needs of more participants in the funds sector, with the regulator’s report on its industry consultation for VCC 2.0 expected shortly.  This could potentially see Singapore’s burgeoning family office sector – currently excluded without a Singapore asset management license – brought into the fold, as well as conversion from unit trusts.  With the industry already anticipating what VCC 3.0 might look like, the focus in Singapore is likely to remain on expanding the offering of VCCs to encourage even greater adoption.

As we look to the future, the funds industry is expecting further developments with the VCC as the MAS looks to expand the VCC’s scope and create a flexible and lasting private fund structure.

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