EVEN before the onset of Covid-19, the need for more structuring options for investment funds was already evident as investors’ requirements have become increasingly complex and sophisticated. Still, the launch of the Variable Capital Company (VCC) structure by the Monetary Authority of Singapore (MAS) in January 2020 was quite timely.
Although Singapore has built itself over the years as a leading Pan-Asian asset management hub with SGD 3.4 trillion (USD 2 trillion) in assets under management and a diverse base of more than 800 traditional and alternative fund managers1, the next phase of growth is to expand the city’s fund value chain to become a fund domicile hub.
Elaine Tan, head of fund services products and solutions, Asia Pacific, for BNP Paribas Securities Services explains: “In line with Singapore's objective to become a fund domicile hub, the establishment of the VCC is designed to fill a gap by offering regional and global fund managers a greater choice of investment fund vehicles when they choose to structure and domicile their funds in Singapore.”
It took only seven months after the launch of the VCC structure to reach the milestone of 100 VCC funds incorporated within the corporate registrar2, demonstrating diverse use cases across traditional, alternative and wealth management strategies. While fund managers and asset service providers who participated in the VCC pilot programme initiated by the MAS agree that the launch of the VCC was a success, there is also a consensus that enhancements are needed to prepare for future opportunities and challenges to this onshore fund structure.
Fumin Feng, deputy director of the financial markets development department at the MAS, commented during a BNP Paribas webinar: “The VCC framework is a good starting point for Singapore-based fund managers to structure their funds. But we do recognise that it is a continued work in progress to enhance the framework to tailor to the needs of fund managers and investors.”
Competitive advantages of the VCC
The VCC structure has proved flexible when meeting the different requirements of fund managers who need to establish open-ended fund structures in Singapore.
Manish Khandelwal, director of business development & products at UTI, one of the 18 fund managers who participated in the MAS pilot programme, commented on UTI's experience: “When we set up our fund management company in Singapore in 2007, we found out that the open-ended company type structures were not available in Singapore and that we had to move to other jurisdictions to set up our funds.”
With the launch of the VCC, Singapore became comparable with other jurisdictions in terms of setting up open-ended fund structures, adding to the city state's reputation as a financial centre.
Commenting on the VCC, Khandelwal said: “The VCC structure facilitates dividend payments as well as the return of capital to investors. Singapore has a high regulatory reputation essential to a financial centre. Furthermore, it is an FATF (Financial Action Task Force) compliant country which supports marketing our funds in the other regions.”
Aside from the open-ended fund structure, the VCC has the flexibility to also be a close-ended fund, an umbrella fund, a standalone fund, a master fund, or a feeder fund.
Jek Aun Long, funds partner at the Singapore office of Simmons & Simmons JWS says: “It [the VCC] captures many ways of doing things right, so it provides a lot of optionality. The flexibility of the VCC is a huge advantage. The fact that it’s domiciled in Singapore obviously comes with advantages because if your manager is located here, your investment professionals are on the ground, it lends very well to substance arguments. There’s a real commercial rationale as to why you will be operating here. So that’s a huge advantage.”
The flexibility of the VCC structure, along with the location of a VCC-structured fund in Singapore, also provides investors who are interested in onshore fund vehicles with greater confidence compared to other structures.
Long commented further on the flexibility of the structure: “In terms of investor confidence in the vehicle, you see it go both ways. For investors who are used to doing things in a certain way, perhaps they may be a little bit resistant. But there are investors who do want to invest in vehicles that are onshore where there’s real substance. From a legal perspective, it simplifies things if you have the VCC and the manager domiciled in Singapore in the same location because then it also means you deal with one set of laws, Singapore laws. For example, you deal with one set of AML rules, you deal with one set of data protection and privacy rules.”
An additional element that makes the VCC competitive vis-a-vis other fund structures is that investors can benefit from more than 80 double taxation agreements (DTAs) between the Singapore government and other jurisdictions. A DTA is a bilateral agreement that provides clarity on the taxation rights of each contracting jurisdiction on all forms of bilateral income flows. The DTA also eliminates instances of double taxation which can arise from cross-border trade and investment activities.
According to David Ng, COO of CSOP Asset Management, which also participated in the VCC pilot programme supported by BNP Paribas: “The VCC, with the tax treaties that Singapore has, is a very powerful tool, especially to investors because tax has an impact on the fund’s performance and ultimately to investors’ returns.”
Lastly, while the VCC is an onshore fund structure in Singapore, it has many features that come with an offshore fund structure without the disadvantages. For example, a fund manager who is setting up an offshore fund structure would have to deal with two sets of service providers – the onshore service provider and the offshore one. Since the VCC is an onshore fund structure, it only involves dealing with one set of service providers for both its onshore and offshore requirements.
“Frankly speaking, while offshore structures are easy to set up, unfortunately we have to deal with two layers of service providers. By having a VCC which is a Singapore onshore structure, we can avail ourselves of a full ecosystem of service providers that are in the same time zone, the same geography, same location and it’s an enormous amount of savings we are talking about,” says Ng.
To ensure the continuing success of the VCC structure, the MAS is planning more features designed to enhance the VCC and make it more responsive to the evolving requirements of fund managers and investors in today’s highly dynamic markets.
One such feature which the MAS is considering based on feedback from the industry is amending the existing legislation to allow fund managers who are keen to convert their existing funds currently structured as companies or unit trusts to VCCs.
Another feature that the MAS is exploring is the feasibility of widening the scope of fund managers allowed to use the VCC structure, to potentially include specific classes and to allow licence exempt managers, such as single family offices.
“Most of us are aware that today a single family office can use a VCC only through a permissible fund manager, in other words, with an external asset manager or multi-family office regulated by the MAS. But there are some single family offices who have their own capabilities and have expressed interest to set up a VCC directly,” says the MAS’s Feng.
Feng says the VCC structure is a part of the MAS’s three-pronged strategy of developing Singapore into a funds domiciliation hub which includes: first, providing a comprehensive suite of fund structuring vehicles to meet fund managers and investors' needs; second, broadening market access opportunities for Singapore-domiciled funds; and third, deepening the asset servicing capabilities of the Singapore funds ecosystem.
The first prong includes the continued enhancements of the VCC structure (i.e. VCC 2.0), the second includes the funds’ passporting schemes, and the third includes providing collaboration opportunities for custodians, fund administrators, accountants, lawyers, and fund directors.
“The VCC framework is a key initiative designed to enhance the value proposition of Singapore as a fund domiciliation hub and it is important for the MAS to work very closely with the industry to achieve this,” Feng says.
The speakers quoted were speaking at a BNP Paribas-sponsored event named “VCC 2.0” in July 2020. BNP Paribas was awarded the title of Best Global Custodian in Asia Asset Management’s 2021 Best of the Best Awards for its exceptional performance.
BNP Paribas Securities Services Website: https://securities.bnpparibas.com/
2 As of mid-August 2020. Updated data for mid-September 2020: