BY AYANA HULL (Senior Associate, Harneys)
One of the main reasons the British Virgin Islands (BVI) is often chosen as a jurisdiction for investment managers to set up their fund vehicles is the fl exibility the legislative regime provides for structuring these funds. There are over 2,200 regulated funds and almost certainly a similar amount of unregulated fund vehicles established in the BVI. Our understanding through years of working alongside some of the biggest names in the industry is that investment managers are seeking a jurisdiction with three basic characteristics: political stability, an effi cient and reliable legal system and experienced industry practitioners on the ground. The BVI happily possesses all three. This has led to a very wide range of clientele showing a keen interest in the jurisdiction, from well-established institutional fund managers in major jurisdictions around the world with billions in assets under management all the way through to individuals wishing to set up incubator funds with a small amount of start-up capital and wishing to establish a successful track record. The legislation allows for this diversity by off ering a product suitable to every shape and size of investment business and ensures that the BVI stays on the cutting edge of global financial services.
Although the limited partnership and the unit trust are available vehicles through which fund managers who are more familiar with those investment structures can structure funds, the limited liability company (a BVI business company limited by shares) is still the most popular for investors whether the fund to be structured is a stand-alone fund or a master-feeder fund. Since the BVI Business Companies Act, 2004 introduced the ability for funds to be structured as segregated portfolio companies (SPCs), fund managers have also taken advantage of this type of company in structuring their BVI funds. Choosing “a BVI”
The standard BVI business company is very useful where a fund may be utilising a single investment strategy, investing in securities of a similar nature and risk profi le or focusing on one type of investment product. It can also be used to structure an umbrella fund, whereby each sub-fund is demarcated by a separate class of shares in the fund, each sub-fund is traded as a separate investment fund and the accounts of each sub-fund are separated from each other by the creation of separate class accounts. There is a fundamental limitation to using the standard BVI business company as a structuring vehicle however — that of third party liability. Although for internal accounting purposes, the accounts of each class of shares in the fund will be regarded as separate and investors will only receive proceeds from the class of shares in which that particular investor invested, this distinction amongst sub-funds within a fund, does not hold true as it pertains to third party creditors. A creditor of a particular sub-fund in a fund structured through a standard BVI business company will have recourse to the assets of any other sub-fund within the fund, where the assets of the particular sub-fund are not suffi cient to satisfy the amount owed to the creditor.
The SPC alternative
It is for this reason that the SPC is gaining traction as a structuring vehicle for BVI funds that employ a multi-investment strategy for multiple investment products and which carry diff erent risks and realization horizons. The SPC structure contains one or more segregated portfolios each of which is regarded as a separate legal entity for asset protection purposes. Deploying a BVI SPC is a particularly useful tool in the hands of a fund manager in order to segregate investment products and risks in a more effi cient way so that the assets attributable to a particular segregated portfolio are held by the company as if a separate fund and to ensure that these assets are not available to meet the company’s general liabilities or the assets attributable to other portfolios. Hence, where segregation of assets is desired, the SPC provides a higher level of protection for these assets under BVI law.
Further, as start-up fund managers seek to fi nd more economical ways to launch funds in a much more careful investment climate, trends are also developing in the BVI whereby the SPC is not only used within the same fund structure but also by unrelated funds and investment managers who are seeking to gain economies of scale by sharing a single BVI SPC platform. On such a platform, all the unrelated entities similarly share a single off ering document with each fund and fund manager being allocated its own segregated portfolio on the platform and with a specifi cally tailored supplement which would provide greater details of the specifi cs of the investment program of each fund and the specifi c risks applicable to the particular fund and investment program.
The BVI is not only fl exible in terms of structuring vehicles; it is fl exible in terms of costs as well. The costs involved in setting up a BVI fund are very modest when compared to other jurisdictions and this low cost-base compared to most other off shore jurisdictions also places the BVI in an advantageous position. Initial and annual government and regulatory fees associated with establishing a stand-alone fund are in the range of $2050 – $2800 (initial fees) and $1,350 – $2100 (annual on-going annual fees) depending on the maximum number of shares the fund is authorised to issue. Legal fees in relation to fund documentation will vary based on a variety of factors but are very competitive with other jurisdictions as well. Similarly, initial and annual government and regulatory fees will be in the range of $4,750 – $5,500 (initial fees) and $4,050 – $4800 (annual on-going fees) for an SPC with two segregated portfolios depending on the maximum number of shares the fund is authorized to issue. Again, legal fees will depend on the number of portfolios and the approach to drafting the documents (the off ering memorandum and each supplement).
Also, with SPCs, as there is no limit on the maximum number of portfolios an SPC can create and the maximum total initial fees in any given year payable by a mutual fund SPC is capped at a maximum of US$10,000, the SPC platform mechanism provides an additional structuring option available for multiple unrelated start-up managers to establish investment vehicles by sharing the annual fees associated with a single SPC.
Recent Augmenting Initiatives
Coupled with the mutual funds product is a new and less onerous regulatory regime pursuant to which BVI domiciled investment managers (approved managers) can obtain approval status within a 30-day period but are able to commence business in this capacity seven days after the application for approval is made to the BVI regulator. Where time to market is critical, the approved manager product can be quite convenient for managers and advisors. It is also a good asset in the regulatory basket of a fund manager as the manager can boast a regulated product (which most investors prefer) whilst avoiding exposure to the full gamut of the licensing regime.
Further, the fl exibility of being an approved manager is such that the approved manager can act as manager or advisor to any number of BVI private or professional funds as well as funds domiciled outside the BVI in a jurisdiction which is deemed a “recognised jurisdiction” if they have the characteristics of a private or professional fund. The approved manager is subject to caps of aggregate assets under management of US$400 million for open-ended funds and aggregate capital commitments of US$1 billion for closed-ended funds. Only where an approved manager exceeds these respective caps and continues to do so for three consecutive months, will such a manager need to become licenced under the Securities and Investment Business Act, 2010 (SIBA).