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Section 65 with Sanne: how to market an offshore fund to South African investors

Insight 25 August 2022

Section 65 with Sanne: how to market an offshore fund to South African investors

HedgeNews Africa sits down with Matthew Pykstra, who is a director and head of the management company at Sanne, a specialist global provider of outsourced corporate, fund and private client administration, reporting and fiduciary services.

As published in HedgeNews Africa Third Quarter 2022.


Based in Cape Town, Matthew Pykstra oversees the Sanne manco, working closely with a range of South African asset managers, offering both long-only and hedge fund products. Click here for the for the webinar.

In recent years many South African investors have sought to increase their exposure to offshore markets, looking to diversify away from a shrinking local equities market as the country faces political and economic pressures.

In the most recent budget, in February, prudential rules were amended to enable pension and mutual funds to invest up to 45% of their assets offshore, up from 30% previously. It’s the largest adjustment yet to the offshore limit, giving domestic investors an opportunity to fundamentally rebalance their portfolios, accompanied by many local managers now offering offshore products, investing ex-South Africa to meet demand.

Established offshore managers are also seeing potential to attract allocations from local investors – the pension and savings industry oversees a total of R2.96 trillion (almost $200 billion) in the country, according to the Association of Savings and Investment South Africa.

The first step is to ensure that the offshore fund is Section 65 approved, allowing it to be marketed to the South African public.

  • Section 65 is a piece of legislation in the Collective Investment Schemes Control Act (CISCA) that addresses restrictions on foreign collective investment schemes to carry on business in South Africa.
  • One of the requirements under Section 65 of CISCA is that Foreign CISs that want to market their portfolios to the South African general public would need to ensure that the scheme and funds are registered and approved by the Financial Sector Conduct Authority (FSCA).
  • The foreign scheme, which is also termed the operator, has a fund or multiple funds that reside under the foreign scheme, and the foreign scheme is typically represent­ed by the investment manager.
  • The foreign scheme with the investment manager must either establish a repre­sentative office in South Africa and seek authorisation from the FSCA or enter into a representative agreement with a third-party FSCA-approved management company such as Sanne Management Company (RF) (Pty) Ltd.
  • Once the application documents have been approved to the FSCA then the for­eign scheme would be able to market the product to the South African public.
  • Sanne, through the compliance function, would then vet any marketing mate­rial including minimum disclosure docu­ments, brochures, presentations, applica­tion forms, and advertisements and lodge with the regulator before marketing to the public.

There are over 600 foreign portfolios that have been Section 65 approved for mar­keting to the South African market. These are primarily long-only funds with a small minority that are hedge funds.

In terms of domestic managers versus global players, I would say a bit of both, however they are predominantly domestic managers. Amongst local players, we have the likes of Allan Gray, NinetyOne and others, whilst global players include Ishares and Blackrock.

We want to create awareness to our ex­isting hedge fund base, which is over 60 regulated QIHFs and RHFs that have off­shore portfolios in existence wishing to market to the South African public. Then there are other local hedge fund managers that have established offshore portfolios or alternatively, foreign investment managers with foreign funds looking to tap into the South African market.

As an example, we recently had a Cay­man-based fund approved. This took a fair amount of time to approve the jurisdic­tion before the control environment of the fund was looked at, given that this was the first Cayman-based fund to be approved.

The first step is to ensure that there is a foreign portfolio and scheme that has been established and approved with an approva­ble jurisdiction in the eyes of the regulator. Sanne can assist in this process by provid­ing guidance in terms of the costing across jurisdictions.

Once the foreign portfolio and scheme is established and approved by the foreign jurisdiction, then a foreign scheme could appoint Sanne Manco as a representative office. Sanne together with the investment manager would collate the application documents utilising the offering memo­randum or founding documents of the foreign scheme by ensuring the control environment of the portfolio is equivalent to South African regulated hedge funds, therefore salient details such as the invest­ment policy, risk restrictions, liquidity re­quirements and protection of investors are paramount.

In addition, there is a list of similarities and differences form that would need to be completed by Sanne comparing the South African jurisdiction to the offshore juris­diction.

Lastly, a representative agreement be­tween Sanne and the foreign scheme would need to be entered into.

It is important to note that the scheme must be available for investment in its domicile of registration; and be promoted in South Africa to the same type of inves­tors under the same, or substantially similar, requirements and conditions relating to the type of investors as in its domicile of regis­tration. In other words, if the offshore fund is available to professional investors abroad then it can only be available to professional investors in South Africa, so we would typ­ically then apply to the regulator for the foreign fund to be structured as a QIHF type fund.

In terms of the time taken, it really de­pends on the fund as well as the jurisdic­tion. If the regulator has a good standing with the offshore jurisdiction, then this would typically be quicker than trying to approve a new jurisdiction.

Furthermore, the more measures the portfolio itself has, the shorter the time it would take to approve.  So one would need to look at both the jurisdiction and fund measures itself.  Typically, this can take 2-3 months, how­ever that is more an estimate rather than an exact timeline.

Sanne would be involved in reviewing the foreign scheme prospectus and relevant documentation, such as the annual financial statements, manager company information, representative agreement, and the regulator letter.”

Matthew Pykstra
Head of Sanne Manco

Typically, a UCITs funds label serves as a stamp of quality and reliability for investors and carries a high regard given that they are highly regulated in terms of risk measures – including requirements around allowable investments, liquidity, disclosure, and inves­tor protection, as well as the technical and practical organisation of such funds.

The most common funds that have been approved operate within Ireland and Lux­embourg, specifically structured as UCITs and Icavs.

When approving the fund, the FSCA will look at the jurisdiction as well as the fund’s control environment.

The regulator’s approval process is to en­sure that the offshore portfolio has a regu­latory environment that is comparable to the South African regulatory environment to ensure homogeneity between the off­shore and local portfolios in terms of struc­ture and governance.

Furthermore, key requirements are that the FSCA needs to be satisfied that:

  • the scheme is sufficiently liquid to meet investor redemptions.
  • the scheme does redemptions at regular intervals.
  • the scheme does not permit investment in an instrument that compels the ac­ceptance of physical delivery of a com­modity, and the scheme particulars or prospectus prohibits it from accepting physical delivery.
  • the assets of the relevant fund are prop­erly protected by application of the prin­ciple of segregation and identification.

There are costs to the regulator, namely:

Initial registration fee

  • For the scheme (including one portfolio) R73,560
  • For an additional portfolio R20,980

Ongoing quarterly FSCA levies

  • R12,300 per scheme
  • R6,671 for each portfolio

Representative office charges

  • Charged in the country of fund denomi­nation.
  • US$8,000 to $10,000 per year for the scheme and first fund (R130,000 to R160,000)
  • An additional fund is $1,000 (R16,000).

It becomes a lot more scalable the more portfolios one has.

Given that these are fixed costs, if you add up the FSCA costs with the initial registration fee and levies as well as the representative office fees, then for the first year a R140 million based portfolio would equate to 20 basis points. If you strip out the initial registration fee, then this scales down to 15bps. If you double the fund to R280 million, it would equate to 10bps including the initial registration fee and 7.5bps if you strip out the fee.

A lot of the costs are at scheme level with the first portfolio, so naturally it be­comes a lot more scalable should one apply for additional portfolios.

Sanne would be involved in reviewing the foreign scheme prospectus and relevant documentation, such as the annual finan­cial statements, manager company infor­mation, representative agreement, and the regulator letter.

When it comes to the submission pro­cess to the FSCA, we would facilitate the completion of all the required applica­tion documents, prepare the representative agreement, facilitate the preparation of the motivation letter, monitor the applica­tion process and engage regularly with the FSCA.

We also undertake ongoing compli­ance support and maintenance such as compliance monitoring and regulatory submission of all marketing material in­cluding minimum disclosure documents, brochures, presentations, application forms, and advertisements.

We monitor the submission of quarterly statistical information, to be submitted by the foreign manager within 30 days after the end of each quarter.

This includes ensuring that levies are paid by the foreign manager within re­quired deadlines (the levy statement will be sent through to the foreign manager once such statement is obtained from the regulator).

We will also review any amendments to the scheme or fund legal documentation and submit to the FSCA for approval, as required.

An operator or foreign scheme could apply on their own accord by applying as a representative office, however this is typically done via a manco as the manco licence is a key consideration when apply­ing. The application process can be quite burdensome and only becomes scalable when operating a large number of portfo­lios across a multitude of AUMs.

It can be seen as similar to hedge fund investment managers with local funds typi­cally partnering with hedge fund mancos rather than establishing their own mancos. Additionally, that layer of independence is always going to be favourable in the regu­lator’s eyes, all else being equal.

If Section 65 approved, one would be able to market to the South African public.

Local managers would find this appeal­ing given that they have existing relation­ships with the main distribution channels through:

  • Financial advisers
  • Lisps that house offshore funds (Sanne has relationships with the vast majority of local Lisps).
  • Asset consultants that have access to the South African pension fund market that could allocate a portion to the offshore fund
  • Local CIS portfolios, especially consider­ing that the Asisa requirement for South African classified portfolios is 45%, not to mention offshore and worldwide man­dates.

Foreign managers would also find this appealing for the above reasons as well as the fact that South Africa is often seen as the gateway to the rest of Africa for inter­national fund managers.

Other insights from Matthew Pykstra

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Insight 27 June 2022
Section 65 approval on Foreign Collective Investment Schemes in South Africa
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