The Variable Capital Company
Simon Vardon, Director, Product Development – Real Estate
The Variable Capital Company briefing note was prepared by Simon Vardon, Richard Murray and Valérie Mantot.
The Variable Capital Company (VCC): The new Singapore corporate structure, delivering on industry demands for a Singapore product, suitable for all types of investment funds which is competitive on the international stage. This briefing note provides an overview of the characteristics of the new VCC and our thoughts as to the expected use of the product across the alternatives sector.
Until now, Singapore has not had a corporate structure suitable for use as a collective investment vehicle by hedge fund, private equity fund or real estate fund managers - clearly, a significant gap in Singapore’s suite of products. To date this situation has been circumvented by the use of an offshore structure such as the Cayman Segregated Portfolio Company (SPC).
The challenge with the current Singapore corporate vehicles has been onerous requirements around solvency tests, distributions and redemption's, coupled with requirements around fixed capital. Financial reporting restrictions on GAAP use were in some cases creating a duplication for some managers.
The Variable Capital Company:
First announced in 2016 and then the subject of a public consultation during 2017, the Variable Capital Companies Act was tabled in Parliament on Monday, 10 September 2018. The use of the new VCC’s will commence during 2019.
Highlights of the new structure:
- The VCC can be set-up as a stand-alone (single) fund, or an umbrella structure with multiple sub-funds.
- Funds can be open-ended or closed-ended funds.
- Variable capital basis allows for issuance and redemption of shares at NAV.
- Economies of scale exist for umbrella structures with multiple sub-funds, including;
- Common service providers,
- Sharing a board of directors; and
- Sharing the economic condition requirements for an Enhanced Tier Fund (ETF) Scheme between the sub-funds.
- Singapore Resident Fund (SRF) Scheme fund requirements are considered at the VCC-level and not sub-fund level, which is potentially advantageous depending on investor profiles.
- A wider choice of accounting standards is allowed, including IFRS and US GAAP.
- Investors registers are not public, but must be available for inspection by the manager and custodian of the VCC and the Government.
- The tax exemptions available under the existing Income Tax Act in relation to income and gains arising from funds managed by a Singapore-based manager have been extended to VCC’s.
- The 10% concessionary tax rate available under the Financial Sector Incentive – Fund Management Scheme, is also extended to incentivised VCC’s.
- Existing GST remission for ETF and SRF funds will be extended to VCC’s.
- The fund manager of the VCC must be registered, licensed or exempted by the Monetary Authority of Singapore (MAS).
- VCC’s structured as umbrella funds with multiple subfunds must have the same fund manager for each subfund.
- Segregation of assets and liabilities of sub-funds can be achieved through utilization of a cellular structure for the sub-funds. Whilst each sub-fund would not have legal personality, it would be registered with the Accounting and Corporate Regulatory Authority (ACRA) and must disclose the cellular structure to third parties with which the VCC is dealing.
- At least one director of the VCC must also be a director of the appointed fund manager.
- The performance of Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT) duties must be outsourced to the fund manager of the VCC, with the VCC ultimately responsible for compliance with the requirements.
Expectations are that the VCC will prove a popular structure for Singapore, particularly for the alternative asset classes. Singapore has an extensive list of tax treaties and now looks set to have a structure which can compete with the traditional fund jurisdictions and products.
Real Estate fund managers should carefully note the requirement for the fund manager to be registered, licensed or exempted by MAS. The current exemption from a license for real estate fund managers is not applicable to the exemption mention. Thus, to access the ability to manage VCC funds some real estate managers will need to first work through licensing requirements.
Richard Murray, Director, Product Development - Hedge at SANNE comments, “The launch of the VCC in Singapore presents an exciting opportunity for Hedge Fund Managers to utilise a corporate structure which is effective for open-ended platforms. This represents a new development for the Hedge Fund industry in Singapore.”
Simon Vardon, Director, Product Development - Real Estate at SANNE comments, “We expect the VCC will be very popular with Real Estate Fund Managers. At a time when substance considerations are moving further up the structuring agenda, Singapore have produced a product which is expected to be both internationally competitive as well as looking set to reduce the use of offshore vehicles by Singapore-based Fund Managers.
Valérie Mantot, Head of Business Development, Asia-Pacific & Mauritius at SANNE and based in Singapore is also enthusiastic about the new VCC, “For many years the Fund industry in Singapore has been frustrated by the lack of a flexible and effective product to structure open and closed-ended funds. The ability for Managers to run multiple sub funds below an umbrella VCC and to gain the benefit of economies of scale in doing so, should prove to be a very popular characteristic for Singapore Fund Managers.”