Variable Capital Companies in Singapore and the opportunities they present for hedge funds, asset management firms and family offices in Singapore | Legal Chat with Robson Lee Teck Leng, a global equity partner of international law firm, Gibson Dunn & Crutcher LLP

In the business of establishing new investment funds, Singapore has kept pace with the global market space.

After its launch in mid-January 2020 by the Accounting and Corporate Regulatory Authority (ACRA) and the Monetary Authority of Singapore (MAS), the Variable Capital Company (VCC) has become an increasingly popular corporate structure for investment funds that complements the existing legal structures available in Singapore.

The VCC is regulated under its own bespoke legislation, the Variable Capital Companies Act (No. 44 of 2018) that was passed in Parliament in 2018 (as amended, the VCC Act).

While ACRA administers the VCC Act and any subsidiary legislation, the anti-money laundering and countering the financing of terrorism obligations of VCCs come under the purview of MAS.

So how does a VCC differ from a Limited Liability Company?

In some respects, a VCC is structured in a similar manner to a limited liability company (LLC). Like LLCs, a VCC is a corporate entity in which shareholders may hold shares.

However, VCCs are tailored for use by collective investment schemes (CIS) in Singapore. Instead of holding shares in a company which is directly used to carry out business, shareholders of a VCC are entitled to receive profits from the VCC’s property in accordance with the rights set out in the VCC’s Constitution.

Notably, VCCs are not subject to the restrictions under the Companies Act (Chapter 50 of Singapore) as LLCs are. This includes aspects tied to the doctrine of capital maintenance, and public access to shareholders’ identities that are applicable to LLCs.

We will explore some of these features in greater detail below.

Key features of a VCC

1.      Flexible capital structure

As its name suggests, a VCC offers a variable capital structure. One of the main benefits of a VCC is that shareholders can easily realise their investments, without being subject to the capital maintenance requirements applicable to LCCs (such as having to seek a separate shareholders’ approval). A VCC is permitted to freely issue and redeem fully paid shares, and pay distributions out of its capital.

LLCs, on the other hand, are only allowed to redeem its shares and distribute dividends out of their distributable profits. VCCs thus provide greater flexibility in the distribution and return of capital to its shareholders.

2.      Choice of a single standalone fund or an umbrella fund

VCCs can be set up as a single standalone fund or as an umbrella fund having multiple sub-funds, with each sub-fund holding a portfolio of segregated assets and liabilities that are “ring-fenced” from the other sub-funds. The umbrella structure allows a VCC to have multiple sub-funds with different investment objectives as well as investors.

The effects of the concept of “ring-fencing” are potentially far-reaching. For example, a VCC may sue or be sued in respect of a sub-fund. Further, a sub-fund could be wound up separately without affecting the continuing existence of the VCC or the other sub-funds under the VCC.

Moreover, fund managers who structure their funds as umbrella VCCs may enjoy substantial cost efficiencies, since sub-funds can share the same board of directors and common service providers as well as consolidate certain administrative functions.

3.      Suitable for different strategies

There are generally no restrictions on the investment strategy used by a VCC. Notably, a VCC can be used for both open-ended and closed-end fund strategies.

An open-ended fund allows investors to redeem their investments at their discretion, and accepts new subscriptions by new investors at any time. On the other hand, a closed-end fund does not permit investors to redeem their investments freely. It also has a fixed number of shares and do not allow new subscriptions after the offer period closes.

As mentioned above, the variable capital structure of a VCC allows it to issue and redeem shares without having to seek shareholders’ approval. This enables VCCs to be used by open-ended investment funds.

4.      Flexibility in accounting reporting standards

Apart from the Singapore Financial Reporting Standards (SFRS), a VCC is permitted to prepare its financial statements using other international accounting standards such as the International Financial Reporting Standards (IFRS) and the US Generally Accepted Accounting Principles (US GAAP). This flexibility in accounting reporting standard allows the VCC framework to adapt to the needs of global investors. While the financial statements may be subjected to an annual audit by a Singapore auditor, the statements will not be made available publicly.

5.      Confidentiality

VCCs are required to maintain a register of shareholders, though (like the VCC’s Constitution and financial statements) this does not need to be open for inspection by the public. Apart from disclosure to public authorities upon request for regulatory, supervisory and law enforcement purposes, the identities of the shareholders can essentially be kept confidential.

The privacy of the shareholders’ register is particularly attractive for family offices, who may wish to maintain their privacy. No other corporate structure in Singapore allows for a similar exemption.

6.      Management of VCCs

VCCs must be managed by a Permissible Fund Manager who ultimately retains overall responsibility for the fund management duties and mitigates any conflict of interests that may arise. A Permissible Fund Manager refers to any of the following:

• A licensed fund management company (i.e. a holder of a capital markets services licence for fund management under section 86 of the Securities and Futures Act (Chapter 289 of Singapore) (SFA))
• A registered fund management company (i.e. a corporation exempted from holding a capital markets services licence under paragraph 5(1)(i) of the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations)
• A person exempted under the Section 99(1)(a), (b), (c), or (d) of the SFA from the requirement to hold a capital markets services licence to carry on business in fund management (i.e. a bank licensed under the Banking Act (Chapter 19 of Singapore))
• A merchant bank approved under the Monetary Authority of Singapore Act (Chapter 186 of Singapore)
• A finance company licensed under the Finance Companies Act (Chapter 108 of Singapore)
• A company or cooperative society licensed under the Insurance Act (Chapter 142 of Singapore)

In addition, a VCC must have at least one director who is ordinarily resident in Singapore, and one director (who may be the same person as the Singapore resident director) who is either a Qualified Representative (as defined under the VCC Act) or a director of the fund manager of the VCC.

7.      Applicable for new incorporation or re-domiciliation of existing overseas investment funds

Crucially, the Singapore VCC structure is a big step in the right direction towards improving the city state’s attractiveness for fund managers worldwide.

Under Singapore law, fund managers are able to incorporate new VCCs, or re-domicile their existing overseas investment funds with comparable structures by simply transferring their registration to Singapore as a VCC. Singapore’s VCC regime makes the re-domiciliation process a fairly straightforward one. Fund managers simply need to register the VCC (and its sub-funds) with ACRA, and notify the relevant authorities of the de-registration accordingly.

This opens the doors for offshore-based funds to set up shop in Singapore.

Why is the VCC structure important for Singapore now?

The VCC structure is neither new nor radical. It has been the de facto fund structure for offshore tax havens – like the Cayman Islands – that are favoured by multi-billion dollar hedge funds, family offices and global asset management firms.

The enactment of the VCC Act merely brought Singapore up to par alongside other global fund centres, and these changes come into effect at an opportune time. Offshore jurisdictions face increased scrutiny for attracting profits without real economic substance and the threat of potential blacklisting. The European Union, for example, updated its list of non-cooperative tax jurisdictions to include the Cayman Islands earlier in 2020 (though it subsequently removed it). Another favourite for fund managers – Hong Kong – remains embroiled in geopolitical uncertainty. Against this backdrop, Singapore may be seen as an attractive alternative for global fund managers.

Benefits of VCC structure on hedge funds, asset management firms and family offices in Singapore

So how does the VCC fund structure benefit hedge funds, asset management firms and family offices? Robson Lee Teck Leng, a global equity partner of international law firm, Gibson Dunn & Crutcher LLP, explains that the VCC structure heralds a new era for the fund management scene in Singapore.

Robson Lee Teck Leng, Partner, Gibson Dunn & Crutcher LLP

“Historically, investment funds are established in offshore jurisdictions for tax purposes, and the launch of the VCC structure is in line with the recent trend of fund managers ‘onshoring’ funds. Amidst frequent and unpredictable geo-political developments (and in the light of the recent world-wide disruptions caused by the COVID-19 pandemic), Singapore’s sterling reputation in politics, economics and legal enforcement, as well as its resolute crisis management in dealing with the COVID-19 pandemic, has made it a safe harbour for foreign funds and investments to berth and anchor a substantial presence,” said Robson.

“Singapore’s international connectivity, political stability and general pro-business sentiment allows fund managers to attract new investors easily. Until recently, global fund managers have established funds in Singapore as LLCs, unit trusts and limited partnerships (LPs). The VCC has augmented the range of choices available to fund managers. Open-ended fund strategies that were not previously available in Singapore is now made possible with the use of the VCC.”

Robson also highlighted that funds that are brought onshore into Singapore can be assured of a robust and well-regulated jurisdiction for investors. As mentioned, VCCs are subject to anti-money laundering and countering the financing of terrorism requirements to prevent it from being abused for unlawful purposes. VCCs are also required to appoint a Permissible Fund Manager that is regulated by MAS.

The requirement of VCCs to have at least one Singapore resident director, a Singapore resident secretary and auditor and a Singapore registered office also makes sense from a fund management perspective, says Robson. Fund managers will find Singapore’s highly-skilled and well-educated labour force adept at carrying out day-to-day fund management operations.

For entities that are redomiciled as VCCs in Singapore from a tax neutral jurisdiction such as the Cayman Islands, Robson further explains that they can tap into Singapore’s vast network of double taxation treaties with 86 jurisdictions, many of which are in the Asia-Pacific region.

“The VCC framework is in a fairly nascent stage, and we certainly expect to see further enhancements to the framework as it evolves to meet the ongoing needs of fund managers and investors. It nonetheless heralds a new era – the city state’s signalling of an unequivocal commitment to entrench its position as the Asian hub for fund domiciliation and management.”