Hedge funds eye new corporate structure in Singapore

Multibillion-dollar hedge funds, private equity firms and family offices from Asia, Europe and the US are poised to move assets to Singapore, after the city state launched a corporate structure in a bid to become the region’s leading financial centre.

The moves come amid growing concerns about the status of Hong Kong. Funds have been developing contingency plans for life outside the semi-autonomous territory after months of pro-democracy protests last year and Beijing’s decision to impose a national security law.

Japan and Singapore have both stepped up efforts to present themselves as the best alternative, with Tokyo expected to offer free office space, visa waivers and fast-tracking of licences.

Singapore launched a legal structure in January called the Variable Capital Company, designed to lure the assets of fund managers and family offices registered in low-tax jurisdictions such as the Cayman Islands and Luxembourg. The VCC is designed for both traditional and alternative investment funds and can be used either as a standalone entity or as an umbrella for multiple funds.

The structure shares many tax-efficient features of Luxembourg’s Sicav, the Segregated Portfolio Company (SPC) in the Caymans and Hong Kong’s Open-Ended Fund Company (OFC), said tax experts.

A large part of the VCC’s appeal derives from the country’s strong regulatory reputation relative to other domiciles, said asset managers that have launched the structure.

The government is also offering to offset up to 70 per cent of eligible set-up costs with a cap of S$150,000 ($108,000) per VCC, under a scheme valid until January 2023.

At least four multibillion-dollar real estate and credit funds with managers based in Tokyo, Hong Kong and Singapore are in the process of registering VCCs. One $1.5bn private equity fund as well as several Japan and Asia-focused hedge funds are also in discussions to do so, according to people with direct knowledge of the situation.

Seventy VCCs — many set up by small and boutique funds or local family offices — have already been launched.

But a much larger wave of companies is coming, say bankers, fund managers, tax advisers and other people familiar with the situation.

“We’ve heard of families from Europe and North America looking at this in a very serious way . . . and some of these have engaged lawyers to work on their mandates,” said Lee Woon Shiu, regional head of wealth planning, family office and insurance solutions at DBS Private Bank in Singapore.

The Cayman Islands, which has historically attracted a large portion of new global hedge fund assets, is reeling from the EU’s decision in February to add the jurisdiction to its blacklist of non-cooperative tax jurisdictions. A significant number of funds with assets in the Cayman Islands are run by managers based in Hong Kong.

The VCC legislation “came out at the right time to soak up this demand where asset managers are now slightly nervous of having their product not only in offshore jurisdictions”, said Armin Choksey, Asia Pacific Asset & Wealth Management Market Research Centre Leader at PwC Singapore, who helped set up the structure.

Yap Chee Wee, chief executive of Fleur Capital, a Singapore-based wealth management firm that has set up a VCC jointly with a visual effects company, said Singapore’s structure marked the first solid challenge to existing fund domiciles in years.

“In my 20 odd years in the financial industry, this is the first time there’s [been] major change. It was long awaited and should have been done much earlier,” he said, adding that he is considering redomiciling the company’s existing funds from the Cayman Islands.

Benny Chey, assistant managing director at the Monetary Authority of Singapore, the de facto central bank, said he expected the VCC to “attract the interest of private wealth and large institutional investors” thanks to its “capital variability, segregation of assets and liabilities, and its ability to access tax treaty benefits”. 

Mr Chey added that requiring VCC fund managers be regulated by the MAS and imposing anti-money laundering and counter-terrorism obligations are among the measures that will ensure these structures’ legitimacy.