Q&A with Ashmita Chhabra, Managing Director, Business Development, Asia Pacific at Apex Group
Background to the VCC
On January 15, 2020, the Monetary Authority of Singapore (MAS) and the Accounting and Corporate Regulatory Authority (ACRA) launched the Variable Capital Company (VCC) framework. The VCC is a new corporate structure designed to attract investment funds, and is a statement of intent for Singapore to secure its future as an attractive global fund management and domiciliation jurisdiction. Now, over a year on from its introduction, we evaluate its initial success and discuss the outlook for the structure.
What is the ‘VCC’?
The VCC is a new corporate entity structure for investment funds, which can be set up as a single standalone fund or, crucially, as an umbrella fund. Under an umbrella VCC, several funds can be housed as sub-funds, with each sub-fund clearly ring-fenced from one another. Parallels can be drawn between this umbrella feature and the UK’s open-ended investment company structure or the protected cell company (“PCC”) or segregated portfolio company (“SPC”) structures in Guernsey or the Cayman Islands.
Unlike these similar structures, the VCC can be used for both open- and close-ended alternative fund strategies. It gives funds a compelling alternative to the existing fund structures available in Singapore as well as solving some of the common constraints of these existing structures.
Why is the VCC attractive for fund managers?
Essentially, the VCC provides Singapore-based managers with an additional choice of how they can structure their funds. Previously, asset managers in Singapore have mainly used offshore structures but with the introduction of the VCC, they now they have a flexible and versatile framework on offer, located in the same jurisdiction.
The VCC is most attractive to fund managers which have a broad Asian investor base or invest within Asia, as they can take benefit from access to the 80+ tax treaties held by Singapore.
Flexibility is proving to one of the key drivers of the popularity of the VCC, and has been central to its early success. Firstly, unlikely many structures in other jurisdictions, it can be used for both closed ended and open-ended funds. Secondly, the VCC offers significant optionality as it can be used to incorporate new funds or re-domicile comparable investment funds from overseas.
How successful has the VCC been so far?
In its first year, the VCC structure has proved popular, with the initial rate of take-up comparing favourably with similar structures in other geographies such as Europe. This is very encouraging, especially given the market challenges of Covid during this time period. The VCC went live on 15 January 2020 following a pilot programme, and 20 VCCs were launched on the same day. This momentum continued, with over 50 VCCs incorporated in the first four months, and close to 250 VCCs by March 2021.
The speed and simplicity of incorporation is a unique benefit of the VCC which has contributed to this initial success. It takes 14 days (for the most straightforward structure) to 60 days to get approval with the ACRA. The process is accelerated as there is no pre-approval process by the regulator, unlike in Hong Kong for example.
Who have been the early adopters of the VCC?
During the pilot phase, a wide range of fund strategies trialled the structure with traditional funds, private equity, venture capital and ESG strategies all participating. Many of the early adopters following the full introduction last year hold similar characteristics: they tend to be early stage wealth managers, smaller investment groups and debut funds.
Along with the faster speed to market, the significant financial incentive of the VCC plays a particularly powerful role in the decision making process for these smaller players. To support the launch of the VCC, the MAS introduced the VCC Grant Scheme (“VCCGS”) to encourage take-up and conversions to VCC. This grant covers 70% of eligible expenses (capped at $150,000 per VCC, and up to three VCCs per fund manager) for work done in Singapore in relation to the incorporation of the VCC. This includes legal fees, tax advisor fees, fund administration fees towards set up, and regulatory compliance consulting fees.
What areas should the regulator be focussing on?
To build on the initial success of the VCC in the years ahead, there will be a number of areas of focus for the market and regulator, including attracting a more diverse range of fund strategies to consider using the VCC structure. International funds looking to re-domicile under the VCC will also be a key source of future growth. As a global financial services provider, we are seeing significant inbound interest emerging from our international client base, particularly those considering alternative fund jurisdictions to Cayman.
What role do service providers play?
Service providers in Singapore will play a crucial role in supporting funds looking to adopt the VCC structure – it is essential that managers adopting the VCC have access to the right advice, expertise and operational best practice. Experienced service providers with a strong local presence are required to help their clients navigate the structure, so that funds can come to market swiftly and efficiently, as well as understanding and complying with the specific requirements of an umbrella structure, such as corporate secretarial, fund administration, directorship, audit to name a few.
What is the outlook for the VCC?
The regulator remains in close dialogue with the industry and we expect will continue to collect feedback before introducing VCC 2.0 in the near future. Singapore has always been an attractive financial hub, with a stable political climate and a proactive regulator which set a legislative environment that encourages innovation and growth. As investors become more familiar with VCC, it will be a very strong contender to attract capital flows and further support Singapore’s role as a global financial jurisdiction.