Monthly Archives: November 2016

BVI Segregated Portfolio Companies go from strength to strength

Segregated Portfolio Companies (SPCs) are now well recognised and widely used corporate vehicles, and we are seeing increasing demand for them in the funds context in both the BVI and Cayman Islands. An SPC benefits from statutory segregation of its assets and liabilities in one segregated portfolio from those of any other segregated portfolio, and from the general assets and liabilities of the company, but is a single, legal entity. The SPC has only one set of constitutional documents, one board of directors and, importantly, one set of annual licence fees (although additional fees are charged per segregated portfolio on establishment (and, in Cayman, annually) these supplementary fees are much lower than the fees for establishing and maintaining multiple entities).

The ability to segregate the assets and liabilities of one segregated portfolio from another makes SPCs popular for umbrella or multi-class investment funds which can operate different investment strategies and, in particular, different levels of leverage, without risking cross contamination across the segregated portfolios.

In the past, SPCs have been popular with emerging managers who may have used an SPC platform as a cost-effective way to enter the market and establish an investment fund. They would effectively “rent” a segregated portfolio of the SPC platform rather than set up a standalone legal entity. This is still the case for Cayman SPCs although it has become less attractive in the BVI since the introduction there of specific products – the incubator fund and approved fund – tailored to the emerging manager each of which offers a quick and cost-effective set-up and minimum ongoing regulatory requirements.

Regulation of SPCs

In the BVI, a company is only eligible to be an SPC if it is, or will be on incorporation, a private, professional or public fund under the Securities and Investment Business Act, 2010. In Cayman, any exempted company can be incorporated as or convert into an SPC (if it follows the conversion procedure set out in the Companies Law).

The prior approval of the BVI Financial Services Commission (FSC) is required before any BVI company may be registered or incorporated as an SPC and this is only granted where the FSC is satisfied that the applicant has, or has available to it, the knowledge and expertise necessary for the proper management of segregated portfolios. There is no equivalent approval needed for Cayman SPCs.

In both the BVI and Cayman, each segregated portfolio either has its own offering memorandum or there is a base offering memorandum for the fund and each segregated portfolio has its own portfolio supplement.

A BVI SPC is required to have an administrator, manager and custodian. As discussed in our Introduction to Cayman Fund Products blog post, a Cayman SPC which is a regulated fund will need to have an administrator and manager but is not required to have a custodian but a Cayman SPC which is unregulated is not required under Cayman legislation to appoint functionaries. The same functionaries may be appointed to all of the segregated portfolios of a BVI SPC or a Cayman SPC which is a regulated fund. Alternatively, each segregated portfolio may appoint its own functionaries. The documents appointing the functionaries must state clearly the segregated portfolios for which the appointment is being made.

Both a BVI  SPC and a Cayman SPC which is a regulated fund are required to have an auditor, and audited financial statements must be filed with the FSC or the Cayman Islands Monetary Authority (as applicable) within six months of the end of its financial year.

The future of SPCs

The use of SPCs, especially in the funds and insurance industries, has grown in recent years and the concept is now well recognised in the international financial services industry. As a consequence, we are getting more frequent enquiries about establishing SPCs and clients are seeing that the features of SPCs are useful, not only for regulated funds but also for a broad range of other uses such as closed-end, unregulated funds or employee benefit schemes. The Cayman legislation is currently more flexible than the BVI legislation and allows unregulated funds to be established as SPCs. Consequently, Cayman is currently winning this work. The BVI Business Companies Act, 2004 provides scope for greater flexibility as to the type of vehicles that are able to adopt the SPC structure, and the FSC is looking into widening the circumstances in which SPCs can be used. When it does this (and we are hopeful that this is imminent), the BVI, with its much lower establishment and annual fees, will become extremely competitive in this market.

If you are interested in setting up an SPC in the BVI or the Cayman Islands, please get in touch.

offshorelitigationblog

Harneys launches offshore litigation blog

I am very pleased to be the first offshore funds blogger to give a shout out to our friends and colleagues at harneysoffshorelitigation.com.* All the very best with the launch of the blog! The team here at Harneys offshorefundsblog are extremely proud to be your guiding light and inspiration, your blogging mentors, as you take your first stuttering baby steps towards true blogging greatness. Congratulations on being the first blog devoted to the world of offshore litigation (and, ahem, the second blog devoted to offshore legal matters).

In all seriousness, we are very excited that there will be a blog devoted to offshore litigation matters now. The offshorefundsblog bloggers worked very closely with our litigation colleagues during the GFC helping some of our investment funds clients deal with distressed situations, whether as a result of trading losses, illiquidity or other factors. Together, we were able to find solutions for those clients that I don’t think a funds lawyer or a litigation lawyer would have been able to come up with alone.

Once they are up on their feet, Phil and I very much hope that the young upstarts at harneysoffshorelitigation.com will be able to provide a few guest posts for our discerning readership as well!

* I think I am almost as proud to be the first offshore lawyer to actually give a shout out on a blog. Keeping up with those hip young millennial bloggers for sure…

Marcum panel

On the Stump – Sao Paulo & New York

I have had the distinct honour and pleasure of being invited to speak at two excellent conferences recently.

In September I headed down to Sao Paulo to speak at the DMS 6th Annual Investment Funds Summit. I was joined on a panel by fellow Harneys partner Marco Martins, along with two representatives from Maitland and one from DMS. It was a slight concern of mine that every other panellist was fluent in Portuguese but thankfully this illiterate Englishman managed to scrape by.

DMS Panel

Phil Graham, far right, and Marco Martins, centre, of Harneys at the DMS 6th Annual Investment Funds Summit in Sao Paulo in September. No one told Phil to wear red socks, which had him a little preoccupied.

We discussed the latest trends and updates from the offshore world, with Marco touching on the new LLCs in Cayman and I was asked to talk through the incubator and approved funds. It was very interesting indeed for both of us to get a real sense of fascination in the room with not only some in-depth queries during the presentation, but also afterwards and well into the evening whilst we were enjoying our caipirinhas. Given the tax amnesty at the moment, offshore structuring remains incredibly poignant and the use of fund vehicles in particular seemed to be of real interest to budding fund managers looking to take in investments from the high net worths who are bringing their money back into Brazil and wanting to put it to good use.

My only disappointment, as you will see from the photo, is that no one provided me with the memo about wearing a pair of bright red socks. Next time.

Phil Graham and Larry Kudlow

Phil Graham and Larry Kudlow at the Marcum Alternative Investment Manager Forum

Not long after I unpacked my bags, I was getting down the suitcase again to fly up to one of our very regular stomping grounds of New York to speak at the Marcum Alternative Investment Manager Forum Dennis Schall put on a truly masterful event which included a keynote speech from Larry Kudlow which was one of the most impressive I have ever heard. A room full of rather loud elephants was hushed into silence by some unbelievably simplistic and yet incredibly brilliant economic policies that led to a standing ovation at the end. Given he acted as senior economic adviser to President-elect Trump throughout his campaign, there is potentially reason to be a little more optimistic than the outlook a number of the political commentators are currently expressing.

Whilst it was far from ideal to speak in and around such an impressive orator, it was great to help emerging managers with both the rationale behind using their service providers in the most efficient manner and then set out the various structures that can be used in our industry to maximise the manager’s goals. Dennis had put together some great panellists indeed and not only do I think we added a little bit of insight, but there was a touch of humour too as you will see demonstrated from my photo with Larry.

Boy, didn’t he look like he was just bubbling with enthusiasm to be seen standing next to the offshore guy…

BVI Funds industry to partner with Help for Children

Hedge Funds Cares BVI Committee

Members of the BVI Hedge Funds Care committee are photographed with Renee Skolaski, CEO of Help for Children, fifth from right, during her visit to the BVI in early November.

Last week we had the absolute pleasure of hosting Renee Skolaski, the CEO of Hedge Funds Care, which recently rebranded as Help for Children, here in the BVI.

Help for Children (HFC) is a charity supported by the alternative asset management industry with international recognition, having divisions in the US, Canada, the UK, the Cayman Islands, Ireland and Hong Kong. Its mission is to prevent and treat child abuse using proven methods. HFC has distributed over $44 million in grants, positively impacting 87,000 lives on an annual basis.

Renee was here to help us set the cogs in motion for the establishment of a BVI division of HFC, an idea conceived by Rob Davis, the founder of HFC, Renee, and Phil Graham at an HFC event in New York earlier this year and which we, with other members of the Investment Funds Association, have been working to develop. This is such an exciting opportunity because funds raised in the BVI will go directly to fund BVI projects to prevent and treat child abuse here on our islands.

During the two days that Renee was here, we had a full schedule meeting professionals currently involved in the prevention and treatment of child abuse in order to understand the need here in the BVI. We learned that the BVI has enacted legislation and put in place procedures to address the treatment of child abuse. It also has highly motivated professionals who are working very hard to address this issue. A shortage of funding means that services are suffering and implementation can be challenging. There are so many potential projects that could be funded, and the support of a BVI division of HFC could make a huge impact.

On Wednesday evening, the Investment Funds Association in the BVI sponsored an event at Peter Island at which Renee spoke to members of the industry to drum up support. We were honoured to have Lorna Smith OBE, Interim Executive Director of BVI Finance, attend and speak at the event and to have her full support for this project. Given the positive response that we received from members of the BVI Investment Funds Association, we feel that we have a responsibility to grasp this opportunity for our community. We are totally committed to seeing a branch of HFC established here in the BVI.

Our fund raising will mainly take the traditional HFC form of one big-ticket gala event so keep an eye on our blog for a save the date. In the meantime, if you are a member of the BVI financial services community and your organisation would like to be a local sponsor, please get in touch with Phil  or me.

Brexit rollercoaster ride continues

The political and economic rollercoaster ride we’ve been on here in the UK since the EU referendum in June seems set to continue following Thursday’s High Court judgment in London[1]. The High Court held that the UK government doesn’t have the power to give notice to withdraw from the European Union under Article 50 of the Lisbon Treaty. Only parliament has the power to change domestic law in the UK and, as serving notice to leave the EU will affect rights under domestic UK law, the government can’t serve notice without parliament’s approval.

So, just as we’d started to get used to the idea of notice being served by the government in March 2017, with the UK then leaving the EU by March 2019, the Brexit process has now been thrown up in the air again.

Keep calm and stay in London?

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