We speak to a lot of emerging managers and we are always pleased to hear when they are looking to expand their investor base and bring in non-US and tax-exempt US investors (such as pension funds and charitable entities), because that is where we come in.
What makes us less happy is when we hear (which we do) that some managers are turning down allocations because creating a master-feeder structure with an offshore vehicle to accept those investors has traditionally been prohibitively expensive. In this current environment of capital raising, turning away potential investors is particularly difficult to contemplate.
Always looking for innovative solutions, we wanted to solve this problem and saw an opportunity to use the BVI “approved fund” vehicle to link up with a domestic limited partnership or limited liability company to form a cost-effective mini-master structure. This has enabled managers who have a proven track-record with a domestic fund to branch out into accepting investments of any size from non-US and tax-exempt US investors.
How does the BVI mini-master work?
For the BVI mini-master fund structure, we use a BVI approved fund as the offshore feeder fund (Feeder) which is established as a BVI limited liability company so as to provide the “blocker” effect.
The approved fund is fast to set up and can commence operation two days after submitting an application for approval to the Regulator. The set-up costs are low and it has minimum on-going obligations.
In order to qualify as an approved fund, the Feeder must fall under the following thresholds:
- the Feeder must have no more than 20 investors; and
- the net assets of the Feeder must not at any time exceed US$100 million.
Any investors into the Feeder will count towards any threshold for the total number of investors in the domestic fund.
If the thresholds relating to the domestic fund or the Feeder are likely to be exceeded, the structure can be converted into a traditional master-feeder structure to remove these restrictions, presumably at a time when the manager has the capital to address such conversion costs.
The approved fund is required to have an administrator, but the administrator does not need to be based in the BVI. This means that the same administrator can be used for the Feeder as for the domestic fund for what is likely to be only a small increase in the annual fees. The approved fund is also not required to appoint an auditor to audit its financial statements, although it may adopt a higher standard should investors require it to do so.
It is possible to establish a mini-master structure using a different BVI fund product if the restrictions on an approved fund do not work for your purposes.
If you would like more information on the mini-master please get in touch.