Sometimes an investor fund dispute is unavoidable. So what strategies can fund managers deploy to resolve investor fund disputes? Sadly, there is no one-size-fits-all approach, but in this post I will highlight some effective and commonly-deployed tactics. Continue reading
I am not just the black sheep of my family; I am the black sheep who stormed out of the farm, sought out the neighbourhood wolf pack and then asked if he might be able to join.
I come from a family of doctors, nurses and teachers who have spent their lives working exclusively in either the truly incredible and freely available British National Health Service or the state sponsored comprehensive school system, which provides a free education to anyone and everyone in the UK. All of these roles are incredibly noble and I remain very proud of the careers my family have chosen.
So it is safe to say that when I elected to go down the path to becoming a lawyer, there were a few furrowed brows. When I then mentioned I wanted to start by assisting major corporations with their legal affairs before moving onto the investment funds industry, frowns began to form. And when I finally announced that I was going to take this vocation into the offshore environment, the tears began to flow accordingly. The sheep in wolf’s clothing had arrived.
You may have heard that the BVI and the Cayman Islands are introducing registers of beneficial ownership. The good news is that, for the funds industry anyway, which is being engulfed by more and more regulatory red-tape, this should be one of the least onerous new developments to your business.
The BVI legislation in relation to the beneficial ownership register comes into force on 30 June 2017 and the Cayman legislation comes into force on 1 July 2017. Each requires information about the beneficial ownership of BVI business companies and Cayman Islands companies (including LLCs) to be uploaded onto a secure and private register maintained within the relevant jurisdiction.
I’m sorry if I got anyone’s hopes up with the title to this post. Unfortunately, this is not going to give fund managers magical insights on how to secure that crucial investment to launch a fund or take an existing fund to the next level. However, this post may help keep some fund managers out of trouble!
I am often approached by clients and contacts with queries about the marketing of their fund interests internationally. This may be because my business cards and email signature state that I am a “Practitioner of Foreign Law” – perhaps people think I am able to advise on the laws of every “foreign” jurisdiction!
The bad news for people with such queries is that I am usually not qualified to answer specific queries on marketing in particular jurisdictions – I only practice Cayman and BVI law. However, the good news is twofold:
1. Asking these types of questions is the right thing to do! All our fund manager clients are (hopefully) aware of the various laws, regulations and rules that govern marketing fund interests in their home country. What every fund manager should also know is that they need to tread very carefully when marketing fund interests overseas. My fellow Offshore Funds Bloggers have written some useful posts on the European Union’s Alternative Investment Fund Managers Directive here and here. Although the funds marketing regime in Europe can be considered one of the most stringent in the world, it is worth remembering that almost every other jurisdiction will have laws and regulations on how (and to whom) fund interests may be marketed there. For example, managers in the United States will be very familiar with the careful planning needed to ensure that their funds fall within the various exemptions and safe harbours of the Securities Act and Investment Companies Act (not to mention state-by-state blue sky filing requirements!). Continue reading
The real estate sector is ripe for international private equity fund managers – and offshore fund vehicles are just the ticket for investment in property portfolios.
When I volunteered to write a guest blog (for our funds team) this month, I must admit I was slightly filled with dread when they said yes with (in my view) rather inappropriate amounts of enthusiasm. What do I know about offshore funds as a corporate and commercial lawyer, who has more recently been turning her hand to corporate restructurings in a flattish transactions market? Well, the answer is in fact quite a lot about what offshore funds are being used for, particularly in the property market in the UK.
I regularly act for residential and commercial property investors and those who lend to them and I also have a (probably) slightly unhealthy interest in Rightmove’s sold property prices. What better credentials do I need?
With a real estate property magnate in the White House and the increase in property investment generally, the real estate sector is ripe for international private equity fund managers to tap into.
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.
The United Kingdom served its Article 501 notice today, giving two years’ notice to leave the European Union. Managers of offshore funds, as well as everyone else here in the UK, now have more clarity on the Brexit timetable, with the UK scheduled to be out of the EU in March 2019. Much has been uncertain since the UK’s referendum in June last year, and that’s not likely to end until the final exit terms are agreed, but it’s clear that the effects of Brexit will be felt beyond the UK and Europe. Brexit negotiations are expected to be intense and politically complex (especially with French and German elections later in 2017 and Scotland’s demand for a further independence referendum before Brexit finally takes effect), with the UK’s stated aim, in its Article 50 notice, of agreeing a “deep and special partnership, taking in both economic and security co-operation” between the UK and EU post Brexit.
So what impact will Brexit have on offshore funds?
This question is asked by start-up and emerging managers all of the time and for good reason. Generally it’s the manager who’s putting down their cash to set-up the Fund, albeit the set-up fees will be amortized at the Fund level when investors come-in. As such the manager needs to be extremely confident (show me a manager who isn’t extremely confident….) that they need a US Fund and the Offshore Fund, rather than one or the other. To make this decision, the manager needs to be focused and strategic with their marketing and to have discussed the pros and cons with their legal counsel. Otherwise the manager could well be wasting their own money. Let’s jump into why a manager should be setting-up a US Fund and the Offshore Fund at the same time.
The Brexit rollercoaster is showing no signs of nearing the end of the ride yet following the UK Supreme Court’s judgment on Tuesday this week. As has been widely reported, the Supreme Court confirmed 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 without an act of Parliament authorising it to do so. The government can’t simply serve notice to leave, as it had hoped and argued before the UK’s highest court, and so it now has to put draft legislation before Parliament, which it published today, to give the government the authority it needs to serve notice.
Opposition parties have already made it clear that they may try to amend the draft legislation, which, with only one section authorising the Prime Minister to serve Article 50 notice, must win the prize for being one of the shortest pieces of legislation in recent years. Although it looks unlikely they’ll de-rail Brexit itself at this stage or even delay the government’s 31 March target deadline for serving Article 50 notice, MPs could try to take Theresa May’s strategy in a different direction from the principles she set out in her speech last week or make the government involve Parliament more in the negotiations, not just give them a vote on the final deal struck.
So what does the Supreme Court judgment mean for offshore funds?
Greetings offshorefundsblog readers. Phil and I have just returned from attending the inaugural Cap Intro West Conference in San Francisco last week. We were both honoured to be invited to speak at the conference: I joined a number of friends presenting a Private Equity and Hedge Fund Boot Camp for start up and emerging fund managers while Phil, somehow, managed to have the audience in stitches while he detailed the ins and outs of AIFMD on his panel on Navigating Fund Marketing Rules and Regulations.
As you might expect at a January conference, a lot of time was spent during the breakouts looking at the tea leaves to determine what 2017 might hold for us. I am very pleased to report that the mood was generally optimistic. Some of this may have due to the Trump administration’s intended policies to boost the US economy and some of this may have been due to the generous pours of the bar staff at the evening cocktails!
As a long suffering Liverpool supporter, I can absolutely assure you that I have literally no interest or desire to defend Jose Mourinho or Christian Ronaldo. In fact, I am actually hardwired to positively enjoy any misfortune they may suffer, such is the slightly callous nature of being a football fan.
However, when they recently both appeared on the front pages of various British journalistic publications (rather than adopting their rather comfortable position on the back page about their latest sulk), linked with entities based in my home of the British Virgin Islands, I felt duty bound to comment. Because, once again, some of the rhetoric being used to describe their personal (and frankly, private) tax affairs was in some parts inaccurate and in others categorically misleading to the reader.
After more than 15 months in the wilderness, with goodness knows what to keep him entertained during his recovery from multiple back surgeries, Tiger finally came back to the PGA Tour this weekend and competed in the Hero World Challenge in the Bahamas.
The entire sporting world watched and waited; could he begin down the road to superstardom once again?
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.