Category Archives: Funds News

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.

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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We bag ourselves a HFM hatrick

I was of course overjoyed with the news that my colleagues in our London office and Hong Kong office had been hugely successful in their respective HFM Awards Ceremonies as HFM is a leading global publication covering the hedge fund industry and these high profile awards (which are judged on the basis of client feedback) are undoubtedly very well regarded in the industry.

But, and I can shamefully admit to this fact only now, another part of me was a touch envious.

The feeling is comparable to the one of sitting on a substitute’s bench and watching your team romp home to a glorious victory without you. Whilst of course externally you smile and whoop with delight, there is another part of you that wishes you could just get a chance to run onto the field and contribute in some way to the success.

Well, our chance to do that very thing came when we found out a few weeks ago that we had been nominated in the US as well and so finally the BVI, Cayman and Vancouver offices had their potential opportunity; could we come on in the 80th minute and bang home the third and final goal? Continue reading

The Age of Uncertainty (a time of opportunity?)

During a recent visit to our London office, I had the privilege of attending AIMA’s Spotlight and Cocktail reception in London, the highlight of which for me was a keynote speech by Robert Peston. For those of you who were not in the UK in 2008 and 2009, Robert was one of the most prevalent economic commentators at the time (and, personally, a bit of a hero of mine).

The theme of Robert’s presentation was uncertainty and the question he asked us all to consider was whether, if 2007 was the age of absolute certainty (albeit, certainty that we were all about to suffer a painful and prolonged recessionary period), 2016 is the age of absolute uncertainty, politically and economically?

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Smoke on the Horizon: investment into Cuba

USA and CUBA currency

One of my favourite aspects of working in the offshore environment is that we get to speak to fund managers based all over the world about the latest hot and trendy investment opportunities. Over the last few years we have dealt with enquiries about bitcoin, crowd-funding, acquiring a portfolio of oil tankers and real estate opportunities in Puerto Rico to name but a few of the more intriguing conversations. It constantly keeps the team on our (permanently parked under the desk) toes and there is no doubt that recently we have been part of a very regular trickle of Cuba based conversations and how to maximise the gradual opening of the borders.

When Raul Castro took over from his brother as President of Cuba in 2008, he began a long-anticipated process of political and economic reform. As a result of his strategy, the stagnant economy has been gradually coming to life, galvanised by a fledgling private sector. Diplomatic advances have been made, animosities are thawing and, slowly but surely, relations with overseas nations are being restored. With this sea change comes the possibility of direct foreign investment, a prospect historically laden with regulatory obstacles and risks – from both sides.

It is easy to see why there is excitement surrounding Cuba’s development. The tourism industry is set to explode and the relaxation in travel restrictions for Americans opens a previously-untapped market of over 300 million potential visitors. Such a vast influx of people will require utilities, hotels, ports, roads and telecoms; truly massive investment is required to improve the current infrastructure and there is cautious optimism from sponsors eager to participate in the process and Cubans looking forward to the resulting developments.

Indeed, it is the tourism sector that US News largely focused on in the following article as the best way to invest in Cuba as a US citizen:

http://money.usnews.com/investing/articles/2016-03-21/7-ways-to-invest-in-cuba

But rather than related company stock-picking, what about direct foreign investment? Is there a way for US based investors to capitalise directly on some of the infrastructure opportunities for example?

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Who you gonna call?

16-09-19-marc-parrott-hfm-trophyIt seems like almost six months since I was in Shanghai to present at the 2nd Annual Hedge Fund China Summit 2016 and to enjoy plenty of the vino tinto at the awards dinner afterwards where my firm, Harneys, picked up the trophy for “Best Offshore Law Firm for Hedge Funds”.

Wait, that’s because it was five months ago.

And what a five months it has been.

Shortly after picking up that award, I was thrilled to hear that my colleagues in our London office had been named Best Offshore Law Firm – Client Service at the HFM European Hedge Fund Services Awards, announced on 21 April 2016.

The HFM Awards are high profile in the global hedge funds industry and the client service award is independently judged based on the relative strength of client testimonials and market feedback. The awards recognise Harneys as having provided leading client service, innovation and expertise to our valued hedge fund clients of all sizes, from start-up hedge funds and emerging managers to global multi-billion dollar investment institutions. That is what we do.

Now, when I say thrilled … what I actually mean is … indignant that my colleagues in London would seek more glory than their far more humble colleagues battling away day and night here in the buzzing hub of economic activity that is Asia.

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Who’s in charge of Tax Policy in Europe?

Many of our readers will no doubt have heard about the recent decision by the European Commission that Apple’s tax structure in Ireland breached the EU state aid rules. But what, you may wonder, does that have to do with offshore funds? For me it raises an important question of principle of who should be deciding international tax policy for multi-national corporations and other companies – including investment funds – that operate on a cross-border basis in Europe.

As we’ve blogged about before, the OECD’s been busy working on its BEPS plan  to try to make the international tax system more joined up  – and limit some of the mismatches that multi-national and other companies have for years (completely legally) used to reduce their tax bills.

Here in Europe, the European Council’s also been working on introducing legislation building on BEPS and the Commission’s 2015 Action Plan for Fair and Efficient Corporate Taxation in the European Union, via the Anti Tax Avoidance Directive. So far, this all looks suitably co-ordinated and sounds sensible when you bear in mind the Commission’s website statement that “National governments are responsible for raising taxes and settling tax rates…The EC Treaty does not specifically call for direct taxes (income and corporate taxes) to be harmonised.”

So how then does the 30 August 2016 state aid decision by the Commission about Apple’s tax structure in Ireland fit into this?

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Cayman LLCs – up and running

Idea Bulb Concept Drawing on Blackboard

They’ve been talked about for a while by our bloggers and contributors but the moment has now come for the Cayman LLC, which has been available for registration since 13 July and numerous of which have already been formed. The Cayman LLC was introduced to meet the requirements of North American managers and intermediaries who use Delaware LLCs and want a flexible offshore version, and Cayman lawyers dealing regularly with North American clients are particularly excited about now being able to offer a “Cayman” version. Its introduction also highlights Cayman’s responsiveness to market demand as it continues to maintain its position as the dominant brand in North America for funds structures.

So what makes the Cayman LLC – or limited liability company, to give it its full name – so interesting?

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Preparing for the demands of institutional investment in an era of transparency

As an emerging manager who has set up a BVI incubator fund with the backing of friends and family, the two to three-year incubation period is time to prove your credentials and build a solid track record with the ultimate aim of attracting sophisticated and institutional investors. However, there is so much more to do during that period than prove that your investment strategy stands up to scrutiny.

In an age of increasing transparency, it is vital that you use the incubation period to start preparing for a time when you will need to meet institutional-style demands in terms of your operations. It is still early days – and you may still fall below AUM thresholds for complying with extraterritorial regulation – but there is a level of infrastructure and reporting that sophisticated and institutional investors will expect before they are going to invest. Continue reading

A view from Shanghai: sunshine funds on the rise in China

Private Equity Funds and Fund of Funds in China, also known as ‘Sunshine Funds’, are growing rapidly. In this guest post, my colleague and Managing Partner of Harneys Shanghai Kristy Calvert explores the reasons behind this trend.

The Asset Management Industry is one of the fastest growing business sectors in China. Privately managed (non-retail) funds in China, often referred to as ‘sunshine funds’ by local practitioners, have traditionally enjoyed a largely unregulated environment – unlike the mutual funds industry, which is heavily regulated by the Chinese Securities Regulatory Commission (CSRC).

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We won!

It was a packed room at The Lawyer Awards last week – all 1250 of us anxiously hoping our firm would be crowned winner – and with few categories so fiercely contested as Offshore Law Firm of the Year, we were definitely on the edge of our seat.

The Lawyer kept us entertained while we waited, though. With hours of comedy from Dara Ó Briain, a rocking band and a beautiful River Thames fireworks display, it was a glittering celebration of a year of hard work and success across the legal industry – and judging from the crowd still packed on the dancefloor at 2am, a night that many didn’t want to end.

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UK Votes to Leave the EU – what does Brexit mean for Offshore Funds?

So, the pound’s tanked, world stock markets are in turmoil, Scotland and Northern Ireland are considering whether to leave the United Kingdom so they can stay within the EU and the Prime Minister has announced his resignation. Last week’s vote to Leave the EU has certainly had a profound (and depressingly predictable for those of us who voted Remain) impact on the UK economy and politics already, with a long period of uncertainty yet to come. The financial services industry in the UK is likely to be significantly affected by Brexit, with various international investment banks having now announced that they’re reviewing their operations here, given the uncertainty over whether they will still be able to passport their financial services and products across Europe from London.

But what impact will Brexit have on Cayman and BVI offshore funds and how they’re marketed into Europe?

 

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Hands on your buzzers – BVI funds conference

Our BVI funds team was out in full force today at a conference we hosted for the BVI financial services community.

As a new way to involve our audience, we put the power in the people and invited our attendees to submit questions for us to answer in a wheel of fortune-style quiz.

When the submissions started rolling in, they ranged from specific and technical points on CRS, FATCA and AML (anti-money laundering) legislation in the BVI to general questions on the state of the funds industry – and some more controversial questions about the Panama Papers. There were moments when we wondered whether we had made the right decision in asking for the views of the public – a feeling that may well have echoed the sentiments of David Cameron on this historic Brexit vote day.

With Phil as quiz master, we played for points and competed for a $500 award from Harneys to one of four local charities. Between us, we managed to tackle the questions and, I hope, keep the attention of the audience. Our regulatory expert, Mirza, dazzled the floor with a few of his spectacularly technical responses. I am happy to report that, despite lagging behind in the first rounds, I came through at the end and won the cash prize which we donated to the HIV and AIDS foundation in the BVI.

Here are a few pictures of us in action.

 

Contestants

 

Audience

 

Speakers