Thu, 07/06/2007 - 07:00
The hedge fund industry in the British Virgin Islands has enjoyed steady if not spectacular growth over the past few years, with the number of new funds domiciled in the jurisdiction showing a strong year-on-year increase through 2006. Although the BVI still lags behind the Cayman Islands as an offshore funds jurisdiction, it is a very strong second, with Bermuda and the Channel Islands well behind in terms of overall numbers of regulated funds.
The continuing influx of new funds is one measure of the competitiveness of the BVI in what has become a keenly contested market. Another is the optimism surrounding the fund administration industry, particularly with the acquisition of Hedge Fund Services by Fortis last year, a new player in Conifer Funds Services and the expansion of activities in the territory by existing administrators. This is good news for other providers of services to the funds industry such as legal and audit firms. At Harneys, the territory's oldest and largest law firm, the funds department enjoyed its strongest-ever year in 2006 in terms of fund formation numbers and revenues. But the competitiveness of the industry is not something that the jurisdiction can take for granted. Although some administrators are servicing non-BVI funds, the development of the sector is largely dependent on the continuing growth of fund domicile business.
To date the BVI has faced relatively few problems in recruitment and staffing, but should demand expand significantly, it may encounter the same issues as Cayman, Dublin and other fund services centres in attracting suitably qualified lawyers and accountants in a very competitive market. The Association of Mutual Fund Practitioners has set out a number of measures that members consider necessary to keep the BVI's funds regime competitive, including an exemption from the timeconsuming licensing requirements for managers of professional funds.
In the meantime, the BVI funds industry is capable of handling much more sophisticated structures than in the past. For example, although there may not be a great deal of private equity activity in the jurisdiction, an increasing number of hedge fund managers are investing in private equity-type opportunities through side-pocket arrangements that accommodate illiquid assets within a traditional hedge fund structure. Side-pockets can raise a number of legal issues, where a strong and experienced legal team can really add value. In addition, funds structured as Segregated Portfolio Companies have been gaining in popularity, with Harneys the clear market leader for legal advice on these structures. The funds industry may also be able to take advantage of opportunities in markets beyond its traditional clientele in North America and Europe. With the Far East very dominant in the BVI incorporations sector, it would seem obvious that the jurisdiction should attempt to build a strong funds profile in that region. However, this will take much time and effort since the BVI has not been the historical choice of domicile for Far East funds business. There is also interest in funds emanating from or investing in Latin America, and while to date the volume of business appears small, that may change in the future. Two elements are central to the continuing growth of the BVI funds sector: a continuing commitment by the Financial Services Commission and the authorities to the industry, and avoiding an increase in the regulatory burden to a level that would make the jurisdiction less attractive. Given those elements, the future for the funds industry in the BVI is bright.
Kieron O'Rourke is a partner and head of investment funds with Harney Westwood & Riegels
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