The worldwide credit crunch and economic slowdown may be temporarily hobbling the growth of hedge funds, but for Walkers’ practice in the British Virgin Islands and for the jurisdiction’s fund indu
The worldwide credit crunch and economic slowdown may be temporarily hobbling the growth of hedge funds, but for Walkers’ practice in the British Virgin Islands and for the jurisdiction’s fund industry as a whole, all the signs are that the sector is continuing to expand. Indeed, in an environment where costs are increasingly important, the BVI may be more attractive to start-up managers because its fees and regulations are not quite as onerous as in other offshore jurisdictions.
Certainly the shortage of credit and indifferent equity markets are having an impact especially on some smaller funds that are finding conditions more difficult, and Walkers has received a number of instructions for the restructuring of funds. These measure include redemption gates, creating side-pockets for illiquid investments and longer lock-up periods, in some cases so-called soft lock-ups that leave an element of discretion to the fund’s directors.
However, at the same time various larger managers are continuing to set up new funds, including one particularly large client that has been setting up funds almost on a monthly basis. An innovation for the BVI fund industry this year has been the launch of green funds, which some promoters see as a strategy that is set to thrive even if the wider economy struggles.
Meanwhile, some of the BVI’s recent legislative changes are starting to bear fruit, such as the introduction at the beginning of 2006 of segregated portfolio companies as part of the islands’ Business Companies Act. As in other jurisdictions such as the Cayman Islands, segregated portfolio vehicles were initially slow to catch the interest of investment managers but are now starting to gain serious traction.
One client, an Indian-based fund manager with several existing funds in the BVI, has set up an SPC that will eventually encompass as many as 11 distinct investment strategies within separate sub-funds. Another, created by an alternative management team that has come out of the banking sector, is using one of the new vehicles to create portfolios for real estate and for financial sector investments.
Segregated portfolio companies are more cost-effective in the long term for investment managers planning multiple fund launches, although they are slightly more expensive to set up because of the legal work required to draft the memorandum and articles and ensure effective segregation of assets. But if the manager envisages running a number of distinct investment strategies, it saves on the cost of establishing separate funds, and will probably prove easier in terms of administration because supplements can be prepared rather than producing entirely new offering documents or sets of memorandum and articles.
Walkers has already received enquiries from clients about potential uses of SPCs that are not yet available under current legislation, such as for closed-ended investment funds or for stub private equity vehicles. So far these companies are only available for use by registered or recognised open-ended mutual funds and licensed insurers, although other applications are expected to be introduced in the future.
The continuing development of the fund sector has helped to cement Walkers’ position as one of the top two international law firms in the jurisdiction. The firm now has around 40 BVI-qualified lawyers, more than a quarter of its worldwide total, and numbers may well continue growing as the appeal of the BVI as a domicile transcends short-term difficulties in the economic environment.
Richard May is head of Walkers’ investment funds and private equity group in the BVI
