BVI funds – structuring trends and developments
By Simon Schilder, Partner, Ogier – Whilst the twin challenges of investor capital continuing to favour established investment managers and increasing barriers to entry for new start-up investment managers, meant that at times 2013 was a fairly challenging year for BVI fund practitioners, for the new funds which did launch during the year, a number of interesting markets trends have continued to emerge and develop.
Themes for new fund raisings
Investment management fees
The majority of new fund raisings we saw in 2013 continued to follow the traditional fee model of a 2% management fee and 20% performance fee, particularly amongst established investment managers. What we saw in 2013 is that variations away from the traditional fee model have generally materialised around the management fee component, rather than the performance fee component. Such variations have also included the use of founder share classes which have enabled investment managers to offer discounted fees to investors coming in at the early stages of the fund’s life. A trend has been that new start-up investment managers have typically been the most innovative in looking to offer alternatives to the traditional fee model.
Side pockets and liquidity control mechanics
Whilst very much standard prior to the financial crisis, the use of side pockets is becoming increasingly rare in new funds, as is the use of gates at fund level and lock-up periods exceeding twelve months.
Mini-master feeder structures
A theme we have increasingly seen during 2013 has been the use of mini-master feeder structures amongst recently established US-based investment managers, who, having successfully raised a domestic only fund have subsequently looked to expand their offering to a non-US investor base by putting in place an offshore feeder fund to invest into their existing US fund (with US investors continuing to invest directly into the US fund).
For new start-up investment managers looking to establish a track record utilising a tightly held investor pool (eg friends and family money), we have seen a continued interest in implementing “incubator” arrangements.
A development that we have seen in this regard during 2013 has been an increase in the interest in utilising the BVI’s private funds regime as a means of creating a fund platform which is both flexible, robust and cost-effective and within the confines of a regulated fund product, by taking advantage of some of the exemptions available from the requirement to appoint certain fund functionaries. The advantage is that it enables the incubator structure to be structured within a formal regulated fund structure (rather than through an unregulated investment vehicle) which has an independently verified track record as a consequence of the requirement for all BVI private funds to have an independent fund administrator.
Developments on the horizon
This year, the BVI’s Approved Manager regime, which was originally introduced at the end of 2012, has been amended so as to expand the types of funds which an Approved Manager may act for, so as to also cover funds domiciled in a “recognised jurisdiction”. Previously, an Approved Manager could only act for BVI-domiciled funds or non-BVI funds investing substantially all of their assets into BVI funds (ie foreign feeder funds). Under the recent amendments, an Approved Manager is now able to manage a standalone fund domiciled in a “recognised jurisdiction” (eg a Cayman or onshore domiciled fund). This is an exciting development for the BVI and will without doubt broaden the appeal of the Approved Manager regime.
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