By James Williams – “The majority of work we’ve had to do has been largely regulatory, dealing with all the worries surrounding FATCA. It’s been a slow year funds-wise and I would imagine that most other BVI administrators would say the same,” comments Calum McKenzie (pictured), Director, Folio Group, whose fund administration arm has been operating there since 2001.
“In terms of new funds we are way down on where we’d like to be. The significant money going into offshore funds at the moment seems to be going to Cayman because that’s where more of the big institutional funds are located. There are some large institutional funds in the BVI but the ones that we’ve dealt with historically have been smaller funds, incubator-type funds and single-manager funds and they are the ones that are struggling to attract significant capital inflows.
“Even the big law firms are lamenting the fact that they’re not getting fund formation work to the same extent as usual.”
Conifer Fund Services, the BVI’s largest administrator with more than USD10billion in AuA, is more upbeat, however: “We acknowledge BVI funds have fallen in the last few years, however Conifer is somewhat unique as it services both onshore and offshore funds from our BVI location. The pipeline going into 2013 looks quite strong,” confirms Howard Eisen, Head of Business Development.
As to the types of funds launching, some are from US managers launching a Singaporean or Hong Kong-focused fund to cater for the Asian market according to Marianne Rajic, partner at Walkers (BVI), in addition to a growing number of Latin American funds being established on the Islands.
“In the BVI we work with some of the old, well-established US institutional managers who have been here since the early 1990s. Some have launched new funds in the last couple of years, others have grown their existing funds and expanded into Asia and the Middle East,” says Rajic.
Richard May, partner at Maples and Calder, further confirms that some of the firm’s larger US managers have also been active in 2012 but that most of the strategies launched have been fairly straightforward: “We’ve seen equity long/short and event-driven strategies rather than merger arbitrage. We launched five or six new funds in December for some of our larger manager clients.”
Even though the introduction of the Approved Managers Regulation in December 2012 will provide lighter touch regulation for smaller managers, the bigger issue for the BVI relates to the size of funds domiciled there. Folio’s McKenzie thinks that legislation and the slightly higher costs for BVI funds under SIBA, although negligible, have “hit the smaller single-managed funds and put off new managers”.
Ultimately, the dynamics have changed. Five years ago a new manager wouldn’t have hesitated in launching an offshore fund. Today’s manager, however, is more likely to remain onshore, build a track record and then think about launching an offshore fund a couple of years down the line. This has impacted the BVI’s start-up manager space.
States May: “There’s not a lot happening in the start-up manager space because of the increased costs of setting up funds. New managers are in a Catch 22 because it’s hard to attract money without a track record, and hard to build a track record without sufficient capital.”
Under the Approved Managers Regulations, the BVI should become more competitive in attracting both fund managers, and new funds, but McKenzie thinks the FSC were too slow introducing it:
“It should have been done two years ago. We made ourselves less competitive by listening to peer groups who are putting pressure on the BVI. The BVI needs to decide what it wants to do: we can’t continue to be the BVI and have higher levels of regulation than places such as the US and UK.
“The Approved Manager regime will help though. It will come in significantly cheaper than a Cayman exempt management company – it just should have been introduced sooner.”
Philip Graham, partner with law firm Harneys, observes that in 2012, with respect to fund activity, a couple of other trends emerged: smaller managers launching incubator-type funds or partnering up with well-established managers and taking on a sub-advisor role.
With start-up managers more conscious than ever about costs of doing business, more are starting to set up incubator-type funds, according to Graham: “We get a lot of people contacting us saying they’ve got family money, what’s the most cost-effective solution? Their general plan is to have an unregulated fund where everything is handled internally, develop a two-year track record, hopefully show a graph that points in the right direction, and then flip it into a regulated fund – which is relatively straightforward in the BVI.”
Some smaller managers are teaming up with larger existing managers to run a certain amount of assets as a sub-advisor and agree on a fee structure. If the smaller manager proves their worth, the established investment manager may then allocate more money and further support the development of their track record; and ultimately allow them to spin out on their own.
“It’s quite an interesting model and we’ve seen that from a few people in 2012. I believe it’s something the smaller and mid-sized managers are turning their heads to. It allows them to avoid the pressures of external marketing and all the other administrative costs associated with getting to market,” says Graham.
Additionally, increased activity among hedge fund managers in the private equity space is providing valuable funds work for law firms like Maples and Calder. As Tim Clipstone, partner, explains: “We’re seeing some fund managers launching fund strategies using a mixture of structures – some open-ended, some closed-ended – and assigning different parts of the interest in an investment to each. This approach suits both short-term investors and longer term investors.”
Conifer’s Eisen says that, from a technology perspective, “2012 was an incredibly important year”. It marked their transition from a services-only administrator to a “services plus software” value proposition through the introduction of their iCon™ platform.
“The iCon™ system is the industry’s premier cloud-based system for portfolio accounting, analysis and reporting – it aggregates all of a fund manager’s positions across all custodians or prime brokers, regardless of asset class, runs it through the Advent Geneva accounting engine, and renders it to the user via a secure web portal. It also serves as a smart data warehouse and plays a pivotal role in disaster recovery and business continuity planning. We have deployed iCon™ to over 50 clients, and will continue to roll it out in the months ahead.
“For 2013 we have just unveiled our new Form PF solution which builds on our iCon™ platform. Because iCon™ is a data warehouse, our clients are able to utilize our Form PF solution to more efficiently complete this complex filing.”
As the BVI is home to more of the start-up fund market, the number of independent director services firms operating there is less substantial than Cayman, as well as the number of administrators and law firms. However, should demand increase, “currently there is a shortage of future directors with extensive experience and knowledge of the investment funds industry”, says Niall Brooks, Managing Director of Castlegate Investment Services Ltd, which provides both full service fund administration and independent directorship services to BVI funds.
BVI managers are more focused on keeping their fund TER low, which means that when it comes to appointing independent directors the BVI still lags behind bigger fund jurisdictions.
“There is no mandatory requirement under BVI law although BVI funds are beginning to catch up with their Cayman counterparts as attorneys and service providers begin to stress the need for good corporate governance and a degree of independence,” says Brooks.
As opposed to the wholesale “Jumbo” directorships evidenced in Cayman, the BVI’s smaller-scale approach actually benefits firms like Castlegate as they are able to provide more of a hands-on directorship service. The director is kept up-to-date with a fund’s performance and can focus more on pertinent issues.
Explains Brooks: “I benefit from fellow work colleagues, who often chase monthly NAVs, and performance and financial information, for me to review. It’s an efficient approach and allows me to concentrate on the more relevant aspects of providing directorship services.
“I like to obtain a sound understanding of the composition of the manager, their experience, investment style, whether or not they have sound internal controls and compliance functions and the willingness of the manager to provide you with whatever KYC, financial and/or due diligence information you may need and request.”
Having on-the-ground independent directors is beneficial to any regulator as it provides them with an immediate point of contact; something that perhaps the FSC hasn’t fully taken advantage of. Adds Brooks: “When SIBA was introduced in 2010, I would have preferred to have seen an exemption from the need for managers and funds to appoint an Authorised Representative, if they appointed a local resident director.”
To remain competitive, some people think the BVI needs to introduce more fund products: for example a lighter touch fund product that mirrors the Approved Managers Regime.
“It’s got to be something along the lines of an exempt fund. The FSC needs to take a risk-based approach: look at the manager, look at the assets they are managing and give them an opportunity to come in, set up a fund quickly, and not require everybody to file regularly, employ compliance officers etc,” says McKenzie, adding:
“One thing that some firms are trying here is the use of segregated portfolio company (SPC) structures on a ‘rent-a-cell’ basis – we’ve thought about it and looked at supporting them but we don’t believe the structure and the risk/return profile appeals to cautious investors.”
Brooks suggests that another area the FSC could potentially look at is a product similar to the Bahamian SMART Fund but Rajic thinks it’s too early to be thinking about new fund products:
“If there is a need for new structures in response to external influences – AIFMD, FATCA – then the FSC would probably be prepared to do something at short notice but there is no need to fix anything at this stage because it’s not broken!”