Since the BVI introduced the Approved Manager regime at the end of 2012 demand has been encouraging, but it has taken time to build. Currently, there are 101 Approved Investment Managers licensed in the BVI, based on figures published by the Islands' financial regulator, the BVI Financial Services Commission (as of 30 September 2015).
That the BVI now has a set of funds – the Incubator Fund and Approved Fund – to complement this lighter touch regulated fund manager regime augurs well for the future. But like the Approved Manager, it will take time for fund numbers to pick up.
"The BVI professional fund is still widely favoured, partly because the compliance teams at service providers, in Europe for example, are familiar and more comfortable with the structure. Some service providers won't support a fund unless it has a certain amount of assets under management; so an incubator fund wouldn't work in that respect," says David Payne, Director, Circle Partners (BVI) – a Dutch financial services specialist with a BVI-based fund administration offering – and Business Development Manager of AMS Financial Group, an affiliate of Circle Partners.
BVI's fund administrators are quite limited in number. Over the last year or two, many have chosen to consolidate their position in light of the fact that BVI fund launches, whilst steady, have hardly hit the heights. Indeed, back in 2014, Circle Partners acquired Caledonian Global Fund Services. The deal meant that it was able to not only acquire new clients but extend its services to the US marketplace through its Orlando-based office.
"Last year, the fund market was broadly flat. We had some subscriptions, some new fund incorporations, mainly with respect to segregated portfolio companies. It was a stable year with steady growth; a trend that has been seen across the funds industry, not just in the BVI," states Payne.
This sentiment is shared by Mara Spencer, Managing Director of ACE Fund Services Incorporated.
"We saw new share classes launch last year and new projects have continued in the first few weeks of 2016. Hopefully we'll continue to see more steady growth in 2016. Despite early concerns over market performance, I don't think we'll see a drop off in demand for fund launches," suggests Spencer.
Calum McKenzie is a Director at Folio Corporate Services Limited. Although he says Folio Group is "guardedly optimistic" for 2016, he is quick to stress that further development needs to take place within the BVI's fund services infrastructure: "We would like to see one or two big-name global administrators coming to the islands. There is potentially going to be a new bank opening up here later in the year, and that's going to add to the jurisdiction, but we would like to see more administrators locating here."
This is an interesting point as it chimes somewhat with a recent McKinsey report into what the BVI needs to do from a restructuring perspective. The report, entitled Building on a thriving and sustainable Financial Services sector in the British Virgin Islands, looked not only at the BVI's financial services industry but the overall economic fabric of the jurisdiction (including telecoms, infrastructure, education).
On the back of this, a delivery team has been established, sitting between the BVI Premier's office and the islands' regulator, the Financial Services Commission, to help improve efficiency and steer initiatives going forward.
There is something of a chicken and egg situation facing the BVI. If it is to attract bigger tier-one administrators, it needs to increase both the size and the number of funds established there. It also, by extension, needs fund managers to start availing more of in situ services: not just fund administration services and auditing services, but directorship services; something that the Cayman Islands has seen flourish.
McKenzie makes the point that a hedge fund manager based in New York might have US legal counsel, possibly one or two independent directors based in New York, and do all of the fund's trade execution and clearing in the US. At the same time, that manager tells investors that they have an offshore hedge fund.
"I think it becomes a moot point. Are they actually availing of a structure that is set-up offshore? That's one of the points we've been making for a while now. It's much better to have your administrator, your auditor, and indeed one or two independent board directors, physically based in the BVI. That is why the BVI's fund administration community needs to further expand," argues McKenzie.
Directorship services is one area that the islands' administrators could potentially tap in to, whilst fund launches remain slow and steady, as a way to drive revenues.
This will require a lot of work educating the fund management community that such services can be utilised out of the BVI. Over the long term, this could attract bigger, established managers as they seek to strengthen their corporate governance. As everything in this industry is based on trust, the more faith established managers have in BVI-based directors, the more they might seek to establish fund products.
"Having Circle Partners (BVI) as a licensed administrator in the BVI does help (in terms of building our business)," says Payne. "Often there is a perception among clients that if they deal with a local administrator things will be done better or more cost-efficiently. We work with our colleagues in the US, Europe and Asia. Depending on where the client request is coming from, we take the lead and then put them in touch with the relevant business development team. It is something that has helped us to consolidate our position."
Payne confirms that under Circle Trust Services (BVI) Limited it has a corporate directorship offering, which has long been used by BVI clients. In the last two or three years, however, it has started to see more demand for individual directors.
"I am based in the BVI and provide directorship to a limited number of funds along with other directors also based in the BVI; we also offer directorship services out of our other global offices.
"I choose to sit primarily on the boards of hedge funds, including long/short equity, distressed debt and fund-of-hedge-funds. We don't want to have too many active directorships because you need the time to properly review the fund's operations and activities. And, importantly, we have to be careful about the amount of exposure that Circle Partners has to any one fund; if we are providing turnkey services to a fund, it might not be advisable to provide directorship services as well because it could lead to conflicts of interest," explains Payne.
McKenzie says that Folio Group has chosen to build out its directorship service in order to generate an alternative revenue stream.
"We don't have any grand designs on becoming as big as DMS Offshore Group in Cayman, but if we can find the right clients that are looking to put governance structures in place, and make sure they are keeping an eye on regulation, updating their PPMs etc, then it's an area of the business we hope will grow in the next few years.
"We are very committed on supporting our core market, which is start-up and emerging managers, from a fund administration perspective, but director services could be an important value-add. Obviously the BVI has a less developed directorship market than Cayman so there is plenty that we, and other fund administrators, can do to get the message out there that they can use experienced, independent directors that reside in the BVI," comments McKenzie.
Over at ACE Fund Services, Spencer says that one key role that the firm has been playing to support the challenges its clients face is keeping on top of the continuous stream of global regulatory developments, and making sure that operational issues, regulatory filings and so on, are closely observed.
"The more that the appointed fund administrator can help in this respect, the more time managers have to focus on running the investment strategy and delivering the best performance to investors.
"One of the things we are looking to do is to make our internal processes more streamlined. With all of the regulatory changes coming into play, it's important to make sure that, even though it is not our responsibility, a fund's AML checks and processes are in place and working properly, that funds are sticking to their operational guidelines; a kind of operational compliance framework that allows us to better monitor the fund's operations.
"We are ultimately partners to our clients so we want to help our clients be more proactive when it comes to ticking the boxes and running the fund correctly, and in compliance. That's where we think we can add value to our clients," states Spencer.
Payne adds that Circle Partners is busy implementing new investor services software called MANTRA to further enhance its client offering: "We are always looking to develop our middle-office services as well as support clients on the custody/depositary side for FoHFs; although this will be done out of the Dutch office."
Niels Herbold is Manager, ATU Fund Administrators (BVI) Limited. As the BVI's first ever licensed fund administration group, with its origination dating back to 1997, the administrator has seen a lot of change over the years; both internally and externally.
Herbold is hoping that fund structuring services with ATU will help the group build out its client base and attract a wider number of hedge fund and private equity managers, in addition to referrals it gets from ATU General Trust. As such, he is not resting on his laurels with respect to the incubator and approved fund products.
"Managers are able to find more cost reductions more on the structuring side. Operational costs are not necessarily going to be discounted because they decide to establish an approved fund, for example. If appointed, fund administrators still have the same professional and corporate responsibilities to this structure, just as much as they do with a BVI professional fund.
"So from an administrator's perspective, it's difficult to explain to managers why a potential administrator's fees are not lower for a BVI incubator or approved fund than they would be for a traditional BVI professional fund set-up.
"Many funds administrators, however, provide corporate and legal services. That opens up the route to talking to more potential managers and outlining how we can support various different fund structures. That is helping expand the role of BVI fund administrators, but from an operational perspective, I don't think the BVI approved and incubator funds will have any material impact on costs: as a result, the corporate and legal side of things could become a more obvious revenue driver, at least in the near-term," explains Herbold.
Increasingly, fund managers want to increase the partnership with their appointed fund administrator to develop a structured approach that supports them – beyond merely providing independent pricing and valuations, striking the NAV, etc – throughout the fund's lifecycle. Part of that partnership is providing managers with practical advice at the pre-launch stage.
"Oftentimes, what we find is that if a manager is looking for a more structured long-term approach to their business they run into limitations with the BVI approved or incubator fund. We always advise clients not to be distracted by what they hear in the market on what they can or can't do, and instead be driven by what their investors want," adds Herbold.
There is, it seems, a lot for the BVI's fund administrator community to feel positive about. And if, as is hoped, the McKinsey report results in the BVI introducing changes to improve the value-add of its financial services industry, the jurisdiction could start to see more administrators, and more expert personnel, arriving over the next few years.
"It's all about bringing the value back to the BVI. We all want more people doing business here, and that is really the purpose of the McKinsey report. One immediate outcome of this is that we hope to have direct flights from Miami to the BVI in place later this year. The Government is also committed to improving the labour and immigration system to make it easier for people to come and work here and do business here. These are all positive developments," concludes McKenzie
