BVI funds - a smart bet in uncertain times
By Christopher Simpson & Kerry Anderson – News outlets, including The Guardian and CNBC, were reporting and market watchers were opining in early 2019 that a slowing world economy forebodes a major global economic shift – possibly another recession. By mid-August, the concern found renewed attention when analysts pointed to an inverted yield curve in the United States Government bond market as a historical precursor to a recession.
According to Credit Suisse, a recession has occurred, on average, 22 months following such an inversion in past cycles. Whether the inverted yield curve is a reliable indicator of an imminent recession is yet to be known; however, activity in the bond market does suggest that investors are looking for alternatives to standard equity investments.
As investors shift away from exchange-traded stocks, alternative investments, as well as tangible assets such as wine and art, become attractive for diversification and risk-adjusted returns. Indeed, according to a 2018 report produced by data provider Preqin and the Alternative Investment Management Association, alternative investment funds often offer better risk-adjusted returns than traditional bonds or equities.
In the current macroeconomic climate, BVI funds are a well-suited vehicle for alternative asset investing as they boast variety, flexibility, and ease of establishment.
Flexible and nimble
BVI funds have a long history of being used as alternative investment funds because they are flexible and nimble. Funds can be set up as companies, unit trusts, limited partnerships, or even limited partnerships with legal personality. Managers can establish funds with segregated portfolios – also known as “cells” -allowing the segregation of investors or asset classes under one fund, even though different investment strategies, fees, and terms might apply. Losses in one segregated portfolio do not affect another and, as such, provide a useful way for a manager to attract investors interested in different asset classes.
Adaptable and customisable
While the BVI Financial Services Commission (FSC) regulates most BVI funds, they can be adapted to a variety of needs and customised to suit a particular investment style, strategy, or target investor class. BVI funds are not limited in the type of assets they may hold or in which they may invest.
Moreover, BVI funds are not limited to using BVI service providers. They are free to use auditors, administrators, and other providers from practically any jurisdiction in the world.
Finally, BVI funds are not required to hold meetings in the jurisdiction nor is shareholder approval required for changes to the fund’s investment strategy or constitutional documents. However, a prudent manager will ensure that investor protections are built-in and that constitutional documents can be customised to achieve the exact balance a fund manager wishes to achieve.
Variety puts BVI funds in an elite category
Fund managers come with different objectives, sizes, and needs. To address a manager’s particular circumstances, the BVI offers an elite variety of fund vehicles, including four open-ended funds, as well as a retail fund option where investors can redeem their interest on-demand under agreed terms. A BVI fund structure can also be closed-ended, which is summarised later in this article.
The four open-ended funds are the professional fund, the private fund, the approved fund, and the incubator fund. The retail fund option is known as a public fund.
• Professional fund: The professional fund provides for shares/interests available to professional investors, only. The initial investment by each of the investors (excluding exempted investors) is not less than USD100,000 (or equivalent). Exempted investors include the manager, administrator, promoter, or underwriter of the fund; or any employee of the manager of the fund;
• Private fund: The private fund’s constitutional documents must specify that it will have no more than 50 investors, or that the making of an invitation to subscribe for or purchase shares is made on a private basis;
• Approved fund: The approved fund has no minimum initial investment requirement but is limited to a maximum of 20 investors at any one time and a cap of USD100 million AUM;
• Incubator fund: The incubator fund is limited to 20 investors, has a minimum initial investment USD20,000 per investor, and a cap of USD20 million AUM.
The BVI fund application process
The FSC requires that a fund choosing to be recognised, registered, or approved in the jurisdiction submit an application. The application requires evidence of the fund’s status together with details of each of the fund’s functionaries; the investment manager, administrator, custodian, and auditor.
In considering an application for recognition or registration, the manager, administrator, and custodian of a BVI investment fund must be incorporated in either the BVI or a “recognised jurisdiction,” which includes many of the well-known financial centres of the world.
Also, functionaries incorporated in other jurisdictions may be acceptable if the FSC regards the jurisdiction as having a prudent system of regulation and supervision of investment business, including mutual funds business.
The above functionary requirements are primarily relevant for private and professional funds since an incubator fund requires no functionaries and an approved fund only requires an administrator. The approved and incubator funds fall under a “light touch” regime which allows for quick approval of applications within as little as one week.
The public fund
The retail option, or public fund, is neither a private fund nor a professional fund. This type of fund is the most regulated since it is open to a larger number of investors, most of whom might be unsophisticated.
Public funds are subject to the BVI Public Funds Code, which sets out four principles by which a public fund must conduct its business, namely: (i) integrity; (ii) management and control; (iii) investors’ interests; and (iv) relationship with the FSC. A public fund is responsible for applying these principles to its particular circumstances, which may require adopting higher standards than is set out in the remainder of the Code to avoid being in breach of the principles.
Rather than using an open-ended fund structure, managers may opt to use a closed-ended structure, which the BVI does not regulate. The closed-ended structure can provide flexibility in pursuing alternative investments. While this type of fund usually mirrors the open-ended fund structure, investors cannot redeem on demand. The option to redeem is typically at the discretion of the company’s directors or the partnership’s general partner. Some managers find the closed-ended structure ideal because of its quick set up, flexibility, and the fact that no regulatory approval is required.
BVI funds are attuned to varied needs
With the uncertainties ahead in the international markets, the BVI investment fund regime provides a wide range of options for fund managers and investors, whether bullish or bearish. The advantages of BVI funds are clear. From the professional fund to the incubator fund, and from the approved manager regime to the ability to apply segregated portfolio principles with statutory footing, alternative investment managers will find the BVI a welcoming jurisdiction for their varied needs in establishing funds.
Partner, Corporate, Investment Funds,
Regulatory, O’Neal Webster
Christopher Simpson advises financial institutions, corporations, and law firms on all aspects of corporate finance including joint ventures, initial public offerings, private placements, mergers, arrangements, corporate restructuring, bilateral and syndicated loans, bond issues, property financing, project finance, special purpose vehicles, investment funds, and general aspects of corporate law.
Head, Investment Funds & Regulatory
Practice, O’Neal Webster
Kerry Anderson advises an international clientele on BVI law in funds, regulatory, corporate, commercial, and joint venture deals and acquisitions. Deeply experienced in the initial structuring or amending of investment vehicles, he often provides continuing legal advice and support throughout their operation.