Inside the approved manager regime
Since the Approved Manager Regulations were implemented in the BVI in 2012, smaller managers seeking a more simplified approval process and lighter touch regulatory framework compared to the Securities and Investment Business Act (SIBA) have really benefited.
Under the approved manager regime, start-up managers can choose to avail of the BVI’s incubator fund and approved fund products, both of which are designed to help build their track records without necessarily having to launch a BVI professional fund on day one.
In that sense, the approved manager enables smaller managers to establish a structure on a cost-effective basis, says Walter Reich (pictured), founder of Tovel Investments Ltd. “For a lot of people looking at the BVI, the approved manager often ends up being the most logical choice.”
Tovel is a boutique group providing directorship, accounting, investment management and corporate governance services. Specifically, Tovel Investments has a full BVI investment management license and Tovel Consulting provides directorship/mind and management related services with focus on approved and licensed fund managers and to the underlying funds. Services include assisting clients in establishing fund structures including licensed and/or approved manager entities.
According to the latest statistical bulletin published by the BVI Financial Services Commission in June 2019, there were 255 approved investment managers and 108 approved funds; this compares to 938 professional funds.
“The approved manager is a flexible vehicle, especially for the clients we work with such as newly established investment managers,” says David Payne, Director, AMS Financial Group, which provides corporate, trust, fiduciary, captive insurance and legal services to investment firms, including independent directorship services. AMS is also an affiliate of Circle Partners, an independent fund administrator with offices in the Cayman Islands, and across the EU, the Americas and Hong Kong.
“The way the regime was drafted, it allows fund sponsors to run both BVI and foreign funds, both closed-ended and open-ended, up to an AUM limit of USD400 million (USD1 billion for closed-ended funds).
“Combining the approved manager with an approved fund has been quite a success. It has been rewarding to see the interest in these products increase since their launch especially considering the time spent by various BVI hedge fund focused committees in trying to develop the right product based on what we were hearing from prospective clients.”
AMS sets up the legal structures for approved funds and approved managers and recommends services such as independent directorships, and over the years the firm has developed a productive relationship with Tovel, with both firms able to provide the key functionaries required in the overall structure who have relevant experience and who can provide the required independence.
“At Tovel, we have a great team of hedge fund experienced individuals. Clients are pleased to know that experienced and qualified individuals are available locally in BVI to act as director, secretary, trader, compliance officer and accountant as circumstances require especially given the ever changing global regulatory environment. We all have relevant hedge fund backgrounds so we can provide a proper value-added service,” explains Reich.
Not every investment professional is going to fit the approved manager regime and it is the job of specialist providers such as AMS to weed out any potentially ill-fitting prospects. This is achieved in the first instance by asking each promoter or manager to fill out a detailed questionnaire on the fund strategy and its key characteristics.
“Once we have that information we can extrapolate it and see if an approved manager will work,” says Payne. “Many of our clients are small to mid-sized managers so we will also look at the number and type of investors in the fund and minimum investment numbers. If the client tells us they have USD500 million in AUM we will automatically rule out the approved manager regime.”
If they are successful, the client could change the approved fund to a BVI professional fund and transition from an approved manager to a fully licensed Category 3 investment fund manager.
This will typically depend on what the client is looking for and what their ambitions are.
“We listen carefully to what clients are looking to achieve both short-term and long-term, we discuss strategy, infrastructure and ability to raise money,” adds Reich.
“We want to know where the person resides, who will be executing trades, what the volume of trades will be, the backgrounds of each person in the investment team and so on. In some cases it might be more appropriate to establish the investment manager in their home jurisdiction. But in other cases, that might not be possible for a variety of reasons and if the fund allows for it, then you can start having that conversation about establishing the investment manager in the BVI.”
At a time when attracting new hedge fund investors is becoming harder than ever, those who choose to go down the approved manager route can at least give an extra level of confidence and demonstrate that their ambitions are long-term.
Another benefit is the flexibility and the reasonable costs of an approved manager. Financial information does need to be filed with the regulator but it doesn’t need to be audited. Not having to pay annual audit fees is an important cost saving for any start-up manager.
“Also, if you compare an approved manager to a fully licensed BVI fund manager, the latter has to have professional indemnity insurance, which is not required under the approved manager regime,” comments Payne.
Reich advises those considering approved manager status to visit the BVI to get a complete understanding of what the jurisdiction has to offer, in terms of the quality of its infrastructure and service providers, but also in terms of soft factors such as climate, lifestyle, schools and such like. “We recently had a prospective manager enjoy his visit to BVI so much he decided to move to BVI with his family and operate his management company from BVI,” he says.
Visits also help when assessing individual fund managers from a personality perspective, and to gauge the quality of their strategy that cannot always be fully determined over the phone or in a questionnaire.
As Reich says: “We want to protect the reputation of our firm and of the BVI. We also want to be fair and honest especially when it comes to time and money. It’s important to gauge the quality of the strategy to avoid getting into a situation where the fund has to be wound down; which can often take more work than setting it up.”
As a final piece of advice, Reich says that it is not as complicated or onerous as one might think to establish an approved fund; perhaps by first bringing in friends and family money, build up a track record, before thinking about taking on external investor capital.
“We’ve seen instances of some people starting off with USD2 million and within two or three years, grow to USD25 million in AUM. Eventually, you have to make the leap and have a proper structure in place. With the products offered here in the BVI, we feel confident we can create a platform for success for our clients at a reasonable cost, and with a reasonable and appropriate level of regulatory oversight,” concludes Reich.
Founder, Tovel Investments Ltd
Walter Reich has resided in the British Virgin Islands for 20 years and is a CPA. Experience gained at a UK based hedge fund, Citco and KPMG allows Walter Reich to offer his services as an experienced and independent director/consultant to offshore based funds and management companies domiciled predominately in the British Virgin Islands. To facilitate these services he founded the Tovel group with team members providing directorship, accounting and fund/management related services. Walter Reich serves on various BVI fund committees, is a trustee of the local IB school and can usually be seen coaching football to kids when not working.
Managing Director Americas, AMS Financial Group
David Payne is a Director of the AMS Financial Group and of Circle Partners and has over 15 years’ experience in the structuring and the administration of investment funds and asset managers in offshore, mid-shore and onshore jurisdictions. David has held top managerial positions in The Netherlands, United Kingdom, BVI, Cayman and USA. David holds a degree in law which he obtained in 1999.