The Bahamas has developed into a jurisdiction capable of responding to the needs of investors – be they wealth managers or single- or multi-family offices – and whilst there is still some way to go to build out its institutional investor base, the tools are in place to support a wide variety of investment requirements.
Some of the innovations that The Bahamas has introduced, such as the ICON legal structure and the SMART Fund series, have helped to put it on the map and it has certainly helped attract more business.
“The ICON has been moderately successful but we are not talking thousands of numbers; then again, nobody ever envisaged mass adoption of the ICON. If one looks at the SMART Fund, which came out back in 2003, it has been very successful with respect to private clients in Brazil and some other jurisdictions,” says Ivan Hooper (pictured, above), CEO of Winterbotham Trust Company Ltd, which has grown to become the largest fund administrator (by number of funds) in The Bahamas. It services over 50 per cent of the SMART Fund market.
He continues: “The Bahamas is willing to be innovative with respect to allowing its industry to have the tools to be useful in today’s new environment, for families, companies, entrepreneurs to set up investment structures, holding structures in a compliant manner. Hopefully this will prove successful in the future. If you look at Brazil, Argentina, the condominium structure on which the ICON is based is widely used. We still don’t know how successful the ICON will be as it is still early days, but the point is the tools are in place for people to use.”
The Bahamas, in other words, is putting the right building blocks in place for it to become a more established funds industry. Up until recently – certainly before the introduction of SMART Funds – the jurisdiction was dominated by trust and private wealth structures. According to Antoine Bastian (pictured, left), Managing Director of Genesis Fund Services, “We lag behind Cayman with respect to funds, not because of any inferiority, but simply because we have not promoted the jurisdiction perhaps as much as we ought to have.
“This is a jurisdiction that continues to progress and to make fund products not only available and accessible, but relevant, to the needs of asset managers, family offices and, increasingly, institutional investors.”
Michael Dean (pictured, left), Vice President, Investment Fund Services, Equity Bank and Trust Bahamas Limited, observes a clear uptake among family offices, particularly in Latin American markets such as Brazil, for private fund vehicles for their assets.
“Agriculture, transportation, real estate, Formula 1 marketing; basically anything you can imagine. People are taking advantage of SMART Funds to hold these assets. Most of our investors come through established global financial institutions, with whom they are investing their wealth. Generally speaking, the number of investors in fund structures is no more than 20 to 30, as far as we can see,” says Dean.
This is why the SMART Fund series has proven so popular. Different fund templates have been designed to accommodate different numbers of investors. For example, SMART Fund 002 will have a maximum of 10 investors, SMART Fund 003 will have a maximum of 15 investors, while SMART Fund 007 can accommodate up to 50 professional investors (‘super qualified’). This is working to The Bahamas’ advantage as wealth managers and private banks work to develop more customised, tax efficient fund structures for their clients.
From 2010 onwards, following the Madoff scandal, SMART funds in The Bahamas really started to take off. According to Bastian, “what we are finding today is that some fund managers are structuring solutions for multi-family offices and single family offices using SMART funds, which are proving easier for them to manage and are less costly.”
Innovation can never be achieved unless there is a good synergy between the regulator, the government and the funds industry in any given jurisdiction. In that respect, The Bahamas is well positioned.
The Securities Commission of The Bahamas (SCB), led by Executive Director Christina Rolle, is taking a sound approach to applying the right level of regulation whilst at the same time remaining open to the views and concerns of the Bahamian funds industry. “I think this has created a good balance and we welcome that,” says Bastian. “Our regulatory environment has always been sound. We’ve never been caught up in any shenanigans. We have always been stricter than Europe and the United States but at the same time managed to remain less invasive.
“We welcome managers from Europe and the US with a proven track record who can bring their expertise to The Bahamas to build out their client base in Latin America, Africa and Asia under the auspices of the SCB’s regulatory regime. We want to attract talent, just like any other fund jurisdiction.”
This willingness to engage in open dialogue helped bring the ICON structure into effect. There was a mutual agreement between industry practitioners and the SCB that it would be beneficial to introduce a product that the Brazilian market would recognise.
“We encourage our clients to share ideas with us on whether there are new products they would like to see, and on such occasions we will share those ideas with the BFSB, with the government and the SCB.
“Right now, we are researching whether there is anything special that investors in Dubai are looking for. It is a jurisdiction that has a unique culture compared to Europe. We want to find out what exactly what investors there want, and to see if we can come up with something appropriate,” confirms Dean.
With respect to the ICON structure, it is a relatively simple legal entity to establish. Similar to a partnership structure, it can be used for either a SMART Fund or a Bahamian Professional Fund, and one of the advantages is that they can be brought to market through an unrestricted fund administrator. What this means is that the licensing process for a SMART Fund typically only takes 72 hours.
“Once the due diligence has been properly followed through we can file all the necessary regulatory documents, get them signed by the SCB, and we then produce a ‘certificate of establishment’. We established the very first ICON, and we’ve already worked on three or four this year. In all cases they have been for Latin American clients,” confirms Dean.
To briefly explain, a Condominium, on which the ICON is based, is a form of joint ownership of property under Brazilian civil law. This was transposed into the Brazilian investment funds regime as the structure under which managers would register their funds. It is a contractual agreement where investors agree to invest jointly and is similar, in principle, to collective investment schemes in Europe.
Currently, European and US managers will still tend to use unit trusts or a traditional International Business Company (IBC) structure. This is largely a cultural issue. Latin American managers will intrinsically lean more towards the ICON.
The end product, either way, will still be a Professional Fund or a SMART Fund but when asked whether ICON could help The Bahamas grow its funds industry, Dean adds: “If you understand the underlying structure you are more likely to accept it and create whatever fund you want underneath it. The more familiar people become with ICON, the more fund formations we will hopefully see.”
Hooper says that part of what has slowed the level of uptake in ICON structures is that larger banking counterparties take much more time with respect to documentation. If one tries to open a bank account for an ICON with one of the big global banking names, they don’t necessarily know what the structure is, let alone have the right documentation in place, and if the client is in a hurry to set the fund structure up they’ll end up just choosing a company structure instead.
“Family offices that set up SMART Funds using an ICON are not your average retail wealth management client. These are sophisticated clients so usually they would be dealing with the same banking counterparties that they have in London, New York, but the problem is those counterparties might never have heard of the ICON. Once a prominent client insists on establishing an ICON using their existing banking counterparty in New York, for example, which will require them to get familiar with the structure…that will be the potential tipping point because other banking groups will follow suit. But that process will take time,” says Hooper.
There is no doubt that SMART Funds and the ICON structure are helping The Bahamas attract Latin American private wealth clients.
The next stage of its evolution is to attract genuine institutional investors; something that the Cayman Islands has done all too well over the last 20 or so years thanks to the popularity of its exempt fund. At the end of the day, SMART Funds were not designed for large institutional market, or for that matter the retail market.
“I wouldn’t say that the lack of developing The Bahamas’ institutional fund market is through any legislative shortcomings, it’s simply the fact that jurisdictions like Ireland, the Cayman Islands and Luxembourg have been more attractive. We don’t yet have, for example, a purely institutional fund product like the Cayman exempt fund. Every Bahamian fund is regulated and licensed. I believe as things evolve, most funds will actually be regulated. In the licensed fund arena we are doing very well compared to Cayman, and are in the top five global jurisdictions for regulated funds,” emphasises Hooper.
If a European or US fund manager wants to establish a professional fund that has brokers, custodians etc. in any jurisdiction, then The Bahamas Professional Fund is more than up to the task. The caveat, says Bastian, is that the nexus between the SCB and the fund is the administrator. “Just as one would have sign off from a Cayman auditor – even though the administrative work might be done in Ireland for example – in a similar fashion a Bahamian Professional Fund can still use a sub-administrator in Europe or New York, thereby offering sufficient flexibility.
“This is a jurisdiction that continues to progress and to make fund products not only available and accessible but relevant to the needs of asset managers, family offices and, increasingly, institutional investors.”
Fund legislation does perhaps need to be introduced into The Bahamas, which is more targeted at the institutional investor audience. The rules are clearly different for dealing with institutions in the UK, for example, compared to private wealth and retail investors, there are proper controls and monitoring processes in place.
Institutions are dealt with in such a way that they understand what they are buying and don’t need to be dealt with prescriptively when buying an Irish QIAIF or a Luxembourg SIF.
Introducing such an institutional product would mark the next stage in The Bahamas’ evolution, but for the time being it is doing a great job fostering interest in the ICON and SMART Fund series.