For a fund jurisdiction that refers to itself as an ‘Innovation Nation’, the Bahamas continues to build its profile and popularity among global fund managers, and, it is hoped that the next stage of its evolution will be to attract more institutional money.
To underscore how innovation is having a tangible impact, the Bahamas is on track to exceed its previous high-water mark for fund registrations. With more than 800 funds, the island is back to pre-2008 levels and firmly on the rebound.
“2015 has been a good year, the number of fund registrations is growing faster than fund liquidations,” says Aliya Allen, CEO of The Bahamas Financial Services Board. “We now have 830 funds licensed and registered in The Bahamas, 502 of which are SMART funds, which demonstrates the attractiveness of that product.”
The Bahamas has been a financial centre for over 80 years focusing on wealth management. A key component of that has been the development of a fund regime that is supportive of its private investor client base but which can also be utilised by institutional investors.
Innovation Drivers: The SMART Fund
The SMART Fund is a key example of how The Bahamas has fostered a culture of innovation.
Currently, seven templates are available for fund sponsors to choose from.
SMART Fund 002, for example, is limited to 10 investors, SMART Fund 004 can have a maximum of five investors operating as a private investment company, whilst SMART Fund 007 may be offered to up to fifty "super-qualified investors" who must each make a minimum initial subscription of USD500K.
“We find that SMART Fund 007 is one of the most popular and fastest growing templates we’ve ever implemented,” explains Allen.
Each template has been developed to meet the particular needs of investors. This is innovation that is carefully planned, not implemented just for the sake of it
“Let’s say you’re a sponsor with a particular business case and none of the templates match that business case. You can apply to the SCB for the approval of a new SMART fund template. It’s a process that allows the SMART fund range to grow organically and be very adaptive to market needs. After the financial crisis, when there was a requirement for managers to have side pockets in place for illiquid assets we came up with SMART Fund 006. So each template has arisen out of a specific business case or market requirement,” says Allen.
SMART Funds have enabled The Bahamas to create a country-specific, market-specific and client-specific investment product that is both fully transparent cross-border compliant. Each fund operates in a supervisory environment that is proportionate to the number of investors and nature of the fund strategy.
Innovation Drivers: Close Interaction among key stakeholders
The close interaction between the private sector, the regulator, and the government also helps to promote innovation in The Bahamas. This has helped, over the years, to create an environment of healthy dialogue among key industry stakeholders, where everyone is plugged in to industry developments. This allows for the cross-fertilization of ideas necessary to stay ahead of the curve and to adapt to market needs.
“In this respect, the BFSB itself plays an important role because there’s a constant focus on planning for innovation; it doesn’t just happen overnight.
Innovation Drivers: Independence
The third point to make is that The Bahamas has been an independent sovereign state since 1973. This gives it the opportunity to create both regulatory and government policies for the right kind of financial industry that it wants to develop. “One of the continual themes when we talk to our clients about what they find attractive is our independence. It always rates highly and managers see it as a clear advantage. We always keep up-to-date with global regulatory trends and what is required of us, as an offshore jurisdiction.
“We set our regulatory policy in accordance with the business that we have and the business that we want,” says Allen.
Innovation Drivers: The Investment Condominium (ICON)
One final innovation driver that cannot be overlooked is the Investment Condominium or ICON. Introduced in late 2014, the ICON is an alternative choice to fund promoters organising their funds as companies, partnerships or unit trusts. Unlike a corporation, the ICON is not in and of itself a legal entity. Rather, it is a contractual arrangement between participants which allows for the pooling of assets for the purpose of investing.
The Bahamas recognised that such a structure was popular in Latin America, especially in Brazil, where the majority of its funds are structured as condominiums. To tap in to the growth of Latin American markets, The Bahamas created the ICON. What this allows managers to do is establish a fund offshore that is able to closely mirror what they have onshore.
“Similar regulatory requirements mean that there is a level of consistency, and the fact that the vehicle is fully regulated helps to give investors confidence. Unlike other jurisdictions, all open-ended funds in The Bahamas have to be licensed and regulated.
“However, with the ICON it goes a step further as it requires regulatory governance. This is provided through a financial institution (such as a fund administrator) that has a balance sheet, thereby adding a higher level of safety to investors,” explains Allen.
There are already some 20 ICON structures up and running in The Bahamas, and with recent numbers rising, likely to be over 60 by the end of the year. Interest is building, mostly among Brazilian managers and investors although Allen notes that Mexico and Chile are also important markets.
For any asset management firms not based in Latin America, and who wish to market funds there, the ICON does warrant consideration, in Allen’s view. “If you are looking for a vehicle that Brazil is comfortable with in terms of how it works, and how it is treated from a regulatory and tax perspective, the ICON is a good fit.”
What is particularly exciting is that The Bahamas is now starting to see growing institutional interest. This is, in part, being helped by the fact that Brazil has implemented new rules to enable more Brazilian investors to invest in funds that target international markets.
“The allocation caps are being driven up and the investor base is expanding and as many Brazilians are familiar with The Bahamas as a funds domicile, we hope that this too will lead to more institutional interest. It will give regular investors, via Brazilian pension plans, access to funds that are investing in global assets.
“A lot of growth in funds up until now has primarily come from family offices but increasingly large institutional investors are starting to look at The Bahamas. I think this demonstrates that we have a solid framework in place to support larger funds and with that, larger institutional investors,” comments Allen.
Flexibility of The Bahamas
The Investment Funds Act in The Bahamas is highly flexible and currently supports four classes of funds: Standard Funds, Professional Funds, Recognised Foreign Funds and SMART Funds. The Professional Fund is aimed at institutional and sophisticated investors and can be licensed by an Unrestricted Administrator, or directly by the Securities Commission. The benefit of availing of the former choice is that it enables fund managers to get their product(s) to market speedily and efficiently.
Allen points out that one of the key advantages of the flexibility afforded by the Investment Funds Act is portfolio composition.
“We don’t have overly prescriptive requirements for portfolio composition. You are free to invest in whatever assets you want, as long as this is done on a wholly disclosed basis; telling your investors very clearly in the Offering Memorandum what your investment strategy and return objectives are and that you clearly disclose the risks associated with that strategy.
“That flexibility is particularly helpful for open-ended alternative funds investing in illiquid assets,” says Allen.
In addition to having the flexibility of portfolio composition, there is also flexibility as to how managers calculate valuations within the portfolio. The Bahamas is not a jurisdiction that requires managers to value the portfolio assets at a certain time or have a certain time for redemptions; it is a completely disclosure-based environment.
That enables the fund sponsor to design a redemption policy that fits the particular asset classes that the fund is going to be investing in. “With the SMART Fund, because you aren’t required to have an audit annually (subject to approval by the investors) it means that you’re not adding an unnecessary layer of operational cost for the fund,” notes Allen, who continues:
“If you invest in private equity, where positions are only determined on the happening of a liquidity event, then why do need an annual audit? It depends on asset classes, but that feature of the SMART Fund is yet another example of how flexibility can benefit managers and, moreover, enhance The Bahamas’ position as a funds domicile of choice.”
To conclude, it is worthwhile noting that The Bahamas is one of the jurisdictions being considered by ESMA for a Third Country passport under AIFMD.
“That’s important because it validates what we stand for as a funds domicile.
“There is a tendency to stick with the jurisdiction you know but I think The Bahamas is showing, through a number of initiatives, that we are very much open for business and we are committed to doing what it takes to create a fertile fund environment,” concludes Allen
