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BVI funds for families

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Managing family wealth through a designated family office has become more popular in recent years. Family offices come in many different shapes and sizes. They can be set up as a single family office or as multi-family office and be based in a number of different jurisdictions across the globe.

The decisive criteria for the best structure and jurisdiction will depend on the particularities of each family and their asset structure. It will also depend on how to best implement asset protection mechanisms and succession planning. Historically, family offices have used trust or foundation structures, maybe combined with special purpose vehicles, to hold and manage the family’s wealth and implement succession planning. Such special purpose vehicles will, in turn, own assets like land, real estate, trading companies, securities and even super yachts and fine art and require very bespoke asset management services.

Investment funds are a viable alternative for such special purpose vehicles, especially for families seeking a structure that offers more transparency for its family members and a robust and clear regulatory environment and, importantly, a tax neutral platform. Other key considerations include confidentiality, data protection and cyber security.

Instead of managing multiple, unrelated, special purpose vehicles or accounts, it is more efficient to pool the assets into an investment fund. This will require the structure to have some regulation. Even where the investors are related, the legal framework of a fund structure provides clarity on the rights and obligations of the investors and the manager.

Two further key elements which might make even a single family office wish to adopt a fund type structure for the assets it manages are, control and incentivisation. A fund structure can provide an element of control to the family office in the same way a fund manager controls a private equity fund – the family office can either own all voting shares in the investment fund or set up a separate investment management vehicle, issue all voting shares to that investment management vehicle and own all shares of that vehicle. The family office will be bound by a clearly drafted investment management mandate, setting out investment objectives and strategies of the investment fund.  By extension, a fund structure also permits the family office to be remunerated in a way which is consistent with fund managers and aligns their interests with the families whose assets they manage. This would typically entail charging an annual management fee subject to a high water mark and a fixed fee. This incentivises the family office team to maximise returns. Regular net asset calculations would be provided by third party fund administrators and assets would typically be kept in custody by reputable custodian banks or prime brokers.

One of the first steps for setting up an investment fund as a family office vehicle will be to choose a suitable fund domicile. For obvious reasons, there will be a preference for a jurisdiction that does not tax the investment fund itself, i.e. which allows the investment fund to be operated as a tax neutral platform.  

The British Virgin Islands (BVI) is one of the most popular and well-established jurisdictions for the formation and operation of investment funds, including those used by family offices. BVI investment fund structures are known globally for their flexibility, allowing investment managers to tailor their offering to the needs of the family office. 

Key advantages of BVI investment funds include the following:

  • A modern, recognised and robust legal system derived from English common law, including a very flexible corporate statute (the BVI Business Companies Act 2004);
  • A dedicated and experienced commercial court and a wide pool of experienced investment fund professionals in all major time zones;
  • Competitive professional and government fees;
  • Fast turn-around times;
  • No regulatory restrictions on investment policies, strategies or objectives; and
  • No requirement to appoint local directors, local functionaries, or local auditors.

Costs for setting up and operating a family office can be quite high. The BVI has created the Approved Fund, a licenced product that is specifically geared at younger family office structures which are, by their nature, more cost sensitive.

The key characteristics of an Approved Fund are as follows:

  • The total number of investors is restricted to twenty investors. 
  • The assets of the Approved Fund must not exceed $100m (or its equivalent in any other currency). Should the assets exceed this threshold, then the Approved Fund can quite easily be converted into a more regulated investment fund. This conversion process requires approval by the BVI regulator, the BVI Financial Services Commission. It is a very straight forward application and the operations of the fund will not be interrupted by this conversion process.
  • No requirement to have an offering document in place, having a short term sheet setting out the liquidity terms and investment mandate of the fund is still recommended.
  • No requirement to have third party service providers appointed, except for appointment of a fund administrator which will, in short, provide the Approved Fund with registrar and transfer agent and net asset value calculation services. The fund administrator will also assist with due diligence on investors and any filing statutory obligations. 
  • No requirement to file audited financial statements. 

Although not required by law, in practice the Approved Fund will often have a third-party investment manager appointed. It may also consider having reputable persons appointed with the safekeeping of its assets. Also, depending on the domicile of the family members it may be advisable to add further functionaries or features to the fund so that the fund would be recognised by local tax authorities as a tax neutral 
investment fund.

An Approved Fund must have two directors, one of which must be an individual. Usually, a senior member of the family will sit on the board of directors to control and supervise the management performance of the investment manager. Alternatively, a professional and experienced individual could be appointed to protect the interests of the family office. 

The Approved Fund would also need to appoint an authorised representative. The authorised representative acts as conduit between the fund and the BVI Financial Services Commission, ensuring that the fund is being operated in good regulatory standing. Financial statements must be filed annually (which need not be audited) and returns must be submitted to the BVI Financial Services Commission regarding the fund’s status, i.e. the number of investors, total investments, aggregate subscriptions and redemptions, net asset value of the fund and details of any significant investor complaints.

The Approved Fund can be set up in different ways, depending on the assets in which the fund will be invested. It is quite common to set up a family office fund with different share classes each being invested in different classes of assets. This allows family investors to pick the investment they would like to make.

Another option is to set up the Approved Fund as a segregated portfolio company (“SPCs”).

In a single family office context, the segregated portfolios can be used to segregate the assets and also the liabilities into distinct pools, maybe by asset class, strategy or geography. Large single family offices with liquid assets may wish to appoint different investment managers to manage each pool of assets and to segregate them from one another in a structure which they control. Also, the family office could simply provide one segregated portfolio of the fund to each family member. 

Alternatively, some fund managers use a segregated portfolio per asset acquired to facilitate club deals whereby each deal is offered to a pool of investors who can opt in or out of each particular transaction.

There are significant cost benefits to be achieved by utilising a segregated portfolio company structure rather than setting up multiple fund structures. Adding a segregated portfolio to an existing SPC is much more cost effective than forming a brand new legal entity. There are reduced operating costs too because the company secretary, board of directors and other fees are shared across the SPC rather than having separate boards and company secretaries.

Lastly, Approved Funds are open-ended funds which means that investors have the right to redeem their investment subject to any lock-up period mechanisms which may apply.

As family offices develop and grow, regulated fund structures are increasingly necessary and helpful in allowing them to perform their primary role of managing the family assets. The use of a fund structure provides a recognised and well established legal framework, which allows the family office itself to become a multi-family office, fund manager or boutique wealth manager. This is in addition to permitting a family office to have greater control over the assets being managed and providing the opportunity for the family office team to be incentivised in line with their peers in the corporate fund management environment. The application of regulation and the use of independent administrators and non-executive directors gives additional comfort to the family whose assets are being managed that there are appropriate checks and balances, and that the assets are being securely held.

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