By James Williams (pictured) – It seems the decision by the BVI’s financial regulator, the Financial Services Commission (FSC), last year to extend the Approved Manager regime to managers running non-BVI funds, as well as those running managed accounts, was prudent. During the course of 2014, several of the islands’ leading law firms saw increased activity in managers applying for Approved Manager status.
“Over the last 12 months we’ve seen a number of clients looking to provide investment management services to managed accounts applying for Approved Manager status, as opposed to a Category 3E investment business license. The net effect being that we are now experiencing growth in the numbers of clients opting to utilise BVI as the domicile of their investment managers. The extension of the regime to cover managed accounts has been significant,” states Simon Schilder, Partner at Ogier.
As of 30 June 2014, there were 43 approved managers registered in the BVI.
Over at Mourant Ozannes, the head of its funds practice Marie-Claire Fudge is feeling optimistic about 2015.
“We are working on a number of Approved Manager applications at the moment with more lined up,” says Fudge, who notes that she is currently seeing a fairly even split of Approved Managers running open-ended funds and closed-ended funds. “It’s a great product and important for the BVI market. Statistically, if you look at the number of fully licensed SIBA managers, there are a lot more Approved Managers coming to market, which I think gives weight to the fact that it is a successful product. I don’t think the regime would have grown or succeeded as much as it has without the ability to extend it to managers running non-BVI funds.”
Annual license fees are just USD1,500 for an Approved Manager running a BVI professional/private fund. In addition to the lighter-touch regulatory benefits of the regime, for start-up managers what is also just as important is speed to market. One can get all the paperwork drawn up and then push the button and launch the fund very quickly, mitigating the risk of losing potential prospective investors.
A manager will generally be able to commence business seven days after submission of the application to the FSC, and then has a 30-day period in which to launch the fund.
Clearly the Approved Manager regime is working to the benefit of the BVI, but what the jurisdiction needs is a complementary fund product that sits beneath the professional and private fund. This is something that Schilder has outlined and proposed in a consultation paper submitted to the FSC in December 2014. Indeed, the proposal calls for not one but two new fund products to better serve the start-up and emerging manager market: provisionally titled the BVI Approved Fund and the BVI Incubator Fund.
“What we are trying to do is have a product that is both competitive with what is available elsewhere (eg. the Bahamian SMART fund) and represents an enhancement to these alternative products. Bermuda also has something that is designed for the start-up market. However, rather than just come up with something that mimics what is already out in the market, what we are trying to do is create something that is both competitive and an enhancement, in meeting the needs of the start-up market.
“I understand from meetings I had with the FSC before Christmas that this is something they are looking at closely. They understood the need to move quickly on this. Hopefully, it’s something that will be introduced to the market before the summer,” comments Schilder.
The planting of the seed to create these new fund products arose from a BVI Investment Funds Committee meeting last year, confirms Phillip Graham, Partner at law firm Harneys.
“We sat down one evening and asked the question: ‘If we had complete control of the funds industry in the BVI, what would we do?’ After talking about a number of issues, one point that we all agreed on was that we should bring a new fund product to market to complement the Approved Manager regime.
“We ended up concluding that we probably needed two new products to offer slightly different things, but both being aimed at the start-up and emerging manager market who would be attracted by the cost-effectiveness of the BVI. That is the space that the BVI is already in but needs to flourish and become the number one jurisdiction of choice for the smaller manager.
“Whilst the BVI has a number of long-standing users of its fund vehicles by managers with many billions under management, I think it’s going to become increasingly hard to convince a new manager, aiming to launch with many hundreds of millions, that the saving of USD10-15,000 a year by using the BVI over Cayman is that compelling,” says Graham.
Since 2007, Graham notes that the FSC has to some extent softened its stance by engaging more proactively with the private sector, recognising to some degree that the regulator’s interests are closely aligned with the interests of the islands’ fund practitioners.
“We know that the FSC is interested in hearing our views and have actively asked the BVI Investment Funds Committee to present their views. Therefore, the proposal that has been submitted for two new fund products won’t be passed around for many years before being mothballed; the FSC are very likely to act quickly on this. That’s the exciting part of being in the BVI right now; it feels like the regulator and the funds’ sector are moving in the same direction,” adds Graham.
Schilder is keen to stress that the BVI Incubator Fund, which would be aimed more at established managers already running assets under management, would not be an SPC structure. Typically, one tends to see a fund administrator running an SPC as an incubator platform, whereby each cell within the structure represents an individual portfolio run by an appointed manager. One of the dangers of using an SPC, however, is that unless they are run correctly, they aren’t necessarily a cheap product for small managers.
“SPCs are great products but you’ve got to know how to use one correctly and that includes the cost of running it properly. The distinction between establishing an SPC platform, using multiple cells for managers’ portfolios, against the “BVI Incubator Fund” is that the latter doesn’t come with the risk.
“Another distinction is that an SPC has to use appointed service providers, whereas that wouldn’t apply to the proposed “Incubator Fund” for the first couple of years. The cost savings of not having to use service providers in a fund’s infancy are what the Incubator Fund is aimed at providing start-up investment managers. That is not possible with an SPC. Some managers might want to appoint such service providers and they might want to have an annual audit, but with the proposed Incubator Fund these would not be mandatory requirements,” explains Schilder.
Graham says that the Approved Manager regime is, to some extent, a bit of a Trojan Horse; it allows managers to get used to the BVI and learn that it offers light touch regulation, flexibility and cost-effectiveness. But even with the success of this regime, it hasn’t yet properly evolved to them using a BVI fund vehicle as well.
“That’s why we need an equivalent fund product. The approved manager has been an amazing success. I know of many practitioners globally that are now recommending it to clients rather than the Cayman exempt manager status, and that’s a great credit to the private sector in the BVI for recommending it and the FSC for introducing it. If we can have that same level of success with the proposed fund products then who knows what we could achieve,” states Graham.
With respect to fund activity, Fudge notes that the last quarter of 2014 saw a significant uptick in fund instructions, both from existing and new fund managers.
“We are working on more new fund instructions at any one time, currently, than I can remember for quite a while,” says Fudge. “We are seeing different types of funds launching, in particular more private equity funds. We are currently working on a few funds looking to launch in Q1 2015 and there are quite a good number in the pipeline as well. Conversations with private equity managers seem to be on the rise.”
According to Preqin, a leading research firm on alternative assets, through June 2014 there was close to USD450bn in distributions paid out to limited partners, indicating just how attractive market conditions have been for managers. On the back of rising levels of dry powder in the private equity market, one might expect to see increased fund formation activity in 2015, although an important caveat to this is that managers will likely face increased competition to find attractive investment opportunities.
Graham confirms that 2014 was a particularly interesting year in that funds were being launched by managers from all corners of the globe, not just the dominant US market. These included managers based in South Korea, Israel, the Philippines, Brazil, Argentina, Chile, even Iraq and Jordan.
“We saw a lot of start-up managers coming to market with friends and family money from all corners of the globe. The majority were hedge fund launches but we did also see private equity and real estate funds. In fact, one is centred around Iraq for a manager looking to invest in infrastructure development; the building of power plants, railway lines, etc,” notes Graham.
That the BVI is starting to attract managers from a wider range of geographies is testament to the good work that the islands’ regulator and service provider community are doing. Managers, especially those based in Asia and Latin America, particularly favour the BVI for company formations; it is a tried and tested product that has built global recognition over the years. What the BVI next needs to do is to engender that same level of acceptance and familiarity with its fund products.
“The BVI is a very flexible jurisdiction, that’s one of its key attractions. The challenge for us in the funds sector is to deliver a clear message in relation to our new bespoke fund products, as we have done with the BVI incorporated company and Approved Manager. That’s a key driver for 2015,” concludes Graham.