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Interest in BVI segregated portfolio companies rises

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There appears to have been a real pick-up in interest in BVI segregated portfolio company (SPC) formations over the last 12 months. Many recent conversations with start-up managers seem to be about forming such structures according to Marie-Claire Fudge (pictured), head of Mourant Ozannes’ BVI funds practice. 

A BVI SPC is a single legal entity containing a number of segregated portfolios. Under BVI law, only insurance companies or investment funds may be incorporated or registered as SPCs. An SPC may only be incorporated with the prior written consent of the BVI Financial Services Commission (the FSC) and must contain the word “SPC” or “Segregated Portfolio Company” in its name.

“Towards the end of 2014, we saw an increased interest in SPC fund formations from managers – in particular, start-up managers. We are also seeing existing SPCs restructuring and launching new portfolios,” confirms Fudge. A total of eight SPCs were incorporated during Q2 and Q3 2014, according to the BVI FSC’s latest statistical bulletin. In total, there are 163 such structures. One of the main attractions for managers is that the assets and liabilities of each segregated portfolio are legally separate from those of other segregated portfolios in the structure. 
“Typically, a manager would use an SPC in a multi-class or multi-strategy fund scenario where the use of segregated portfolios is being applied to separate the gains and losses as between different investment objectives and risks. An SPC which is correctly structured and managed can offer cost efficiencies compared to an umbrella fund structure with multiple subsidiaries or to running separate funds for each investment strategy” explains Fudge.

Due to the legal segregation between the assets and liabilities of each portfolio in an SPC structure, BVI legislation requires the directors of an SPC to establish and maintain certain procedures including:

• the segregation and maintenance of segregation of segregated portfolio assets, which should be kept separate and separately identifiable from both the assets of other segregated portfolios and the general assets of the SPC; and

• where relevant, to apportion or transfer assets and liabilities between segregated portfolios or the SPCs general assets. 
“The directors are under a duty to both establish and maintain procedures relating to the segregation of portfolio assets,” says Fudge. “However, directors may allow segregated portfolio assets to be collectively invested or managed, so long as each portfolio’s assets remain separately identifiable.” 
When the directors of an SPC enter into a contract with a third party, such as a fund functionary, then the segregated portfolio to which the contract relates should be identified in that contract and the contract entered into by the SPC for and on behalf of such portfolio. If assets or contracts have been incorrectly attributed between segregated portfolios, then there is a statutory procedure for the directors to follow in order to make the correct attribution. 
The BCA also provides that segregated portfolio assets shall only be available and used to meet liabilities of the creditors of that particular segregated portfolio. The SPCs general assets can also be used to meet a portfolio’s liabilities, if its own assets are not sufficient.

“This offers statutory protection to investors of one segregated portfolio in relation to losses or cross class liabilities in other segregated portfolios” confirms Fudge. “However, there is little case law on SPCs and therefore, limited guidance on how an SPC structure would be treated in a jurisdiction which does not have laws on SPCs. This highlights just how important it is to correctly structure and manage an SPC.” 

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