The British Virgin Islands (BVI) remains one of the most popular offshore fund jurisdictions for hedge fund managers. In terms of ‘brand identity’ a BVI-licensed fund is recognised by global investors as a well-established, reputable fund vehicle.
“The BVI fund product has been around for a long time, there are lots of BVI funds in the global market, investors are familiar with them, it’s a proven fund product and conceptually people understand how it works. Consequently, it’s not an unusual choice of fund to establish when looking to attract investors and investors are very comfortable investing into BVI funds,” says Simon Schilder, a partner at the law firm Ogier.
According to Q2 2013 figures released by the island’s financial regulator, the BVI Financial Services Commission (FSC), 21 professional funds and nine private funds were established during the quarter. There are now 1,567 professional funds and 567 private funds active in the BVI.
These represent the vast majority (90 per cent) of funds on the island. Professional funds are targeted at professional investors (minimum investment of USD100K) while private funds have a maximum of 50 investors and are offered on a private basis. Practically all funds in the hedge fund space will take the form of either one of these fund structures.
“With respect to private funds, there will be limitations on the number of investors who may invest and the way in which a fund may be marketed, which for a small manager is perhaps not an issue anyway. A manager is always able to convert into a professional fund should the fund suddenly grow and exceed 50 investors and the conversion process in these circumstances is fairly straight forward,” says Schilder.
Elise Donovan, the executive director of the BVI International Finance Centre, the marketing and promotional arm of the island’s financial sector, notes that when it comes to establishing a BVI fund the regulatory process is “very straightforward”:
“There are no detailed prospectus content requirements for such funds. Having filed an application for recognition, the licensing process will not involve a detailed regulatory review of the fund’s prospectus/offering memorandum. This therefore enables the licensing process to be concluded reasonably quickly (usually within 10 days).
“Additionally, for funds intending to be recognised as a ‘professional fund’, they are permitted to commence business for 21 days without holding a licence, which therefore enables such funds to launch as soon as they are ready (and so prior to receiving their licence from the FSC). This therefore provides investment managers with a quick time to market,” says Donovan.
Speed to market is certainly a major advantage, particularly for managers who fall under the Approved Managers regime, which the BVI introduced last year. This is effectively a ‘regulatory light’ regulatory regime for small and mid-sized BVI fund managers and is comparable to de minimis rules for European managers under the AIFM Directive.
“If you are setting up a professional fund, you can operate without being licensed for 21 days, provided that you file your licence application within 14 days of launching. If you are combining your professional fund set up with the set up of an Approved Manager, you can submit your application seven days before launch. In a market where it is still tough for managers to raise capital from investors, such that they need to be nimble and responsive, the BVI offers a number of opportunities for a manager to be just that,” says Schilder.
“The FSC are very efficient when processing applications for recognition and usually return the applications within five business days,” adds Tim Clipstone, a partner at the law firm Maples & Calder.
Another appealing feature is that the running costs of a BVI fund versus funds domiciled in other offshore jurisdictions are slightly lower. That is particularly helpful to new managers who are looking to control their cost base.
“Maintaining a fund in good standing is cheaper in the BVI than in comparable jurisdictions; from a regulatory perspective the BVI is largely comparable to other similar jurisdictions, so much so that it has express filing obligations in the event of a change to the structure of the fund, which are set out in the Mutual Fund Regulations and which provides clarity and certainty for practitioners and managers alike,” Clipstone explains.
The manager of a BVI fund is free to choose any service providers they like provided they are located in a recognised jurisdiction. Unlike the Cayman Islands, which requires the sign-off of a fund’s accounts by a local auditor, managers of BVI funds are free to use an auditor in their home jurisdiction (e.g. London) although there are international audit firms located in the BVI should a manager wish to avail themselves of someone local.
There is no requirement to have local directors or quarterly board meetings in the BVI. Having said that, corporate governance is taking on much greater importance. Increasingly, there is an investor-led push for managers to appoint independent boards of directors.
“There are a number of service providers in the BVI who provide professional directorship services, should the manager want to have a BVI-based independent director. But the manager is free to choose, there is no requirement to use local directors just because you have a BVI fund.
“Often what we see is that managers like to review a number of potential candidates and pick and choose their directors depending on where the synergies are going to be. The current best practice is for funds to have a majority of directors independent of the manager, such that a fund’s board of directors frequently comprise three directors, two of which are independent. We also sometimes see managers choosing independent directors from separate service providers, so as to assemble a board of directors which is both truely independent of one another and offering complimentary skill sets.
“The only regulatory requirement in the BVI is for the fund to have at least two directors,” explains Schilder.
Aside from the flexibility of choosing service providers, the cost-efficiency and well-established brand of the BVI fund, and the ability for new managers to offer potential investors a regulated fund without being overburdened by heavy regulation, another feature for managers to be aware of, says Donovan, is that the BVI also has a dedicated Commercial Court presided over by Justice Edward Bannister QC:
“The legislative approach adopted by the BVI Court throughout the litigation coming out of the financial crisis has generally been fairly ‘investment manager friendly’ and, unlike the courts in other jurisdictions, the BVI Commercial Court has been reluctant to put BVI funds into an orderly wind down of their positions and return money to investors on the grounds of ‘loss of sub-stratum’.
“This has the advantage of providing the investment manager with certainty that it can rely upon the liquidity control mechanics provided for within the fund’s constituent documents.”
To expand briefly on the Approved Managers regime, this applies to any manager running an open-ended fund with no more than USD400million in AUM and USD1billion of aggregate capital commitments in a closed-ended fund. The advantage to this regulatory light regime is that it avoids smaller managers having to become licensed under SIBA, whose ongoing obligations are more onerous.
Schilder explains: “For a small manager with say USD50million under management and a small investment team, the Approved Manager regime offers many attractions over the more onerous Category 3 investment business licensing regime under SIBA. For instance, the business’ need for it to audit its financial statements is questionable, as is the need for it to have a compliance officer and a compliance manual. Similarly, for such managers, the need to prepare a detailed business plan containing their protections for the next three years or the need to obtain prior written consent from the FSC to appoint a new director, for example, would be unnecessarily onerous.”
Managers will only need to become licensed under SIBA once their AUM exceeds the USD400million threshold: “If you’re trading USD370million and you have a bumper month and you shoot up to USD410million you don’t immediately become ineligible under the Approved Managers regime.
“However, if you track above USD400million for three consecutive months then you will have to convert from being an Approved Manager to the more onerous Category 3 investment business license under SIBA,” says Schilder.
Clipstone says the Approved Manager regime has the potential to be very popular, in particular if extended to managers managing funds outside the BVI, but is yet to fully take off.
“At present, while the concept has been well received for providing a regulated product which takes into account the nature of the funds being managed, the take-up has been relatively slow due to it being limited to managers managing BVI-domiciled open and closed-ended fund structures and related enterprises. As such, many potential users have been disappointed that they cannot use the Approved Manager regime to manage their existing, usually Cayman, non-BVI funds.”
The Approved Manager regime is similar to the ‘excluded person’ product offered in the Cayman Islands, which also allows managers to benefit from light regulation but there is a crucial distinction between the two jurisdictions: in the Caymans, the manager benefits from exemption and has no requirement for the fund to be licensed whereas a BVI approved manager is licensed by the regulator and has ongoing obligations, albeit on a less onerous basis than SIBA-licensed managers.
It’s basically a win-win situation. Managers avoid the full force of regulation, yet at the same time can point to the fact that they have a regulated fund product that investors can take succor from.
Suitability of BVI funds to European investors under AIFMD
One of the major considerations for managers establishing new funds, especially in offshore markets like the BVI, is their suitability in the eyes of global regulators. With respect to the AIFM Directive in Europe, the BVI has signed up to the cooperation agreement with ESMA and already has 25 Tax Information Exchange Agreements (TIEAs) in place globally.
“The BVI IFC, together with the BVI Government, are being proactive in ensuring that the BVI continues to be eligible to sit at the top table of international financial centres. Along with all of its competitor jurisdictions, a cooperation agreement was successfully concluded in July between ESMA (on behalf of each EU Member State) and the BVI.
“The existence of this co-operation agreement together with a well-established TIEA network means that BVI funds can continue to be marketed into the EU under the AIFMD in accordance with domestic private placement rules,” confirms Donovan.
“The BVI government are in the process of signing up to TIEAs with each of the EU Member States to allow BVI funds to qualify for marketing under the pan-EU marketing passport if and when the regime is extended to non-EU funds and managers,” says Clipstone, with Schilder reaffirming the point by concluding: “In due course, the next phase of the Directive will allow non-European managers (third country managers) to passport their funds across Europe in 2015 and we are fully confident that BVI funds will qualify for passporting.”