A version of this article was also published in HedgeWeek.
Segregated Portfolio Companies (SPCs) are now well recognised and widely used corporate vehicles, and the BVI is seeing increasing demand for them in the funds context. A segregated portfolio company benefits from statutory segregation of its assets and liabilities in one segregated portfolio from those of any other segregated portfolio, and from the general assets and liabilities of the company, but is a single, legal entity. The SPC has only one set of constitutional documents, one board of directors and, importantly, one set of annual licence fees.
The ability to segregate the assets and liabilities of one segregated portfolio from another makes SPCs popular for umbrella or multi-class investment funds which can operate different investment strategies and, in particular, different levels of leverage, without risking cross contamination across the segregated portfolios.
In the past, SPCs have been popular with emerging managers who may have used an SPC platform as a cost-effective way to enter the market and establish an investment fund. They would effectively “rent” a segregated portfolio of the SPC platform rather than set up a standalone legal entity. This has become less attractive since the BVI introduced specific products – the incubator fund and approved fund – tailored to the emerging manager, each of which offers a quick and cost-effective set-up and minimum ongoing regulatory requirements.
Regulation of SPCs
A company is only eligible to be an SPC if it is, or will be on incorporation, a private, professional or public fund under the Securities and Investment Business Act, 2010.
The prior approval of the BVI Financial Services Commission (FSC) is required before any company may be registered or incorporated as an SPC and this is only granted where the FSC is satisfied that the applicant has, or has available to it, the knowledge and expertise necessary for the proper management of segregated portfolios.
Each segregated portfolio must have its own offering memorandum or portfolio supplement.
An SPC is required to have an administrator, manager and custodian. The same functionaries may be appointed to all of the segregated portfolios of the SPC or, alternatively, each segregated portfolio may appoint its own functionaries. The documents appointing the functionaries must state clearly the segregated portfolios for which the appointment is being made.
An SPC is required to have an auditor, and audited financial statements must be filed with the FSC within six months of the end of its financial year.
Key features of SPCs
In addition to the statutory segregation of assets and liabilities between segregated portfolios, the key features of an SPC are:
Duty of directors
The directors of an SPC are under a duty to establish and maintain procedures to keep segregated portfolio assets separate from the general assets and assets of other segregated portfolios and, where appropriate, to apportion assets and liabilities between segregated portfolios and general assets.
Where a segregated portfolio is liable to a person, that person is entitled to recourse firstly to the segregated portfolio assets attributable to that segregated portfolio and secondly to the general assets, to the extent that the segregated portfolio assets are insufficient to satisfy the liability attributable to the SPC, but not to any other segregated portfolio of the SPC.
The Court may make an order to liquidate a specific segregated portfolio if it is satisfied that the assets attributable to that segregated portfolio are, or are likely to be, insufficient to discharge the claims of creditors in respect of that segregated portfolio without liquidating the SPC as a whole.
SPCs may issue shares in each segregated portfolio in more than one class and a class of shares may be issued in more than one series. Unlike an ordinary BVI business company, an SPC is not required to state in its memorandum of association the classes of segregated portfolio shares that the SPC is authorised to issue.
Dividends and distributions
Dividends and distributions paid in respect of segregated portfolio shares can only be made by reference to the assets and liabilities of the segregated portfolio in respect of which the shares are issued.
Contracting with an SPC
Any contract or other agreement or similar arrangement which is intended to be binding on or for the benefit of a segregated portfolio must explicitly state that it is executed by the SPC for and on behalf of such segregated portfolio. Where there is a failure to do this, the directors must, on becoming aware of it, make necessary enquiries to determine the correct segregated portfolio to which the relevant arrangement relates, make the correct attribution, and then notify all persons who are a party to, or may be adversely affected by, that arrangement of the attribution.
The financial statements of an SPC must take account of the segregated nature of the company and include an explanation of the purpose of the SPC, how the segregation of the assets and liabilities of the SPC impacts on the members of the SPC and persons with whom the SPC transacts, and the effect that any existing deficit in the assets of one or more segregated portfolio of the SPC has on the general assets of the SPC.
The future of SPCs
The use of SPCs in the funds and insurance industries has grown in recent years and the concept is now well understood and recognised in the international financial services industry. As a consequence, we are getting more frequent enquiries about establishing SPCs, not only for their traditional uses in the BVI as regulated funds and insurance companies, but also for a broader range of uses, for example as closed-end, unregulated funds or employee benefit schemes. The BVI Business Companies Act, 2004 provides scope for greater flexibility as to the type of vehicles that are able to adopt the SPC structure, and the FSC is looking into widening the circumstances in which SPCs can be used. We expect that the use of SPCs in the funds industry will continue to grow, and that when the BVI expands the permitted uses of the SPC, it will become even more popular.