This article highlights the BVI’s versatile range of fund products available for every type of manager.
As soon as an investment manager considers the establishment of an offshore fund vehicle, the British Virgin Islands will be part of their thought process. It has been an attractive and popular jurisdiction for hedge funds for over 30 years, and with the recent updates to the legislative framework on 1 January 2020, there are even more reasons to use a BVI vehicle as a springboard for offshore fund raising.
The BVI continues to be a significant player in the offshore hedge fund space, with approximately 1,500 hedge funds recognised by the BVI Financial Services Commission (FSC). The BVI also offers a very popular and cost-effective regulated fund management product in the form of the ‘approved manager’. The number of approved managers has steadily grown since its introduction in 2012, with 270 currently approved by the FSC.
The BVI benefits from a diverse offering of open-ended fund products suited to everyone – from the start-up manager setting up an incubator fund, through to established institutional fund managers with billions under management. Operators can choose whether to use the internationally recognised BVI business company or, indeed, the recently updated limited partnership structure, which meets all of the requirements that investors might need.
There is also the option to use a segregated portfolio company, where a manager decides that they want to take advantage of the innovative statutory segregation and ring-fencing of liabilities.
Let’s take a look at the characteristics of the five fund products available in the BVI.
The incubator fund is a cost-effective vehicle aimed at emerging managers. It allows them a two-year incubation period (with an extension of up to 12 months) to establish a track record and test the strategy’s viability. During that period, the fund can operate with light regulation and without carrying out an audit.
An incubator fund has sensible limitations to it, which include a cap of 20 ‘sophisticated private investors’ and the net assets of the fund must not at any time exceed US$20 million. But if either of these limits are met, the regulations provide a sensible timeframe to upgrade the fund’s regulatory status to one of the other types of funds set out below, without losing the established track record.
The approved fund is aimed at managers looking to establish a fund with a private offering to a small group of investors on a longer-term and economical basis.
This type of fund must appoint a administrator from the outset, but otherwise has a variety of options to determine which service providers it requires.
It operates in a similar manner to the incubator fund, including the benefit of the fast-track approval process and also with a cap of 20 investors. But it has an increased AuM threshold of US$100 million, which provides a great deal more flexibility to maintain this fund type.
Private funds do not have a minimum subscription threshold or impose any ‘professional’ or ‘sophistication’ tests for investors. Instead, it focuses on the logical restriction of ensuring that either it has no more than 50 investors at any one time or that the fund interests are purely marketed on a private basis. This has made them popular for friends and family offerings in particular.
Professional funds are the most popular category of regulated fund in the BVI and make up approximately 70 per cent of all regulated funds in the jurisdiction. There is no restriction on AuM or on the number of investors that can be brought into the fund.
However, the interests in a professional fund may only be issued to ‘professional investors’, and the minimum initial investment by each professional investor must not be less than US$100,000 (or other currency equivalent), unless the investor is ‘exempted’, in which case there is no minimum initial investment.
A ‘professional investor’ is a person whose ordinary business involves, whether for that person’s own account or the account of others, the acquisition or disposal of property of the same kind as the property, or a substantial part of the property, of the fund or who, whether individually or jointly with their spouse, has a net worth in excess of US$1 million (or other currency equivalent), which can include the residential home.
In order to allow a professional fund to launch quickly, it may carry on its business, or manage and administer its affairs, for a period of up to 21 days without being recognised by the FSC, which is useful when there is a time-constrained opportunity that must be met.
A public fund is generally viewed as a retail product; therefore, logically, the regulatory burden placed on it is considerably higher than that of a private or professional fund. However, it is not subject to any BVI restrictions on the categories or number of investors it may invite to invest in the fund.
Registered public funds may not make an invitation to the public or any section of the public to purchase shares unless prior to such invitation they publish a prospectus that complies with the Public Funds Code, which is approved by and signed on behalf of the fund’s directors and which is registered by the FSC.
A public fund will require a full suite of service providers, but as with every other category of fund, there is versatility to appoint service providers that are located in a jurisdiction that best suits the manager and the fund’s investors, rather than requiring any of them to be based in the BVI.
2020 legislative updates
The recent updates to the BVI investment funds legislation look to ensure that the BVI is well placed to keep up with internationally recognised parameters and best practice that should be in place around hedge funds, but also retain the jurisdiction’s agility and cost-effectiveness. They primarily deal with the introduction of provisions relating to:
- defining and identifying the property and assets of the fund
- the obligation to maintain a clear and comprehensive policy for the valuation of fund property with procedures that are sufficient to ensure that the valuation policy is effectively implemented
- the logical requirement that the fund’s administrator values fund property in accordance with the valuation policy
- ensuring that the valuation policy and procedures of the fund should:
- be appropriate for the nature, size, complexity, structure and diversity of the fund and fund property
- be consistent with the provisions concerning valuation contained in its constitutional documents and offering document
- require valuations to be undertaken at least on an annual basis
- include procedures for preparing reports on the valuation of fund property
- specify the mechanisms in place for disseminating valuation information and reports to investors
- ensuring that the fund’s manager is independent from the fund’s administrator, or where this is not possible, ensuring that any conflicts are managed, disclosed and monitored appropriately for the protection of the investors
- ensuring that sensible and appropriate arrangements are in place for the safekeeping (and segregation where necessary) of the fund property.
There are also updates to the audit standards that are required for the financial statements of a fund, which expand the list of international standards accepted by the FSC and, again, allows the manager to select an auditor in a geographical region that best suits the fund.
We are confident that investment managers will find the updates are handled by the FSC with its usual level of professionalism and understanding of the pressures that are faced by managers in the exceptionally hard fund-raising environment. Indeed, they have already issued guidelines that demonstrate a distinct acceptance that there cannot be a one-size-fits-all approach to fund vehicles, and that they will accept sensible applications on behalf of offshore vehicles where they need some flexibility around these parameters.
There is no doubt that the private sector in the BVI is excited about the year ahead. They look forward to welcoming the ever-increasing number of new managers to these shores.
This article was originally published by HFM Global.