Singapore passed the Variable Capital Companies Act 2018 into law on 31 October 2018. This introduces a new type of Singapore fund vehicle, the Variable Capital Company (VCC), which will now serve as an alternative to other types of vehicles such as companies, partnerships and unit trusts. On the face of it, the VCC appears to be an attractive vehicle for Singapore fund managers, as it offers several of the advantages of a partnership (in terms of flexibility, privacy, relaxed capital repatriation restrictions and less stringent corporate governance requirements), while at the same time retaining certain features of a company – specifically, the VCC would be treated as a company for Singapore tax purposes, and hence could be attractive for Singapore fund managers that wish to benefit from Singapore’s extensive tax treaty network.

Key Features of the VCC

Certain key features of the VCC are set out below:

  • Flexibility. A VCC can be used for both open-ended and closed-ended funds. VCCs can also freely redeem shares and pay dividends. This creates greater flexibility for the distribution and return of capital, as opposed to companies that are subject to restrictive capital maintenance requirements.
  • Sub-funds. One of the VCC’s most appealing features is that it can be set up as a stand-alone entity or an umbrella entity comprising a number of sub-funds. These sub-funds will have separate assets and liabilities, but are without distinct legal personality.
  • Manager. A VCC needs to be managed by a manager that must be regulated or licensed by the Monetary Authority of Singapore (MAS) or otherwise fall within certain exemptions from such regulation or license. This means that the VCC is targeted to fund managers that have a genuine business reason to be in Singapore – foreign fund managers with no substance in Singapore would likely be unable to establish a VCC.
  • Establishment and governance requirements. A VCC must fulfil certain director requirements (e.g., it must have at least one Singapore resident director, as well as one director who is either a director, or otherwise a qualified representative, of the VCC’s manager). However, these requirements should not be difficult for Singapore-based fund managers to fulfil. A VCC generally is not required to hold annual general meetings, provided adequate notice is given to its members that no such meeting is intended to be held. An annual general meeting will only be required where it is requested by 10% of shareholders.
  • Privacy. A VCC’s shareholder register and financial statements are not publicly available.
  • Tax. A VCC is treated as a company for tax purposes and should be able to access Singapore’s treaty network. The VCC can also qualify for a number of existing income tax fund exemptions currently available to other fund vehicles.

Commentary

Singapore has developed a variety of initiatives over the years to boost the fund management industry in Singapore, including the recent initiative by the MAS to allocate up to $5 billion for management with private equity and infrastructure fund managers that are looking to either establish a significant presence, or expand their existing operations, in Singapore. The success of these initiatives has been varied – the long-standing income tax exemptions for funds managed out of Singapore and the recent venture capital fund manager regime1 can be regarded as successes, while the promotion of the Singapore limited partnership as a fund vehicle for closed-ended funds has generally failed to displace the use of Cayman limited partnerships, even for closed-ended funds managed by Singapore fund managers. Although there is nothing inherently wrong with Singapore limited partnerships, they do not offer material advantages over Cayman limited partnerships with which global investors are more familiar. It will be interesting to see whether Singapore fund managers will start moving away from the use of Cayman limited partnerships to the new VCC vehicle, particularly in the closed-ended fund context, given that institutional investors will need to get comfortable with an entirely new type of vehicle (and indeed, in a jurisdiction that is not yet regarded as one of the major fund domiciles).

For fund managers that are setting up operations in Asia, our sense is that the flexibility and business-friendliness offered by the VCC could be an important consideration in determining where they should base their Asia operations. However, this is likely to be strictly limited to Asia-specific considerations, whether related to raising money from Asian investors and/or structures for investments into Asia. In particular, it seems unlikely that the VCC would present a broader challenge to vehicles in better-established fund domiciles, such as Luxembourg and Ireland, as their attractiveness is often motivated by factors that Singapore may not offer (such as AIFMD or UCITS passporting rights).

The ability to establish sub-funds would be an attractive feature for hedge funds and other open-ended funds. Further, private equity fund managers (including global managers that already have a licensed manager in Singapore) could also potentially take advantage of this feature. For example, private equity fund managers could establish the VCC as an umbrella investment holding vehicle, using the underlying sub-funds as a means to segregate investments and/or to hold deal-specific co-investments. In this regard, one issue (which is common to structures in Cayman and elsewhere that permit assets and liabilities to be segregated on a sub-fund by sub-fund basis) that could materially impact the uptake of the VCC among fund managers is whether other jurisdictions will recognise the limited liability of each sub-fund. There may also be questions as to whether other jurisdictions will treat the VCC as a company for the purpose of any double tax treaties.

The VCC seems, on its face, a well thought-out initiative and will certainly have its attractions. As to whether the VCC will become a vehicle of choice to rival better-established fund domiciles, it is perhaps too early to gauge.