On January 15, 2020, the Monetary Authority of Singapore (MAS) and the Accounting and Corporate Regulatory Authority (ACRA) launched the Variable Capital Company (VCC) framework, a new corporate structure specifically designed for investment funds, strengthening the foundations for its continued prominence as a global financial services and fund domiciliation hub. We are now over a year on from its introduction and it is time to take stock of its initial impact. In this piece, we examine the early adoption of the structure and consider the areas of focus to build on its early successes.

Background to the VCC
The VCC is a new corporate entity structure that is purpose built for investment funds. It also offers the flexibility of compartmentalisation via umbrella structure, just like a Protected Cell Company or a Segregated Portfolio Company. Umbrella funds can house different strategies/investors in different compartments called sub-funds, with each of the underlying sub-funds ring-fenced from one another providing legal segregation of assets and liabilities. As it’s a corporate fund structure with no regulatory definition of investment strategies that can be housed in it, VCC can be used across alternative fund strategies (both open-ended and close-ended). This new corporate entity structure gives funds an alternative to existing fund structures available in Singapore, such as limited partnerships, unit trusts and private limited companies, as well as plugging some of the gaps and constraints of using these structures.

Along with this, the VCC offers the flexibility of incorporating via re-domiciliation. Re-domiciliation is a feature of incorporation that allows a corporate entity in other compatible jurisdictions to be brought over to home jurisdictions and retain its characteristics from day-one, thereby retaining the track record.

The attraction of VCC for fund managers
For Singapore-based managers, the VCC provides them with an additional option for structuring their funds. In the past, managers here have mainly used offshore structures, and now they have a flexible and versatile framework in the same jurisdiction.

Service providers in Singapore will play a crucial role in supporting funds looking to adopt the VCC structure

Primarily, the VCC benefits those fund managers with a broad Asian investor base or those who invest in Asia, as they can take advantage of access to Singapore’s 90+ tax treaties.

The structure offers significant flexibility as it can be used to incorporate new funds or re-domicile existing comparable and compatible overseas investment funds. It can also be used for both closed-ended and open-ended funds, unlike some structures offered in other jurisdictions. We see that this flexibility is proving to be one of the key attractions behind the popularity of the VCC and has been central to its early success.

Early successes
The VCC structure proved to be immediately popular: the VCC went live on 15 January 2020 and 20 VCCs were launched on the same day. Data shows that total of over 50 VCCs were incorporated in the first four months, and over 300 VCCs by June 2021. This compares favourably with the initial rate of take-up of similar structures in other geographies such as Europe, especially when taking into account the added complications of Covid.

We have seen many of the early adopters of the last year hold similar characteristics: early stage wealth managers, smaller investment groups and debut funds. In part, this is due to the generous financial incentive which plays a powerful role in the decision-making process for these players: as part of the launch of the VCC, the MAS introduced the VCC Grant Scheme (VCCGS) to encourage adoption and conversions to VCC. This grant covers 70% of eligible expenses (capped at $150,000 per VCC, and up to three VCCs per fund manager) for work done in Singapore in relation to the incorporation/re-domiciliation of the VCC. This includes legal fees, tax advisor fees, regulatory advisory fees towards set up, and consulting fees.

Into late 2020 and certainly in 2021, we have seen the adoption extend to mid and larger asset managers and global players taking up the VCC.

In addition, the speed and simplicity of incorporation is a unique benefit of the VCC which has contributed to this initial success. It takes 14 days (for the most straightforward structure) to 60 days to get approval with the ACRA. The process is accelerated, because, unlike Hong Kong, there is no pre-approval process for at least alternative funds by the regulator. As such, many of the early adopters are those for which speed to market is a key priority.

Areas of future focus
Undeniably, Singapore has seen initial success with the launch of the VCC, with the market welcoming the new structure and we expect it to gain further momentum as the market becomes more familiar and comfortable with the regime. We see international funds looking to re-domicile under the VCC to be a key source of future growth.

To build on the initial success of the VCC in the years ahead, the market and regulator will continue their focus and collaboration to attract a diverse range of asset and wealth management niche sectors, to accommodate complex investment strategies and investor pooling concepts. With the VCC framework in place for over a year and half, enhancements are being proposed based on feedback and experiences from the industry that are being reviewed by the regulator. Included in these proposals are an extension of VCC’s utility ranges from family offices to real estate funds.

The structure offers significant flexibility as it can be used to incorporate new funds or re-domicile existing comparable and compatible overseas investment funds

At the end of April 2021, MAS also established the Singapore Funds Industry Group, a new public–private sector partnership to strengthen Singapore’s value proposition as a global full-service asset management and fund domiciliation hub. One of the points of focus under SFIG would be working on enhancing and further developing the VCC framework.

Service providers in Singapore will play a crucial role in supporting funds looking to adopt the VCC structure – ensuring managers have access to the right advice, expertise and operational excellence. For example, experienced service providers are required to navigate the structure, help funds come to market swiftly and efficiently, as well as adhering to and understanding the requirements for the umbrella VCC with respect to corporate secretarial, fund administration, custody, directorship, and audit to name a few.

Outlook for the VCC
Singapore has always been an attractive financial hub, with a stable political climate and a proactive regulator which sets a legislative environment to encourage innovation, foster continued growth and provide certainty of its application.

As global investors become more familiar with the VCC, it will emerge as a very strong contender to attract capital flows and further support Singapore’s growing aspirations as a global financial jurisdiction.