One of the reasons as to why the BVI introduced the Incubator and Approved Fund products in May 2015 was, partly, in response to the fact that fund launch numbers in the global hedge fund industry had started to steadily decline. Rising regulatory and compliance costs were hurting start-up managers and dissuading people from coming to market.
In that sense, the BVI was quite prescient and demonstrates the forward looking approach that its regulator, the BVI Financial Services Commission (the "Commission"), takes to ensure that the jurisdiction remains as accessible as possible to start-ups and emerging managers, as well as the more established managers.
"Over recent years, practitioners, service providers and the Commission have been proactive in bringing out new BVI Fund products to attempt to reverse a gradual decline in the number of funds domiciled and launched in the BVI.
"New legislation not only targeted the funds themselves but also the manager with the introduction of the Investment Managers (Approved Manager) Regulations 2012 which allows managers to commence business within seven days of filing its application with no restrictive requirements such as the need for audited financial statements, a dedicated compliance officer, capital adequacy or need for PI Insurance," says Niall Brooks (pictured), Managing Director, Castlegate Investment Services Limited, a full service independent fund administrator in the BVI and provider of directorship services. Brooks is also a Team BVI Member of BVI Finance, which is responsible for protecting, promoting and developing the BVI's financial services industry.
"One of the key attractions of the BVI as a jurisdiction is that it is well regulated by the Commission, has quality service providers, while still offering a full suite of investment products, to cater for all types of fund structures at an affordable price."
Now that the BVI has the Approved and Incubator Funds alongside the BVI Professional and Private Fund, managers are able to accommodate a wide range of investors with varying minimum investments and varying structural and organisational requirements.
The Incubator Fund is permitted to operate for two years (with the possibility of one additional year) with no mandatory requirement to appoint functionaries i.e. administrator, custodian or manager and no requirement to have an audit.
While an Incubator Fund may not require the appointment of service providers, Brooks would recommend the appointment of at least an administrator to provide some degree of independence This high degree of flexibility is contingent upon the fund remaining within the relevant thresholds applicable to the fund at all times. These thresholds are:
- A maximum of 20 investors;
- A minimum initial investment of USD20,000 by each investor; and
- A cap of USD20 million on the value of the net assets of the fund.
The Approved Fund is aimed at friends and families who wish to establish a fund for a longer term but on the basis of a more private investor offering.
It too has relevant thresholds:
- A maximum of 20 investors at any one time; and
- A cap of USD100million on the value of the net assets of the fund.
Brooks confirms that in December and January, Castlegate has seen an uptake in the number of prospective clients looking to launch Incubator and Approved Funds as well as applications to be an Approved Manager. Enquiries are on a worldwide basis including established European jurisdictions, where managers are becoming frustrated with the length of time it takes to establish and launch professional investor funds.
"With the Approved and Incubator Fund products in place, in addition to the Approved Manager regime, the BVI probably has one of the most robust and flexible pieces of legislation in place to attract start-up managers who want to launch a fund with friends and family money and build a track record.
"Cayman doesn't have equivalent legislation; nor does it probably need or want it However that is not to say that the BVI should be overlooked when it comes to Managers wishing to launch the more established Professional or Private Funds. In my view, the BVI has the potential to become the world's leading offshore jurisdiction for start-ups and emerging managers but it's too early to say for certain at this stage. Still, it is something that people envisage here and are generally bullish about," explains Brooks.
As the global funds industry continues to adapt to new regulations and jurisdictions put steps in place to demonstrably improve transparency and governance frameworks, it is incumbent upon any fund domicile – onshore or offshore – to make itself heard. The BVI has many redeeming features but in Brooks' view, it has been too quiet for too long and needs to promote itself and its products more widely and more often.
"The biggest challenge is making people aware of the products we have here in the BVI and the level of service that its current service providers are able to offer. Administrators located in the BVI use leading industry NAV, accounting and shareholder systems while the number and size of auditing firms on the ground continues to grow," says Brooks.
Whilst the BVI might not necessarily have the same quantity of service providers compared to other jurisdictions, it is not lacking in expertise and quality.
"Where the BVI has an advantage is that the cost of servicing funds is lower, the work permit fees are very minimal compared to Cayman and other jurisdictions and the cost of living is very reasonable which means that cost savings can be passed on in the form of lower more, competitive fee quotations.
"There are more events and seminars taking place to promote the BVI, which BVI Finance is pushing, so that's encouraging," adds Brooks.
From a governance perspective, the BVI's reputation is highly regarded. The Global Forum on Transparency and Exchange of Information for Tax Purposes, a Paris-based body of the Organisation for Economic Cooperation and Development, announced in August 2016 that the BVI's regulatory framework was "largely compliant" with the organisation's rules.
This gives both managers and investors confidence in the BVI as a place to do business and that its financial services industry is committed to achieving the highest standards possible.
Speaking about fund governance, Brooks remarks: "While the BVI does not have the same quantity of independent non executive directors, compared say to Cayman, there is a network of high quality directors here in the BVI that not only service BVI funds but also Cayman funds and managers. Some managers specifically want directors not resident in Cayman, largely due to concerns over the number of positions held.
There will be more governance work if and when the BVI receives a third country passport from ESMA under AIFMD. BVI can't afford not to have access to the European market. We have an office in Malta and we are fully aware of the governance demands under AIFMD."
How well BVI Finance is able to get the story out to promote the BVI and the extent to which there is continued uptake for the Incubator and Approved Fund, will be two key drivers for the BVI over the next couple of years, in Brooks' opinion.
"The BVI offers a clearly defined route for someone wishing to start up a hedge fund business. They can begin with an Incubator Fund, build a track record and then move into an Approved Fund if they exceed USD20 million. Then, if they have further success and attract more than 20 investors and/or USD100 million in AUM, they can simply convert the Approved Fund into a BVI Professional Fund.
"This provides a series of stepping stones for the manager without having to dramatically change the structure or organisation," concludes Brooks.
