British Virgin Islands

The Global Reach of the BVI as an Investment Funds Jurisdiction


By Philip Graham, Chairman of the BVI Funds Association, and Gary Hales, Head of Business Development for BVI Finance (18/09/2017)

The BVI is recognised globally as a leading funds jurisdiction. It has built up this reputation over the course of many successful decades, based upon the essential building blocks of being tax neutral, politically stable and economically secure.

Approximately one quarter of all offshore hedge funds established worldwide have been, or are, domiciled in the BVI, making it the second largest jurisdiction for regulated investment funds. This impressive record can be attributed to its highly regarded legal system based on well-established and recognised English common law principles, its sophisticated yet user-friendly legislation and full compliance with all internationally recognised tax reporting and anti-money laundering standards.

The BVI offers five regulated funds products (as discussed further below), which make the BVI a suitable home for everyone, from the start-up manager setting up an incubator fund, to an established institutional fund manager with billions under management who may require more of a retail-style platform. In addition, largely as a result of the jurisdiction’s world-class legislation, the BVI is increasingly the domicile of choice for closed-ended vehicles (i.e. those in the real-estate, private-equity and venture-capital spaces). Because of the flexibility and sophistication of BVI legislation, the BVI is also becoming the home for more niche areas such as crypto-currency funds, hybrid funds and crowd funding platforms.

The incubator fund: Aimed squarely at emerging managers, this category of regulated fund benefits from a fast-track launch process, low establishment costs and light-touch, intelligent regulatory obligations. It allows managers a two-year incubation or ‘validity’ period (with an extension of up to 12 months available) to establish a track record and test an investment strategy. It is restricted to having a maximum of 20 investors, each investing no less than US$20,000, and a cap on assets under management of US$20,000,000, thereby being ideal for friends and family investors. It is proving very popular internationally for managers currently operating in the managed account space and wanting to move to the next step of consolidating their investors and developing a track record.

The approved fund: This fund benefits from similar advantages to the incubator fund and is seemingly becoming the most suitable choice for smaller managers and family offices. The primary difference is that this fund does not have a validity period and therefore can be operated without a time restriction so long as the assets under management remain under US$100,000,000 and the fund has no more than 20 investors. The other main difference is that this type of fund requires an administrator, who can be based anywhere in the world. This has generated a significant level of interest amongst the administration community who have seen the opportunity to effectively use this low-cost, flexible fund as a way of bringing smaller clients onto their platform.

The private fund: This long-standing category of regulated fund must either have no more than 50 investors or only make invitations to subscribe for, or purchase fund interests on a private basis. Aside from those restrictions, this fund type has no minimum investment amount per investor and no limitation on the total assets under management. This has traditionally made them very popular as master fund vehicles, as the most cost-effective way to establish this type of offshore vehicle as compared with other jurisdictions, and also with managers looking to cater for and maintain a friends and family offering.

The professional fund: This is the BVI’s most popular category of regulated fund and will be very familiar to the readers as it has been around for over 20 years. There is no restriction on assets under management, nor number of investors; it is simply limited by the type of investor that may subscribe (‘professional investors’) and that the minimum initial investment into a professional fund by each investor must not be less than US$100,000 (or the equivalent in another currency).

The public fund: This is a retail-style product aimed at managers wishing to solicit a large number of investors with no restriction on either the categories of investors it may invite to invest in the fund, or the minimum investment per investor. Due to this inherent flexibility, it comes with a higher level of regulatory protection but still enjoys a good level of popularity compared to other similar types of vehicles in other jurisdictions, largely because of the cost and speed to market.

While the majority of investment funds launched in the BVI are established as corporate entities, two other vehicles are proving increasingly popular: the limited partnership and the segregated portfolio company (A single company limited by shares but offering statutory segregation of assets and liabilities between separate ‘portfolios’ – the SPC).

The limited partnership: The BVI will very soon be enacting an entirely re-written Partnership Act, ushering in the most innovative and sophisticated limited partnership legislation globally, which recognises the best aspects from other equivalent and very successful statutory acts (from Delaware to New Zealand). The re-written Partnership Act will not only add to the popularity of the limited partnership as a vehicle for hedge funds, but also private equity funds.  

The SPC: Growth in recent years has been centred on the use of approved fund SPCs, which are proving particularly useful for managers operating managed accounts who would like to use a corporate structure for their accounts. Each managed account can be placed into a separate ‘portfolio’ thereby precluding any risk of cross-contamination between different accounts. They have also found niches for family offices acting for multiple individuals or groups of individuals who require different investment strategies, each of which can be operated through a separate ‘portfolio’ and as platforms for start-up funds. Whilst SPCs can currently only be approved, private, professional or public funds, as a result of huge market demand, the BVI will very soon be enacting legislation to extend the use of SPCs for unregulated, closed-ended structures, which will expand their potential use immeasurably.

In addition to its fund products, the BVI has a sophisticated regulatory regime for licensing funds service providers, such as investment managers, advisers, administrators and custodians. Reflecting the BVI regulator’s responsiveness to market demands and its desire to provide innovative solutions, the BVI introduced its ‘Approved Manager Regime’.

The Approved Manager Regime is aimed at non-institutional investment managers and advisers and has been extremely successful in enabling the smaller emerging manager to enter the investment funds market, while still being in line with international regulatory standards. The ongoing obligations of the approved manager are more limited than those of a fully licensed investment manager and the approval process is fast and efficient. The approved manager is subject to caps of (i) aggregate assets under management of US$400milion for open ended funds and (ii) aggregate capital commitments of US$1 billion for closed ended funds. The approved manager is extremely popular and means that the BVI can offer a full package for emerging managers. In addition, this product is attracting managers of Cayman funds given that it out-performs the Cayman equivalent, (the Cayman Islands Securities and Investment Business Law Exempted Manager) both on cost, and because it offers the stamp of a regulated product, which the Cayman alternative does not.

 

The changes to legislation, in combination with the already broad existing product offering, will certainly add to the BVI’s enduring appeal as a jurisdiction of choice for the establishment of investment funds.