British Virgin Islands (BVI)

British Virgin Islands SPECIAL REPORT 2019

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INNOVATION ACCOMMODATION CONSOLIDATION BVI embraces digitalisation and BVI is ideal home for start-up Approved manager regime proves crypto funds hedge funds its worth

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INSIDE THIS ISSUE…

04 FOREWORD By Elise Donovan, BVI Finance

06 BVI TO EMBRACE DIGITALISATION TO FURTHER INNOVATE FUNDS INDUSTRY By James Williams

12 THE IMPORTANCE OF A TRIED AND TESTED JURISDICTION By Simon Gray, BVI Finance 14 BVI LPs ENJOY STRONG YEAR‑ON‑YEAR GROWTH 12 Interview with Eric Flaye, Conyers

16 THE BVI APPROVED MANAGER – A TAILORED SOLUTION FOR START-UP MANAGERS By Paul Waldron, Harneys BVI

19 THE RISE OF CRYPTO HEDGE FUNDS IN THE BVI By Simon Gray, BVI Finance

20 OPPORTUNITIES FOR PRIVATE CLIENTS IN THE BVI By Ian Montgomery, Collas Crill (BVI)

22 BVI FUNDS – A SMART BET IN UNCERTAIN TIMES By Christopher Simpson & Kerry Anderson, O’Neal Webster

25 BVI: THE NEW HOME OF THE START-UP HEDGE FUND MANAGER 22 By Simon Gray, BVI Finance

26 TECHNOLOGY INNOVATION IS RE-SHAPING THE MARKET Interview with Jacques Roux, KPMG

28 INSIDE THE APPROVED MANAGER REGIME Interview with Walter Reich, Tovel Investments Ltd & David Payne, AMS Financial Group

30 BVI SPACS By Michael Killourhy, Ogier (BVI)

32 DIRECTORY

Published by: Global Fund Media Ltd, 8 St James’s Square, London SW1Y 4JU, UK 30 www.globalfundmedia.com ©Copyright 2019 Global Fund Media Ltd. All rights reserved. No part of this publication may be repro- duced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. Investment Warning: The information provided in this publication should not form the sole basis of any investment decision. No investment decision should be made in relation to any of the information provided other than on the advice of a professional financial advisor. Past performance is no guarantee of future results. The value and income derived from investments can go down as well as up.

BVI REPORT | Nov 2019 www.hedgeweek.com | 3 FOREWORD Foreword

ith close to 1,500 registered funds, the British Virgin Islands (BVI) is a leading offshore domicile with hedge fund manag- W ers from all over the world choosing the jurisdiction to set up and manage their businesses. The popularity of BVI funds is testament to both the ease and cost-effectiveness of establishing business in the jurisdiction, as well as the quality and sophistication of the BVI’s legislative, regulatory and judicial framework. This is reflected in the confidence hedge fund managers have in the jurisdiction as a result of our longstanding reputation as a respected globally integrated international business and finance centre. Our business and finance centre mediates over USD1.5 trillion of investment globally, equivalent to two per cent of global GDP, reflecting cross-border investment in the widest variety of physical, corporate and financial assets. What’s more, our reputation has helped cultivate a cadre of world- class specialist providers forming part of an international network with offices around the world. Other fund managers are drawn to our political stability and legal system rooted in English common law, protecting assets from potential loss, damage or sequestration as a result of socio-political instability. Over the years we have successfully developed a range of adaptable company and business laws for the varying needs of hedge fund managers with complex structures and asset classes. This statutory infrastructure is respected by international regulators and standard set- ters across the globe. We also have the ability to settle disputes at the highest levels of a company via our well-regarded commercial court and International Arbitration Centre, which maintains a roster of over 190 highly regarded international arbitration and dispute resolution practitioners. The future of the hedge fund sector is bright. The continued growth of equity investment coupled with light speed developments in quantitative hedge fund technologies over the last year alone mean more investors are seeking returns from forward-thinking managers with a track record of success – and the BVI is well positioned to support with this. The BVI is committed to continuing to work closely with hedge fund managers to create and maintain a positive regulatory and administrative environment in which they can innovate, evolve and grow and we look forward to seeing where the next 12 months take us. Elise Donovan CEO, BVI Finance Elise Donovan Elise Donovan is the chief executive officer of Chief Executive Officer, BVI Finance BVI Finance and brings to the role wide-ranging work experience in Asia, North America, the Caribbean and Africa. Elise has played a major role in expanding and deepening the BVI’s financial services footprint in cities around world, specifically in the Asia Pacific region, through strategic relationship building, conducting forums and seminars on the BVI’s financial services business, including at major financial institutions.

4 | www.hedgeweek.com BVI REPORT | Nov 2019 Celebrating 30 Years Serving the British Virgin Islands and Beyond SKILL AGILITY SUCCESS Representing all legal phases of corporate, banking, finance, regulatory, litigation, real estate, trusts, business, admiralty, and intellectual property for companies, investors, individuals, and families.

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Christopher Simpson • BVI +1 284 393 5800 +1 (284) 393-5800 [email protected] Vanessa King • Managing Partner OVERVIEW

BVI to embrace digitalisation to further innovate funds industry

By James Williams

he theme of digitalisation took centre whether large or small can have significant stage at the annual Meet the Regulator effect and impact. Sometimes size doesn’t TForum held by the BVI’s financial reg- matter, but strength always does. We need ulator, the Financial Services Commission every connection to be strong,” she was (‘FSC’) this July. During the forum, Deputy reported to say. Managing Director, Corporate Services of FSC, Offshore jurisdictions are placing great Jennifer Potter-Questelles emphasised the importance on digital transformation in importance of embracing digitalisation, stating financial services. Not only does blockchain that “digitalisation is our ticket” and that as technology have the potential to revolutionise the FSC continues to innovate, so the industry asset servicing (think smart contracts, AML/ is encouraged to do the same at all levels of KYC processes, automated reconciliation their organisations. and investor subscriptions), it could open up As BVI Finance highlights on its website, a huge array of investment opportunities as Potter-Questelles said that integrity and sus- entrepreneurs seek to finance their ideas with tainability of the industry are dependent on all security token offerings (STOs). Not to mention the collective parts and more importantly on the continued evolution of crypto strategies. our connections to each other. “Weak links, Christopher Simpson is Partner, Corporate

6 | www.hedgeweek.com BVI REPORT | Nov 2019 OVERVIEW

Finance at O’Neal Webster. He notes that the The BVI Government is pressing ahead with the digital assets space continues to grow “but I have seen somewhat of a levelling off – where implementation of blockchain technologies to help managers and investors now understand that better prepare for future weather emergencies.” not all digital assets are created equal and that some are extremely volatile and are unlikely to Simon Gray, BVI Finance succeed in the long term.” On the other hand, he says, others have on conversations with BVI service providers) found a niche and are gaining traction. that they were not well thought through; if at “It is still a wait and see approach generally all. This led to service providers declining a but there is no doubt that this is the future. lot of work. We have worked on a few and are currently “The last thing we want is to put all the working with clients on structure and docu- work into setting up these structures, appoint mentation for their chosen investment vehicle. independent directors, only for the approved Investing in bitcoin and other well-known cryp- manager to get shut down for non-compliance tocurrencies seems to be the leading trend,” reasons,” comments David Payne, Director, AMS remarks Simpson. Financial Group, which provides corporate, trust The BVI has really made a concerted effort and legal services to investment firms, including to embrace the digital asset revolution. independent directorship services. Recent amendments to the BVI’s anti- That’s not to say that all crypto funds are an money laundering rules now permit digital ID accident waiting to happen. As with any new verification and the receipt of electronic copies asset class, it is maturing, along with the cal- of documents, so businesses are able to use a ibre of those wishing to run robust funds with blockchain provider to double check identities. good corporate governance in place. Speaking recently to Hedgeweek, Simon “We recently sat down with two individu- Gray, Head of Business Development & als from England and had a three-hour long Marketing, BVI Finance, said: “We have already dialogue, by the end of which we did feel seen a number of businesses and individuals comfortable with their offering,” confirms using digital Know Your Customer service pro- Walter Reich, founder of Tovel Investments Ltd. viders as a result of this change, illustrating “Every question we put to them on custody, the overall improvement of due diligence via valuations, etc, was met with a considered crypto technology. response. They had put the time in to really “As an aside, it is interesting to note that give us comfort and on that occasion, we pro- the BVI Government is pressing ahead with ceeded to work with them. They came to the the implementation of blockchain technologies BVI in person, which we really appreciated. to help better prepare for future weather emer- “One of the principals has now decided to gencies. Earlier this year, the BVI Government move down to the BVI with his family and will announced a partnership with blockchain trade as an approved manager. We are looking company, LIFElabs.io, to provide a ‘Rapid forward to him bringing his knowledge to the Cash Response’ enabling people on-island BVI and working closely with him.” to purchase goods and services with digital At a wider level, the BVI’s key value prop- currencies. osition has always lay in its compelling “This is a great example of the spirit of the combination of ease, speed and cost-effec- BVI demonstrating that we are always ready to tiveness of formation, and flexibility in terms of embrace new technology if it can be shown to structuring and governance, as supported by offer us improved solutions.” a regulatory regime which is robust but appro- A couple of years ago, there were still con- priate for private fundraising globally. cerns over the quality and pedigree of crypto Traditionally, this has been especially traders, in particular, seeking to launch new appealing to small to mid-cap managers funds in the BVI (and other offshore jurisdic- although in more recent times BVI has been tions). This is understandable given it is still a proving increasingly attractive to larger and relatively nascent asset class. more established fund managers as well. When it came to interrogating corporate “Playing to these core strengths, we expect governance frameworks, it is fair to say (based BVI to continue to gain market share in the near

BVI REPORT | Nov 2019 www.hedgeweek.com | 7 OVERVIEW

The approved manager product is now a well known and trusted regulatory option, which has helped stem the flow, as we frequently see people opting again to set up both the manager entity and their funds in the BVI.” Simon Schilder, Ogier

8 | www.hedgeweek.com BVI REPORT | Nov 2019 OVERVIEW

term, especially as fund formation and mainte- to be directed and managed from the BVI or nance costs and compliance burdens continue undertake core-income generating activities to increase markedly in many other offshore in the BVI. If it is just passive holding, which jurisdictions,” suggests Eric Flaye, head of is what a feeder fund typically does, the only Conyers’ BVI funds practice in London. obligations are to comply with the statutory obligations of the BVI Business Companies Act Economic substance rules and having adequate employees and premises To continue to build market share, like all juris- could be limited to having a registered agent dictions it is incumbent upon the BVI to continue (and authorised representative) in the BVI and to update its regulatory regime to satisfy global registered office in the BVI, which is something standards such as those set out by the OECD. all BVI funds have to have anyway. The BVI is rated as “largely compliant” by the “If you are a Category 3 investment busi- OECD Global Forum and meets the standards ness licensee, and doing fund management set by the Financial Action Task Force (FATF) – activities, then you will be in scope. However, the global standard setter in this area. if you are an approved manager, as the law At the end of 2018, the BVI passed a law on currently stands, you will be out of scope,” economic substance, which came into effect explains Schilder. 1st January 2019. All offshore jurisdictions had Another regulatory development has been to do this to get the statute on economic sub- the BVI Business Companies Act amendments stance enacted. The first draft of the BVI’s (Oct 2018) in relation to segregated portfolio guidance notes came out on 22nd April and companies. Under the amendments, SPCs are these were updated and released in early now permitted for use by unregulated private October. It is now called the Rules on Economic equity and VC funds. Substance in the British Virgin Islands. Flaye explains that such structures are pop- The Act imposes economic substance ular with umbrella or multi-class funds “which requirements for British Virgin Islands com- wish to operate multiple different investment panies and limited partnerships that are not strategies and benefit from statutory segrega- tax “resident” in countries outside the BVI and tion of assets and liabilities as between the carry on “relevant activities”. various investment programmes”. “There are nine relevant activities but the busi- Schilder confirms that in terms of fund for- ness of being an investment fund is not one of mation work in 2019, “one of the things that these relevant activities,” says Simon Schilder, typifies the work we’ve done is that sizea- Partner at Ogier. “While being a fund is not a ble amounts of new business has been for relevant activity, depending on what funds are non-traditional areas of the alternative asset doing, they may become in scope through virtue space; such as private debt strategies and of their underlying investment strategy; credit hybrid strategies using a mix of liquid and illiq- strategies are one example of this, because a uid assets in closed-ended structures.” fund which makes available credit facilities and One of these hybrid strategies specifically derives income from this could be considered to sought to avail of the SPC structure. be undertaking financing and leasing business, “SPCs are used in the marketplace for a which is a relevant activity.” couple of reasons. Firstly, for the manager to In such an instance, the fund would need to pursue different investment strategies and risk have economic substance in the BVI: by being profiles and ring fence those strategies in indi- directed and managed from the BVI, having vidual cells. And secondly, where managers adequate employees and premises in the BVI are trying to design customised investment and undertaking core-income generating activ- products either for specific investors or groups ities in the BVI. of investors, where everything is housed within “Potentially feeder funds which are used one investment fund vehicle. It is a way to solely to hold shares in the master fund could avoid having to set up multiple funds,” he says. also come in to scope on the basis of undertaking holding business. However, entities BVI funds in action undertaking holding business are subject to The BVI has a variety of fund product options less onerous economic substance compli- that serve the purposes of all fund manager ance obligations, in that they are not required types and sizes. For smaller and emerging

BVI REPORT | Nov 2019 www.hedgeweek.com | 9 OVERVIEW

managers, the BVI has proven to be well in USD400 million for open-ended funds and USD1 tune with their needs by offering sensible reg- billion for closed-ended funds. Start-up manag- ulatory oversight without requiring them to set ers are typically the main ones using this regime, up BVI professional funds from day one. The which is less onerous compared to becoming a two main examples of this are the approved fully licensed BVI investment manager under the fund and incubator fund, in addition to a lighter Category 3 investment business regime. touch regulatory management structure; the “Previously, those looking to set up as an Approved Manager regime. offshore investment manager chose to use The BVI incubator fund is ideal for new Cayman to become a Cayman exempted man- managers and start-ups and the pursuit of ager. The effect of this was for a lot of people alternative investment strategies since it is to also set up a Cayman fund alongside the not required to have functionaries or an offer- manager. The reason why the FSC asked us, ing memorandum. However, such funds are and other industry practitioners, to develop required to file a description of its investment what is now the approved manager regime, strategy and give appropriate investment warn- was because the number of new investment ings to investors. managers was falling. The approved manager An incubator fund is permitted to operate for product is now a well known and trusted regu- two years (with the possibility of one additional latory option, which has helped stem the flow, year). This period allows for the establishment as we frequently see people opting again to of a track record without onerous regulatory obli- set up both the manager entity and their funds gations. Before the end of the two or three-year in the BVI,” comments Schilder. period (as applicable) or upon exceeding any of What the approved manager has over the the specified thresholds, the fund can be con- Cayman exempted manager product is that verted into an approved, private, or professional with an exempted manager one pays a fee fund or it may choose to wind up its operations. each year but does not have a license to wave The approved fund is ideal for closely con- at prospective investors. With the approved nected investors and family offices. It has no manager product, one can tell investors that minimum initial investment requirement, but it you are licensed and regulated by the FSC, is required to appoint an administrator to pro- providing an additional layer of reassurance vide proper oversight of its operations. Similar to investors. to the incubator fund, an offering memoran- Such has been the success of the approved dum is not required, but the fund must file a product suite that managers beyond the US description of its investment strategy and give and Europe, long the traditional strongholds of appropriate investment warnings to investors. hedge fund management, are showing grow- Unlike the incubator fund, the approved fund ing interest. Payne points to Asia and Latin can continue to operate as an approved fund America as key growth markets and states for an indefinite period or be converted into that “some people are setting up approved a professional or private fund or wind up its managers even though they are using man- operations at any time. aged accounts. It’s a flexible structure and I’m glad the BVI went ahead with it.” Approved manager regime maintains appeal Simpson concurs: “The approved manager Various law firms interviewed for this report all regime has been good for the jurisdiction confirmed that the vast majority of manager especially since it was broadened to allow applications this year have been to become an such managers to manage foreign funds. approved manager. It has proven to be a real “With the regime’s quick turn around time, boost to the island, and shows no sign abating. clients can maximise opportunities as they “When it was first introduced we had to arise. In general, this regime has allowed the steer clients away from what they knew in the BVI to feature in more fund structures around past, in terms of what the new offering was. the world. Now, clients straight away ask us how to set “Clients are attracted to the highly regarded up as an approved manager; it is the default international reputation of the BVI and so option clients are asking for,” says one law including a BVI fund manager in a fund firm partner. structure adds more than just a vehicle for The AUM limit to be an approved manager is management of the fund.” n

10 | www.hedgeweek.com BVI REPORT | Nov 2019 collascrill.com

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BVI // Cayman // Guernsey // Jersey // London // Singapore BVI FINANCE The importance of a tried and tested jurisdiction

By Simon Gray

hile the popularity of the British as part of the Securities and Investment Virgin Islands (BVI) as a centre Business Act 2010 (SIBA). W for hedge funds is testament to the ease and cost-effectiveness of establish- A tried and tested jurisdiction ing funds in the jurisdiction, the quality and With such a complex, ever moving environ- sophistication of its legislative, regulatory and ment in mind, hedge funds based in the BVI judicial framework is also a significant reason can be safe in the knowledge that the law of for managers choosing to set up their funds the jurisdiction is derived from a combination in the BVI. of statute and common law influenced by the Litigation against hedge funds is a rarity in laws of England and other Commonwealth the sector, but that is not to say that hedge jurisdictions. funds are immune from legal proceedings. As one of the world’s largest centres for With the rise of more onerous international the incorporation of companies, with about regulations, coupled with hedge funds being 400,000 active BVI business companies, the used by larger, more traditional retail investors courts and legal professionals in the BVI have for significant portions of their investment port- a deep knowledge of corporate litigation and folio, the potential for legal disputes is always disputes. a risk. This means that all managers and their investors can be safe in the knowledge that Reacting rapidly in a shifting legal environment high value complex disputes are fairly adjudi- By the end of 2018, the majority (55 per cent) cated upon from the Commercial Division of of hedge fund investors surveyed globally by the BVI High Court and the Eastern Caribbean Preqin claimed to be “dissatisfied” with fund Supreme Court, and from there on to the Privy manager performance after the sector col- Council in the UK if needs be. lectively lost more than 3 per cent over the While hedge fund managers do not expect course of the year. And, while markets have to have to deal with complex legal disputes rallied thus far in 2019, another market down- on a regular basis, it is a common reality of turn would only increase focus on the quality managing money. Crucially, investors want to of hedge fund strategies once again. be sure that if an issue arises they can be Issues including the independence of confident that they can rely on the strong directors, the performance of auditors and and recognised legal system of the BVI administrators, and the inadequacy of risk dis- for restitution. n closures and valuations have also come to the fore in recent months. Simon Gray At the same time, hedge funds also often Head of Business Development & Marketing have to adapt to shifting regulatory rules. Simon Gray is a senior financial services’ professional with strong international The Alternative Investment Fund Managers experience gained in the Caribbean, Middle East and Asia as well as major Directive (AIFMD) for example, which many experience in both public and in private sectors. Combining an investigative BVI-based funds choose to adhere to, now background with 25+ years of first-hand experience of international financial regulates hedge fund managers’ ability to services and product innovation and design, Simon has spent much of his working life in the private sector with senior roles including Baring Asset market to investors. Elsewhere, hedge fund Management and Barclays Wealth. He has previously worked well established managers in the BVI must also ensure they are organisations including as Director, Supervision (DFSA) within the Dubai meeting international market abuse directives International Financial Centre.

12 | www.hedgeweek.com BVI REPORT | Nov 2019 Limitation is not the norm.

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© 2019 KPMG (BVI) Limited, a British Virgin Islands company limited by shares and a member firm of the KPMG network of independent firms affiliated with International Cooperative (“KPMG International”). All rights reserved. CONYERS BVI LPs enjoy strong year‑on‑year growth

Interview with Eric Flaye

iscipline is one of the key traits of any Act we had a number of private equity clients successful fund manager – sticking who would use company structures as closed- D to the core investment strategy and end funds, rather than more conventional avoiding style drift. And in some respects, the limited partnership structures, which was less same is true of offshore jurisdictions. than ideal on many counts.” Over the years, rather than try to compete The new Limited Partnership Act was for mega-funds with the Cayman Islands, the drafted in collaboration with industry practition- BVI industry has instead focussed its efforts in ers by essentially cherry picking what were carving out a reputation as the natural home considered the best aspects of legislation in for mid-sized and emerging managers across other onshore and offshore jurisdictions. It both the hedge fund and PE/VC fund space. was also front of mind that Delaware is one of Relative market positioning is difficult to the most common onshore jurisdictions seen quantify in the unregulated PE/VC space, as by offshore law firms. As such, the legislation offshore regulators do not maintain statis- is designed such that when Conyers receives tical data for unregulated funds, but as Eric partnership fund documents from US counsel Flaye, head of Conyers’ BVI funds practice in based on Delaware law, the team can effi- London, observes: “Anecdotally, we have seen ciently turn them into equivalent documents a lot of activity and interest in private equity for an offshore BVI fund. fund formation and related transactional mat- “The new limited partnership legislation ters in the BVI during the past 18 months or represents the culmination of industry efforts so, and industry practitioners in the BVI seem to create a state of the art limited partnership quite bullish about BVI’s prospects and growth act which is highly attractive, in particular, to trajectory in the near term.” private equity and venture capital funds. For In June 2019, BVI Finance reported that the example, it includes provisions facilitating BVI enjoyed an 81 per cent increase in the capital call (subscription) financing, expressly number of new limited partnerships formed permits forfeiture of partnership interests of in Q1, citing figures from the BVI Financial defaulting limited partners (thereby address- Services Commission, the BVI’s financial ing uncertainty regarding the enforceability regulator. Overall, some 56 new limited part- of ‘penalty clauses’ at common law) and nerships were established, compared to adopts certain corporate law concepts 31 in Q1 2018. In total, the number of active such as the ability to merge, consolidate limited partnerships is fast approaching or migrate a BVI limited partnership, and 1,000 (977 in June 2019). This growth can be minority squeeze-out provisions, all of which attributed, at least in part, to the new BVI are innovative and add additional structur- Limited Partnership Act, which was enacted ing flexibility. The new legislation has proven in December 2017. incredibly popular since its enactment in “The new Act has proven immensely late 2017 and we fully expect this to popular and a great success for the continue in the months and years BVI and its funds industry in a to come,” adds Flaye. very short period of time,” says One of the many attractive Flaye. “The situation in the BVI features of BVI limited part- was quite unusual in that prior nerships, which can help to the introduction of the new managers keep a lid on

14 | www.hedgeweek.com BVI REPORT | Nov 2019 CONYERS

costs, is the ability to appoint an onshore entity as the general partner (rather than having to form or register an additional entity offshore). This is often particularly attractive in master-feeder structures. “For example, with a master-feeder structure you could have the same Delaware LLC act as the general partner of both the Delaware fund and also the BVI fund,” confirms Flaye. It is also important to note that under the new BVI Economic Substance legislation, which was enacted in late 2018, BVI limited partnerships that do not have legal personality are expressly out of scope of the legislation. In any event, under the new BVI Economic Substance legislation, collective investment significant flexibility in terms of structuring and vehicles are, generally speaking, out of scope governance. unless they conduct some other category of “Traditionally, this has been especially ‘relevant activity’ such as ‘holding business’ or appealing to small to mid-cap managers. ‘financing business’ (e.g. direct lending/credit Playing to these core strengths, we expect strategies or alternative finance strategies). BVI to continue to gain market share in the Broadly equivalent economic substance near term, especially as fund formation and regimes have also been introduced in the maintenance costs and compliance burdens Channel Islands, Cayman and Bermuda. continue to increase markedly in many other These new economic substance rules have offshore jurisdictions,” says Flaye. been the main regulatory issue occupying Looking ahead, as the BVI continues to offshore practitioners’ minds this year and evolve and adapt to changing market dynam- are the latest continuation of a trend towards ics, Flaye believes that fund subscription (or greater regulatory compliance and the costs ‘capital call’) finance may be a key potential that come with it. growth driver. Over recent years this particular A lot of these new requirements dispropor- segment of the BVI market has been under-de- tionately hit smaller fund managers, as often veloped, in part due to the BVI’s historical they don’t have the in-house capabilities to focus on emerging managers. deal with such matters. But as Flaye concludes: “The BVI legal “The point of concern is that compliance system is creditor-friendly and well-adapted for costs keep rising, globally across all major subscription financing, so there are certainly onshore and offshore funds jurisdictions, and no impediments from a legislative perspective. it puts a real squeeze on emerging managers And the new Limited Partnership Act includes who are basically investment market entrepre- various provisions which were designed to neurs. This is unwelcome, as it risks stifling optimise debt financing by BVI limited partner- innovation and market competition and limit- ships. We have observed some traction in this ing returns, and many new global compliance space in recent times and expect that momen- requirements are, quite frankly, inappropriate tum to continue as the BVI funds industry for private fundraising as opposed to retail matures and continues to capture more market offerings. That said, the BVI has always been share in the mid to large-cap space.” n and remains very attractive from this perspective, with a regulatory regime which is robust Eric Flaye but appropriate for private fundraising glob- Associate, Conyers ally,” remarks Flaye. To reaffirm this article’s opening state- Eric Flaye is an Associate in the Corporate department of Conyers in London. Eric has a broad corporate practice with particular expertise and interest in ment on discipline, in Flaye’s opinion the private investment funds, mergers and acquisitions, and joint ventures. Eric BVI’s key value proposition has always lay has represented many notable PE/VC sponsor groups and family offices, with in its compelling combination of ease, speed extensive experience in acting as lead counsel and managing all legal aspects of offshore fundraising, restructuring and other significant corporate transactions. and cost-effectiveness of formation, and

BVI REPORT | Nov 2019 www.hedgeweek.com | 15 HARNEYS

The BVI approved manager – a tailored solution for start-up managers

By Paul Waldron

he BVI approved manager product, active approved managers and we expect this first introduced in 2012, continues to number to grow steadily. Tbe a popular choice with start-up and The approved manager has a number of emerging managers all over the world. It was key attractions and advantages, as summa- introduced as an alternative to the full invest- rised below: ment management licence available under the • Cost: The FSC charges an application Securities and Investment Business Act, 2010 fee of just USD1,000, plus an annual fee (“SIBA”) in the BVI, which remains a robust of USD1,500. Due to the simplified and product ideally suited to institutional managers. streamlined application process associated However the application process and ongoing legal fees are also relatively modest. When obligations were considered to be somewhat combined with the low annual registry fees daunting for managers running a lower AUM, payable for BVI companies this makes an or without the experience and track record approved manager very cost-effective to to meet the requirements. The process also establish and maintain. took a number of months to complete and • Speed: The FSC approval process is for managers wanting to put their capital to designed to run in tandem with the fund work quickly, the BVI needed an alternative approval process. A BVI approved manager product. In response to this, the Financial can be incorporated and approved in as Services Commission (the FSC), alongside the little as 1 – 2 weeks, and can commence Investment Funds Association in the BVI devel- business 7 days after submitting a short- oped the approved manager as an investment form application to the FSC. management product tailored to the specific • Simplified application process: Applicants needs of start-up and smaller managers, with are required to submit a short application a suitably appropriate level of regulation and form to the FSC setting out the applicant’s oversight. The interest was there immediately basic details, submit a CV / resume for and as of September 2019, there were over 260 each director and senior officer, complete a

16 | www.hedgeweek.com BVI REPORT | Nov 2019 HARNEYS

‘fit and proper’ declaration for each director jurisdiction when establishing an approved and senior officer, provide basic details of manager to ensure that they are also meeting the funds it proposes to act for and details the relevant licensing requirements. of any proposed delegation of activities. Harneys is seeing strong interest in the • Flexibility: Approved managers are not approved manager product from across our wide restricted to managing only BVI domiciled network of offices, with a growing proportion of funds – they can also manage open-ended approved managers being used for non-BVI fund funds domiciled in other recognised juris- structures. This is particularly noticeable in Asia dictions, unregulated closed-ended funds where BVI companies are already widely used (domiciled in the BVI or a recognised juris- and recognised. While Asian managers certainly diction) and managed accounts within the domicile their investment funds in other offshore applicable AUM limits (see below). The list jurisdictions as well, they also tend to be familiar of BVI recognised jurisdictions covers the and comfortable with the BVI offering and the usual established onshore financial centres approved manager is a product that sits very (including China) plus the more established nicely with their needs. offshore financial centres. As the regulatory and cost burden increases • Reduced regulatory obligations: An for investment management solutions in other Approved manager has no capital ade- offshore jurisdictions, the attractions of the quacy or professional indemnity insurance approved manager have become more obvi- requirements and is not required to appoint ous. The directors of an approved manager a compliance officer or to have a compli- are not required to pay an annual fee or regis- ance manual. There is no requirement for ter with the FSC. Approved managers are not the directors to register with the FSC and required to appoint multiple anti-money laun- no requirement to prepare audited finan- dering officers or comply with onerous local cial statements. An approved manager is data protection rules. Fees payable to the FSC required to have a minimum of two direc- and the BVI registry are considerably lower tors (which need not be BVI residents) and than those payable in other offshore jurisdic- a BVI authorised representative. As regards tions. When combined with the competitive annual filings, an approved manager is only fees charged by BVI registered agents and required to submit a short annual return, a law firms, the cost advantages of the approved director’s certificate and unaudited financial manager become compelling. The FSC is also statements to the FSC. a responsive and progressive regulator and • Generous AUM limits: An Approved man- generally approves complete approved manager can manage aggregate assets of up ager applications in one week or less. to USD400 million for open-ended funds The BVI approved manager is now a well and aggregate capital commitments of up tried and tested investment management solu- to USD1 billion for closed-ended funds. The tion. As knowledge of the product grows and BVI takes the very justifiable approach that the regulatory and cost burden increases in larger managers require a greater level of other offshore jurisdictions we anticipate that oversight due to the higher risks that are more and more start-up and smaller managers involved and must have a full SIBA invest- will look to use a BVI approved manager. When ment management licence accordingly. combined with other innovative BVI fund prod- As can be seen, the FSC has carefully con- ucts such as the incubator and approved funds, sidered the requirements of start-up and the BVI should absolutely be the go-to jurisdic- emerging managers, whilst balancing the tion for start-up and emerging managers. n requirement for appropriate and prudent regulation. An approved manager is an attractive Paul Waldron product for principals wherever they might Counsel, Harneys be located in the world and regardless of the domicile(s) of their fund vehicles or managed Paul Waldron is a member of Harneys’ Investment Funds and Regulatory teams, practising the laws of the British Virgin Islands and the Cayman Islands. He account platform. As with any other offshore advises on all aspects of offshore investment funds, including pre-formation investment management product, Harneys strategy, regulatory compliance, operation and restructuring. Paul has over a will always recommend that managers also decade of experience working in connection with all types of fund vehicles, take local regulatory advice in their home including private equity and hedge funds, limited partnerships and start-ups.

BVI REPORT | Nov 2019 www.hedgeweek.com | 17 ogier.com

Inn vative

We understand funds. Ogier’s specialists have been at the forefront of fund set-up, structuring and finance since the inception of the industry with many actively involved in drafting the key laws that underpin fund structures across our international jurisdictions. We act for investment fund managers, banks, financial institutions, funds, investors and promoters, working with blue chip clients with established track records and the most innovative and entrepreneurial new sponsors entering the market. We pride ourselves on providing responsive and practical advice, while our hands-on, partner-led teams ensure a consistent approach.

Legal Services British Virgin Islands Cayman Islands Guernsey Hong Kong Jersey London Luxembourg Shanghai Tokyo BVI FINANCE The rise of crypto hedge funds in the BVI

By Simon Gray

he crypto hedge fund is a new phe- Hedge fund managers are often attracted nomenon, created by entrepreneurial to this structure as offshore funds are typically Tinvestment managers looking to take subject to significant administration and high advantage of the huge gains that cryptocurren- levels of supervision, whereas the BVI incuba- cies have experienced over the last three years. tor fund minimises initial requirements so as At present, the sector is still in its fledgling to enable start-up crypto managers to come to phase. A 2019 report by PwC estimated that market faster and more seamlessly. there are fewer than 200 active crypto hedge funds collectively being managed today, with Taking advantage of the crypto bounce only USD1 billion in total assets under man- While many hedge fund managers enjoyed the agement (AUM). 2017 highs of crypto assets, the last 18 months It seems more a sector for plucky manag- have been more challenging with Bitcoin down ers who see the potential in the asset class for 72 per cent alone. now – the average crypto hedge fund team is That said, things are looking up once again seven to eight people, managing just USD21.9 thanks, in part, to the mainstream acceptance million in AUM according to PwC. of crypto assets and the spectre of Facebook That said, the cumulative average invest- having launched its own crypto currency, ment management experience for crypto Libra. Since January 2019 the asset class has funds is 24 years, indicating that an increasing bounced, with Bitcoin up more than 160 per number of experienced investment profession- cent over the last nine months. als are moving into the space. To take advantage of this bounce, hedge The BVI is home to one in six of these fund managers will be seeking jurisdictions crypto hedge funds – in fact it is a top three that do not over-regulate but rather support jurisdiction for such funds, according to PwC. and encourage the asset class – and the BVI So why are start-up investment teams choosing is doing just that. to domicile their new funds in the BVI and what The BVI Government and the Financial do we foresee for the future of the asset class? Services Commission (FSC) has adopted a ‘wait and see’ approach to regulation which Incubators are the perfect fit continues to be the best approach as the The most popular fund structure that crypto sector matures and develops itself. Indeed the hedge fund managers are choosing in the FSC announced its new progressive fintech BVI is the incubator fund. This structure was and Sandbox regime earlier in 2019, and is devised in 2015 before anyone had even heard designed to build on this growing trend.. of a Bitcoin, but fortuitously it provided the per- Hedge fund managers are starting to make fect set-up for light-touch, short-term crypto a name for themselves using crypto assets, vehicles. working with great minds to develop smart The BVI incubator fund incorporates a ‘20- assets and the BVI is dedicated to ensuring 20-20 criteria’ – it allows a maximum of 20 that they are not stymied by unnecessary invited investors, each of whom must make bureaucracy in this process. a minimum initial investment of USD20,000 We look forward to continuing but the fund must not exceed a cap of making the BVI the global hub for USD20 million in terms of the aggre- this exciting type of investment into gate value of its investments. the future. n

BVI REPORT | Nov 2019 www.hedgeweek.com | 19 COLLAS CRILL Opportunities for private clients in the BVI

By Ian Montgomery

A new generation of offshore incorporations Succession planning for offshore incorporations, particularly those where companies are controlled by one individual, needs careful consideration. Problems can arise where a significant proportion of shares in a BVI company are held by a foreign-domiciled deceased individual with a foreign will or no valid will at all, particularly where the deceased was the sole director of the company. As a matter of BVI law, a BVI grant of probate has to be obtained to allow shares in a BVI company to pass to the intended successors. This can be a complex and time-consuming process, typically involving a substantial degree of correspondence between those involved, as well as potential translations of key documents, together with of trusts, Virgin Islands Special Trusts Act accompanying affidavits and an affidavit of (VISTA) or indeed making a BVI will to cover foreign law. BVI situs assets. Luckily for the younger generation we are The crucial point here is that wealth and increasingly working with, the BVI business succession planners are now having these company model has inherent flexibility built in conversations as soon as an offshore entity is around a company’s memorandum and arti- created, not 35 years down the line when it is cles of association (M&A). A growing trend often too late. Where offshore investors used currently sees all parties ensuring that own- to only focus on today, the new generation is ership and control passes from the primary equally as concerned about tomorrow. shareholder to their intended successor automatically by amending the M&A. Innovative investment structures Simply put, this entails the creation of two Another key development seen across the classes of share, one of which is held by the industry in recent years is the rise of private primary shareholder and ceases to hold rights clients using some of the most innovative on the primary shareholder’s death, and the structures to facilitate increased offshore other held by the intended successor, which investing. To this end, there has been a surge attains right on the primary shareholder’s death. in the number of ‘incubator’ funds being used This method of succession planning to allow people to attract and pool investment ensures that the intended beneficiaries imme- and manage their own fund. These lightly reg- diately and automatically control the shares in ulated, short-term investment vehicles were the company, as designated, and are entitled created to provide the ability to set up and to appoint their own directors to manage and run a cost-efficient licensed fund that allows operate the company accordingly. investors to withdraw their funds on demand. Other traditional succession planning tools The BVI’s incubator fund rules incorpo- which may be considered include the use rate a “20-20-20 criteria” – the fund can have

20 | www.hedgeweek.com BVI REPORT | Nov 2019 COLLAS CRILL

a maximum of 20 invited investors, each of institutions recommending that their clients do whom must make a minimum initial investment business offshore. As a leading international of USD20,000 and the fund cannot exceed finance centre, well respected for its financial USD20 million in relation to the aggregate regulation, transparency and exchange of infor- value of its assets. mation, the BVI is well placed to benefit from Increasingly, private clients are using these increasing reporting standards driving global constructs as a means of managing their own banks to seek out the most reputable jurisdic- fund and to attract co-investment. Offshore tions in which to conduct their business. funds can be subject to significant administration and oversight, but the BVI incubator fund Economic substance opportunity was designed to minimise costs and simplify One of the primary reasons the BVI has main- the process while at the same time allowing tained its position as a leader in offshore the manager to launch the fund in a jurisdic- investment and financial planning is a con- tion with a strong international reputation. stant readiness to take on the next challenge There are no requirements to appoint fund and seek out new opportunities. functionaries and no need to have an auditor. A key example of this is the implementation In addition, there is no requirement for an offer- of the European Union’s economic substance ing memorandum, and reporting obligations to requirements which call on all offshore entities the BVI’s Financial Services Commission (FSC) to demonstrate a certain degree of on-island are limited. “substance”, such as locally based directors Ultimately, the rise of these new structures or in some cases offices and employees. is allowing clients to do more with their wealth, We expect guidelines on how BVI-based work more efficiently with other business entities will need to comply to serve as partners and build their track record as a fund both a challenge and an opportunity for the manager. jurisdiction. While many private clients hold assets other Privacy vs transparency than shares within their structures – meaning At present, the BVI is facing a number of they will most likely fall outside the scope of the upcoming regulatory developments from both economic substance rules – for others there the European Union and the United Kingdom. will be a need to plant roots in the BVI. The BVI Government maintains that it will not The impending European Union implement public registers of beneficial own- rules provide an opportunity to ership unless they become a global standard, strengthen and broaden our wealth in spite of the UK Government recently stating and succession-planning offering, its intention to enforce such registers on its allowing us to work more closely with Overseas Territories by Order in Council by 2020. other businesses and professionals in What’s more, we also face the possibility the jurisdiction, and ultimately of clients having to report to a greater level of create an even better service detail on their offshore businesses as a result for clients. n of the Common Reporting Standard (CRS) and increased regulation concerning the Foreign Account Tax Compliance Act (FATCA). Ian Montgomery Privacy is a significant issue for many Partner, Collas Crill clients seeking wealth and succession advice Ian Montgomery heads up Collas Crill’s BVI Corporate, Finance and Funds in the BVI. For many reasons, including safety team and is based in Collas Crill’s BVI office. He advises financial institutions, and security, people wish to have their most public and private businesses, individuals and funds on all aspects of corporate, commercial and finance law. His areas of expertise include, mergers and personal financial issues to remain private. acquisitions, joint ventures, private equity, debt and equity financing, public Private wealth issues inevitably involve listings, security arrangements, tax efficient investment structures, corporate families and sensitive information which most restructurings and reorganisations, takeovers, commercial contracts and people would prefer to remain out of the corporate and commercial aspects of shareholder and contractual disputes. He has significant experience advising on cross-border transactions in the real public domain. estate, financial services, energy and technology sectors, with a particular focus That said, while this wave of regulation will on transactions involving the Middle East and North Africa. Prior to joining Collas probably affect some clients, it will also serve Crill, Ian worked for Mourant Ozannes in Jersey. He has also worked for Harney Westwood & Riegels in the BVI and Pinsent Masons in London. as a huge boost to the banks and financial

BVI REPORT | Nov 2019 www.hedgeweek.com | 21 O’NEAL WEBSTER BVI funds – a smart bet in uncertain times

By Christopher Simpson & Kerry Anderson

ews outlets, including The Guardian investment strategies, fees, and terms might and CNBC, were reporting and market apply. Losses in one segregated portfolio do N watchers were opining in early 2019 not affect another and, as such, provide a that a slowing world economy forebodes a useful way for a manager to attract investors major global economic shift – possibly another interested in different asset classes. recession. By mid-August, the concern found renewed attention when analysts pointed to Adaptable and customisable an inverted yield curve in the United States While the BVI Financial Services Commission Government bond market as a historical pre- (FSC) regulates most BVI funds, they can be cursor to a recession. adapted to a variety of needs and customised According to Credit Suisse, a recession to suit a particular investment style, strategy, has occurred, on average, 22 months follow- or target investor class. BVI funds are not lim- ing such an inversion in past cycles. Whether ited in the type of assets they may hold or in the inverted yield curve is a reliable indicator which they may invest. of an imminent recession is yet to be known; Moreover, BVI funds are not limited to using however, activity in the bond market does sug- BVI service providers. They are free to use gest that investors are looking for alternatives auditors, administrators, and other providers to standard equity investments. from practically any jurisdiction in the world. As investors shift away from exchange- Finally, BVI funds are not required to hold traded stocks, alternative investments, as meetings in the jurisdiction nor is shareholder well as tangible assets such as wine and approval required for changes to the fund’s art, become attractive for diversification and investment strategy or constitutional doc- risk-adjusted returns. Indeed, according to a uments. However, a prudent manager will 2018 report produced by data provider Preqin ensure that investor protections are built-in and the Alternative Investment Management and that constitutional documents can be cus- Association, alternative investment funds often tomised to achieve the exact balance a fund offer better risk-adjusted returns than tradi- manager wishes to achieve. tional bonds or equities. In the current macroeconomic climate, BVI Variety puts BVI funds in an elite category funds are a well-suited vehicle for alternative Fund managers come with different objectives, asset investing as they boast variety, flexibility, sizes, and needs. To address a manager’s par- and ease of establishment. ticular circumstances, the BVI offers an elite variety of fund vehicles, including four open- Flexible and nimble ended funds, as well as a retail fund option BVI funds have a long history of being used where investors can redeem their interest as alternative investment funds because they on-demand under agreed terms. A BVI fund are flexible and nimble. Funds can be set up structure can also be closed-ended, which is as companies, unit trusts, limited partnerships, summarised later in this article. or even limited partnerships with legal per- The four open-ended funds are the pro- sonality. Managers can establish funds with fessional fund, the private fund, the approved segregated portfolios – also known as “cells” fund, and the incubator fund. The retail fund -allowing the segregation of investors or asset option is known as a public fund. classes under one fund, even though different • Professional fund: The professional fund

22 | www.hedgeweek.com BVI REPORT | Nov 2019 O’NEAL WEBSTER

provides for shares/interests available to professional fall under a “light touch” regime which allows for quick investors, only. The initial investment by each of the approval of applications within as little as one week. investors (excluding exempted investors) is not less than USD100,000 (or equivalent). Exempted investors The public fund include the manager, administrator, promoter, or under- The retail option, or public fund, is neither a private fund writer of the fund; or any employee of the manager of nor a professional fund. This type of fund is the most regu- the fund; lated since it is open to a larger number of investors, most • Private fund: The private fund’s constitutional documents of whom might be unsophisticated. must specify that it will have no more than 50 investors, Public funds are subject to the BVI Public Funds Code, or that the making of an invitation to subscribe for or which sets out four principles by which a public fund must purchase shares is made on a private basis; conduct its business, namely: (i) integrity; (ii) management • Approved fund: The approved fund has no minimum ini- and control; (iii) investors’ interests; and (iv) relationship with tial investment requirement but is limited to a maximum the FSC. A public fund is responsible for applying these of 20 investors at any one time and a cap of USD100 principles to its particular circumstances, which may require million AUM; adopting higher standards than is set out in the remainder of • Incubator fund: The incubator fund is limited to 20 inves- the Code to avoid being in breach of the principles. tors, has a minimum initial investment USD20,000 per investor, and a cap of USD20 million AUM. Closed-ended structure Rather than using an open-ended fund structure, manag- The BVI fund application process ers may opt to use a closed-ended structure, which the The FSC requires that a fund choosing to be recognised, BVI does not regulate. The closed-ended structure can pro- registered, or approved in the jurisdiction submit an appli- vide flexibility in pursuing alternative investments. While this cation. The application requires evidence of the fund’s type of fund usually mirrors the open-ended fund structure, status together with details of each of the fund’s function- investors cannot redeem on demand. The option to redeem aries; the investment manager, administrator, custodian, is typically at the discretion of the company’s directors or and auditor. the partnership’s general partner. Some managers find the In considering an application for recognition or regis- closed-ended structure ideal because of its quick set up, tration, the manager, administrator, and custodian of a BVI flexibility, and the fact that no regulatory approval is required. investment fund must be incorporated in either the BVI or a “recognised jurisdiction,” which includes many of the well- BVI funds are attuned to varied needs known financial centres of the world. With the uncertainties ahead in the international markets, Also, functionaries incorporated in other jurisdictions the BVI investment fund regime provides a wide range of may be acceptable if the FSC regards the jurisdiction as options for fund managers and investors, whether bullish having a prudent system of regulation and supervision of or bearish. The advantages of BVI funds are clear. From investment business, including mutual funds business. the professional fund to the incubator fund, and from the The above functionary requirements approved manager regime to the abil- are primarily relevant for private ity to apply segregated portfolio and professional funds since an principles with statutory footing, incubator fund requires no func- alternative investment managers tionaries and an approved fund will find the BVI a welcoming only requires an administrator. jurisdiction for their varied needs The approved and incubator funds in establishing funds. n

Christopher Simpson Kerry Anderson Partner, Corporate, Investment Funds, Head, Investment Funds & Regulatory Regulatory, O’Neal Webster Practice, O’Neal Webster

Christopher Simpson advises financial institutions, corporations, Kerry Anderson advises an international clientele on BVI law in and law firms on all aspects of corporate finance including joint funds, regulatory, corporate, commercial, and joint venture deals ventures, initial public offerings, private placements, mergers, and acquisitions. Deeply experienced in the initial structuring or arrangements, corporate restructuring, bilateral and syndicated amending of investment vehicles, he often provides continuing loans, bond issues, property financing, project finance, special legal advice and support throughout their operation. purpose vehicles, investment funds, and general aspects of corporate law.

BVI REPORT | Nov 2019 www.hedgeweek.com | 23 DAVID PAYNE Mind your own business, we will take care of the rest. [email protected] +1 305 812 7977 BVI FINANCE BVI: the new home of the start-up hedge fund manager

By Simon Gray

new generation of hedge Structured to support start-up fund managers are looking to success A make a name for themselves. Despite this, the faster a start-up man- But starting a fund, raising money and ager can get moving the better. Thus, managing a back office can be a gru- by using a BVI incubator fund or an elling task even for the most talented approved fund, a new manager can rising stars. set up without having to appoint local The main challenge for a start-up directors or local functionaries, as well hedge fund manager is that insti- as there being no requirement for a tutional investors are looking for a local auditor sign off on the fund’s three-year track record before they accounts. even consider investing, while alterna- What’s more, while a start-up tive sources of funding expect at least hedge fund may be looking for mil- 12-18 months of experience. lions in investment, it will also be So how do new fund managers go looking to keep outgoings low so the about achieving this track record with- for flexible fund and underlying busi- fact that the BVI offers low start-up out drowning under the operational ness structures, which is precisely the and ongoing fees is a welcome boost costs and constraints of running an reason why the BVI has become such for hedge managers. investment management business? an attractive destination for first-time Finally, for managers looking to This is where the BVI comes in with hedge fund managers. develop a fresh approach to invest- flexible rules and products designed ing, they can set up their funds in the not to be an administrative burden, Start-ups are bucking the trend BVI with maximum flexibility. Directors thus attracting a new generation of Another big driver in start-up manag- or shareholders can amend the con- managers who want to make a name ers striking out alone is the fact that stitutional documents of a BVI fund, for themselves and fast. start-up funds are particularly attrac- providing a degree of flexibility for tive to investors. restructuring. Also, it is worth noting Desire to strike out alone Recent data from Preqin found that BVI funds have no regulatory There are many reasons a fund man- that nearly three-quarters of hedge restrictions on investment policies ager may want to strike out on their fund investing institutions would con- or on performance and other fee own. Firstly, remuneration – there is sider investing in funds with assets of arrangements. often a desire to divide up interest USD300 million or less. In fact, it was While it may be tougher than more equally, rather than seeing the found that 524 investors are already ever to start a hedge fund, for those majority go to the most senior figures invested in a fund with a track record who hit the ground running and in an established hedge fund. of three years or less despite general begin building some steam via the There are also perceived bene- assumptions around the need to be BVI, they are quickly able to realise fits around career progression and more established in this regard. returns and start to develop their own future succession which come from Such funds are attractive because reputation. designing a fund from scratch and they produce significantly better And while the BVI can’t necessar- discarding the structural boundaries returns compared to the wider hedge ily guarantee returns, it can certainly of older firms. fund industry, delivering a five-year guarantee a friendly environment for In order to achieve this, however, annualised return of 12.22 per cent new hedge funds managers looking start-up managers need to be able to compared to 8.98 per cent for small for any help they can in making it on work in an environment that allows first-time funds, according to Preqin. their own. n

BVI REPORT | Nov 2019 www.hedgeweek.com | 25 KPMG Technology innovation is re-shaping the market

Interview with Jacques Roux

How big an opportunity do you think who not only understand digitalisation, but for technology innovation is for the BVI’s service whom it has become intrinsic. provider community, broadly speaking? Those service providers that are able to The investment funds industry, like most adapt to meet that base expectation will not other activities in the financial market space, only thrive from a competitive stand-point but is information intensive. Data is the lifeblood will also, by leveraging the efficiencies of the of alternative investments and, therefore, digitisation internally as well as externally, digitisation is already proving to be a key significantly enhance their own profitability. driver in the next wave of the investment fund industry’s growth. We fully believe that, Could you explain a little about KPMG’s smart ultimately, digitisation is going to have a audit technology – Clara – and how this might similar effect on the alternative investment benefit your fund clients (and their investors) industry as the effect of the internet on the over the coming years? media content industry. Here then, lies a KPMG Clara is KPMG’s smart audit platform. significant opportunity for the service provider It is central to our efforts to increase audit community in the BVI – those that are able to quality and consistency globally. The Clara evolve to meet the needs of the equivalent of platform enables the use of our new, more the online content provider will thrive whilst effective audit methodology that continues to those still intent on making deliveries to develop in alignment with the ever-changing physical premises will ultimately go the way requirements of the global auditing standards of Blockbusters. whilst also delivering an improved experience The challenge for the BVI service provider to our auditors and our clients. community is to embrace the opportunity that This platform is currently being deployed digitisation presents. To do that they need to across all our audits globally in a phased understand the demands – and the risks – manner. It will integrate our existing data & associated with the significant increase in data analytic capabilities that already use sub- volume that digitisation will create at the same ledger information, bots and other processing time as overcoming the barriers that legacy tools, with emerging technologies such as systems and legacy thinking can create. predictive & cognitive analysis. Bringing all of The BVI has a thriving hedge fund start-up this functionality into one place so that it can environment due, primarily, to the approved be easily and consistently deployed across manager and incubator funds regimes as our global audit practice will ensure value- well as our developing regulatory approach enhancing and highly accurate audit delivery. to fintech/crypto. This means we are It is the technologies within the Clara seeing an influx of new hedge funds from platform which provide the most value to a generation that has grown up solely in a our clients. Clara will improve both the digital environment and, therefore, for whom efficiency and timeliness of our audits whilst digitalisation is a base expectation as opposed further enhancing the quality of our work by to a potential development opportunity. substantially increasing the level of testing This “generation” focusses on profitability, and coverage attained. For example, these speed and level of service; has far fewer technologies now allow us to analyse the preconceptions than any generation before; accuracy and completeness of up to 100 per and wants to engage with service providers cent of all investment transactions within a

26 | www.hedgeweek.com BVI REPORT | Nov 2019 KPMG

portfolio, on an individual investment basis, jurisdiction’s standing and competitiveness, and at the click of a button. Historically these but also to ensuring efficient adherence to sorts of transactions would have been tested the ever increasing raft of global regulatory manually on a sample and/or investment type requirements and expectations. basis, taking much longer and providing less coverage. What importance would KPMG attach to As we have already discussed, our clients electronic verification of customers under are increasingly relying on digitalisation to amendments to the BVI’s AML code last year? accelerate their business. This transition is The modernised AML laws represents a com- exciting, but complex. KPMG Clara, and the mitment to embracing aspects of digitalisation technological solutions which it incorporates, in the BVI, whilst ensuring that it is supported allows us to meet the audit challenges posed by a robust and focused regulatory legal by this digital acceleration. It enables us framework. In this day and age, we simply to analyse and assess the ever-expanding have to give our professional services firms volume of data upon which our clients rely, the tools they need to offer customers instant whilst more efficiently delivering audits of access to the jurisdiction. Being able to sign only the highest quality. Within the BVI we are documents, enact transactions and deal with current deploying Clara on a number of our BVI business from smart devices is critical to audit engagements with full deployment in a ensuring that the BVI remains the domicile of phased approach in 2020-2021. choice in international business and finance. The amendments, which we hope are the Jennifer Potter-Questelles, the FSC’s Deputy first of many, are also timely given that busi- Managing Director, recently commented nesses continue to shift towards increased that “digitalisation is our ticket” when reliance on fintech to conduct operations. speaking about the importance of embracing Critically, the ability to rely on electronic verifi- innovation. Are you pleased to hear the FSC cation without reducing the level of regulatory speak positively on this topic? oversight performed goes a long way to sup- Absolutely. At the dawn of each major IT porting the high quality international business innovation, predictions about its adoption centre that the BVI operates. and impact have invariably been proven We have already easily concluded that wrong – they tend to overestimate adoption financial services, including alternative pace and underestimate the magnitude of investment structures and in particular those the impact. We believe this will hold true with a fintech/crypto focus, is the primary early with respect to digitalisation and its impact adopter of digitalisation. The BVI, therefore, on the alternative investment industry (and needs to keep pace with developments in this indeed broader financial services). Only those space. The amendments to the AML code jurisdictions that fully embrace the concepts last year clearly demonstrate the BVI’s and opportunities around digitalisation will intention to be at the forefront of fintech ensure they are ready to thrive into the future. developments. When viewed alongside It is, therefore, encouraging to see that our the jurisdiction’s stated ambition to regulator understands the importance of these continue embracing digitalisation, this innovations for the BVI. should ensure that the BVI remains the Indeed, digitalisation presents a unique domicile of choice for progressive opportunity to catapult the BVI ahead of alternative investment vehicles its competitors. It’s great to see the BVI that embrace the new and the FSC demonstrating their support technological age. n of digitalisation through steps like the amendments to the BVI AML code and the introduction of digital sandboxes for the Jacques Roux Crypto and blockchain industries. However, Managing Director, Audit, KPMG ultimate success can only be achieved with Jacques Roux leads KPMG’s audit team in the BVI, having joined the firm in the ongoing and unequivocal support of both 2008, and has specialised in the alternative investment sector for the last 13 Government and the Regulator. Digitalisation years. One of Jacques’ main passions outside of work is supporting the local community and he leads KPMG’s Citizenship programme in the BVI. is our ticket to enhancing not only the

BVI REPORT | Nov 2019 www.hedgeweek.com | 27 THE TOVEL GROUP & AMS FINANCIAL GROUP Inside the approved manager regime

Interview with Walter Reich & David Payne

ince the Approved Manager to investment firms, including independent Regulations were implemented in the directorship services. AMS is also an affiliate S BVI in 2012, smaller managers seeking of Circle Partners, an independent fund a more simplified approval process and lighter administrator with offices in the Cayman touch regulatory framework compared to Islands, and across the EU, the Americas and the Securities and Investment Business Act Hong Kong. (‘SIBA’) have really benefited. “The way the regime was drafted, it allows Under the approved manager regime, fund sponsors to run both BVI and foreign start-up managers can choose to avail of the funds, both closed-ended and open-ended, BVI’s incubator fund and approved fund prod- up to an AUM limit of USD400 million (USD1 ucts, both of which are designed to help build billion for closed-ended funds). their track records without necessarily having “Combining the approved manager with an to launch a BVI professional fund on day one. approved fund has been quite a success. It In that sense, the approved manager has been rewarding to see the interest in these enables smaller managers to establish a products increase since their launch espe- structure on a cost-effective basis, says Walter cially considering the time spent by various Reich, founder of Tovel Investments Ltd. “For a BVI hedge fund focused committees in trying lot of people looking at the BVI, the approved to develop the right product based on what we manager often ends up being the most logical were hearing from prospective clients.” choice.” AMS sets up the legal structures for Tovel is a boutique group providing director- approved funds and approved managers and ship, accounting, investment management and recommends services such as independent corporate governance services. Specifically, directorships, and over the years the firm Tovel Investments has a full BVI investment has developed a productive relationship with management license and Tovel Consulting Tovel, with both firms able to provide the key provides directorship/mind and management functionaries required in the overall structure related services with focus on approved and who have relevant experience and who can licensed fund managers and to the underly- provide the required independence. ing funds. Services include assisting clients in “At Tovel, we have a great team of hedge establishing fund structures including licensed fund experienced individuals. Clients are and/or approved manager entities. pleased to know that experienced and According to the latest statistical bulletin qualified individuals are available locally in BVI published by the BVI Financial Services to act as director, secretary, trader, compliance Commission in June 2019, there were 255 officer and accountant as circumstances approved investment managers and 108 require especially given the ever changing approved funds; this compares to 938 global regulatory environment. We all have professional funds. relevant hedge fund backgrounds so we “The approved manager is a flexible vehicle, can provide a proper value-added service,” especially for the clients we work with such explains Reich. as newly established investment managers,” Not every investment professional is going says David Payne, Director, AMS Financial to fit the approved manager regime and it is Group, which provides corporate, trust, the job of specialist providers such as AMS fiduciary, captive insurance and legal services to weed out any potentially ill-fitting prospects.

28 | www.hedgeweek.com BVI REPORT | Nov 2019 THE TOVEL GROUP & AMS FINANCIAL GROUP

This is achieved in the first instance by asking each audit fees is an important cost saving for any start-up promoter or manager to fill out a detailed questionnaire on manager. the fund strategy and its key characteristics. “Also, if you compare an approved manager to a “Once we have that information we can extrapolate it fully licensed BVI fund manager, the latter has to have and see if an approved manager will work,” says Payne. professional indemnity insurance, which is not required “Many of our clients are small to mid-sized managers so under the approved manager regime,” comments Payne. we will also look at the number and type of investors in the Reich advises those considering approved manager fund and minimum investment numbers. If the client tells status to visit the BVI to get a complete understanding of us they have USD500 million in AUM we will automatically what the jurisdiction has to offer, in terms of the quality of rule out the approved manager regime.” its infrastructure and service providers, but also in terms If they are successful, the client could change the of soft factors such as climate, lifestyle, schools and such approved fund to a BVI professional fund and transition like. “We recently had a prospective manager enjoy his visit from an approved manager to a fully licensed Category 3 to BVI so much he decided to move to BVI with his family investment fund manager. and operate his management company from BVI,” he says. This will typically depend on what the client is looking Visits also help when assessing individual fund for and what their ambitions are. managers from a personality perspective, and to gauge “We listen carefully to what clients are looking to achieve the quality of their strategy that cannot always be fully both short-term and long-term, we discuss strategy, determined over the phone or in a questionnaire. infrastructure and ability to raise money,” adds Reich. As Reich says: “We want to protect the reputation of our “We want to know where the person resides, who will firm and of the BVI. We also want to be fair and honest be executing trades, what the volume of trades will be, especially when it comes to time and money. It’s important the backgrounds of each person in the investment team to gauge the quality of the strategy to avoid getting into a and so on. In some cases it might be more appropriate to situation where the fund has to be wound down; which can establish the investment manager in their home jurisdiction. often take more work than setting it up.” But in other cases, that might not be possible for a variety As a final piece of advice, Reich says that it is not as of reasons and if the fund allows for it, then you can start complicated or onerous as one might think to establish having that conversation about establishing the investment an approved fund; perhaps by first bringing in friends and manager in the BVI.” family money, build up a track record, before thinking about At a time when attracting new hedge fund investors is taking on external investor capital. becoming harder than ever, those who choose to go down “We’ve seen instances of some people starting off with the approved manager route can at least give an extra USD2 million and within two or three years, grow to USD25 level of confidence and demonstrate that their ambitions million in AUM. Eventually, you have to make the leap are long-term. and have a proper structure in place. With the products Another benefit is the flexibility and the reasonable costs offered here in the BVI, we feel confident we can create a of an approved manager. Financial platform for success for our clients at a information does need to be filed with reasonable cost, and with a reasonable the regulator but it doesn’t need to and appropriate level of regulatory be audited. Not having to pay annual oversight,” concludes Reich. n

Walter Reich David Payne Founder, Tovel Investments Ltd Managing Director Americas, AMS Financial Group

Walter Reich has resided in the British Virgin Islands for 20 David Payne is a Director of the AMS Financial Group and years and is a CPA. Experience gained at a UK based hedge of Circle Partners and has over 15 years’ experience in the fund, Citco and KPMG allows Walter Reich to offer his services structuring and the administration of investment funds and asset as an experienced and independent director/consultant to managers in offshore, mid-shore and onshore jurisdictions. David offshore based funds and management companies domiciled has held top managerial positions in The Netherlands, United predominately in the British Virgin Islands. To facilitate these Kingdom, BVI, Cayman and USA. David holds a degree in law services he founded the Tovel group with team members which he obtained in 1999. providing directorship, accounting and fund/management related services. Walter Reich serves on various BVI fund committees, is a trustee of the local IB school and can usually be seen coaching football to kids when not working.

BVI REPORT | Nov 2019 www.hedgeweek.com | 29 OGIER BVI SPACS

By Michael Killourhy

017 and 2018 were record setting prestige of listed status is also important– as it years for Special Purpose Acquistion was for China Direct Lending when acquired 2 Company (SPAC) offerings in the United by the SPAC DT Asia Investments in 2016 States. Strong demand continued into 2019, to become the first Nasdaq listed Chinese with SPAC IPOs crossing the 100 mark by end finance business. Q2 2019. SPACs are publicly-traded invest- SPACs remain popular with Chinese spon- ment vehicles that raise funds via an IPO to sors for linking domestic businesses into US complete a targeted acquisition (a “business listings, notwithstanding trade tensions and combination”) within a limited time frame recent SEC rule changes. Continued Chinese (18-24 months). The funds raised are placed in interest in SPACs is also welcome for British an interest bearing trust account and may only Virgin Islands entities. While most US listed be used to fund a business combination. If the SPACs are Delaware corporations, for non-US company fails to complete a business combi- sponsors seeking targets outside the US, a nation, the funds are returned to investors with vehicle incorporated outside the US might interest (by the redemption of their shares). offer more efficient post acquisition struc- Investors also have the option to redeem their ture. The SEC also allows rules concessions shares on the same terms immediately before for non-US issuers which qualify as “Foreign a business combination. Private Issuers”. For non-US sponsors, particu- SPAC offerings are structured as sales of larly Chinese sponsors, the BVI has become a “units” comprising common equity and deriv- preferred jurisdiction. ative securities (usually warrants exercisable The BVI’s appeal has several factors, includ- following a business combination and/or ing the SPAC suitability of BVI company law, tax “rights” that convert into shares on a business neutrality and the similarities between aspects combination). The units will initially trade as a of the BVI and Delaware company statutes. single security, but later their components will BVI SPACs are also pioneers, features such as trade separately. “rights”, “fractional warrants” and the ability to SPAC units can offer unique investment extend SPAC life spans were used in BVI SPACs opportunities. For hedging or yield-focused several years ago. The first India focused SPAC strategies, the assured redemption return of in recent years was a BVI company, as was the SPAC shares, backed by the trust account, SPAC that facilitated the first ever Nasdaq listed offers a relatively attractive yield (SPAC shares Chinese finance business, and in 2018 a BVI typically trade at a discount to their fixed SPAC, National Energy Services Reunited Corp, redemption price) with very low risk. Unlike completed a unique simultaneous double busi- comparable hedges such as US Treasuries, ness combination when it acquired two Middle SPAC units also include, through their com- Eastern oil businesses with a combined value ponent warrants or rights, a free option to over USD1.1 billion. n participate in the post business combination undertaking – which can survive even if the Michael Killourhy investor elects to redeem its shares before Partner, Ogier close. SPAC warrants also offer opportunities Michael Killourhy is head of corporate law at Ogier’s British Virgin Islands for more aggressive strategies. The warrants office. He advises on a broad range of corporate transactional matters, with will expire worthless if the SPAC fails and are particular emphasis on capital markets work (both equity and debt), mergers and priced accordingly by the market, while most acquisitions and complex corporate restructuring. Michael’s BVI law practice institutional investors eschew the risk, its pric- also encompasses cross-border joint ventures and emerging market investment, structured finance and financial reconstruction. Michael is recommended ing can still be compelling to others. by Legal 500 and IFLR while Chambers Global cites Michael as “very For targets, SPACs offer an alternative knowledgeable on corporate law and governance, with a practical way of dealing means of accessing growth capital. The with complex issues”.

30 | www.hedgeweek.com BVI REPORT | Nov 2019 conyers.com

BRITISH VIRGIN ISLANDS INVESTMENT FUNDS EXPERTISE

For more information about our global BVI Investment Funds group, please contact:

BRITISH VIRGIN ISLANDS LONDON HONG KONG Robert J.D. Briant Linda Martin Piers Alexander [email protected] [email protected] [email protected] +1 284 346 1100 +44(0)20 7562 0353 +852 2842 9525

Anton Goldstein Eric Flaye SINGAPORE [email protected] [email protected] +1 284 346 1119 +44 (0)20 7562 0341 Preetha Pillai [email protected] +65 6603 0707 DIRECTORY

The AMS Financial Group (“AMS”) is an international financial services provider that was formed in 1982 in the British Virgin Islands. The Group specialises in corporate secretarial; trust and fiduciary; captive insurance; legal; and mutual fund services to both institutional and private clients. AMS has a Class I Trust License in the BVI and has been servicing clients for more than 30 years. AMS has built a global presence and has offices in key financial centres to service clients operating through multiple jurisdictions. Circle Partners is an investment fund administrator, registrar and transfer agent headquartered in The Netherlands with offices in the Americas, Caribbean, Europe and Asia.

www.amsfinancial.com Contact: David Payne | [email protected] | +1 305 812 7977

BVI Finance is the ‘voice’ of the British Virgin Islands’ financial services industry; marketing and promoting its products and services, as well as managing its excellent reputation as a premier international business and finance centre. BVI Finance was incorporated as a company limited by Guarantee in December 2016 and has operated as a public-private partnership since then. BVI Finance maintains a strong relationship with key stakeholders including Government and its many partners locally and internationally, media outlets and investors in emerging and traditional markets.

Contact: BVI Finance Limited | [email protected] | +1 284 852 1957 www.bvifinance.vg

The BVI is a leading offshore finance centre. With high standards of transparency and excellence in regulatory affairs, the jurisdiction has a reputation for exceeding international best practice standards. Our BVI office is a leading corporate and litigation firm, providing a wide range of legal services to local and international clients. As the demands of clients and the level of practice in the BVI have developed, the practice has grown both in professional capability and technology to provide the high standard of service required to meet those demands. We serve a diverse clientele that encompasses individuals, entrepreneurs, companies, private businesses, Government bodies, local and major international banks and financial institutions. www.collascrill.com

Conyers is a leading international law firm with a broad client base including FTSE 100 and Fortune 500 companies, international finance houses and asset managers. The Firm advises on the laws of Bermuda, the British Virgin Islands and the Cayman Islands, from offices in those jurisdictions and in the key financial centres of London, Hong Kong and Singapore. The Firm’s expertise includes corporate law and finance including investment funds and private equity, equity and debt capital markets, M&A, banking and finance (conventional and Islamic), asset finance including shipping and aircraft finance, restructuring and workouts, the formation of entities including companies and partnerships, corporate governance and insurance and reinsurance. Conyers is affiliated with the Conyers Client Services group of companies which provide corporate administration, secretarial, trust and management services. www.conyers.com Contact: Lauren Brook | [email protected] | +1 345 945 3901

Harneys advise on all aspects of the life of a BVI or Cayman Islands funds including formation, restructuring and closure, both in distressed and planned scenarios. With a client base that includes some of the largest and most respected investment fund managers and upcoming stars in the industry, and the respect of the leading law firms in the global funds industry, our investment funds team provides investment fund managers with quality advice on all aspects of their BVI and Cayman Islands funds.

Contact: Co-heads of Harneys’ Global Investment Funds Team Philip Graham | [email protected] | +1 284 852 2551 www.harneys.com Ian Gobin | [email protected] | +1 345 815 2903

32 | www.hedgeweek.com BVI REPORT | Nov 2019 JURISDICTION OF CHOICEJURISDICTIONBRITISH OF CHOICE VIRGIN Investment Fund Services: ISLANDS Establishment and administration of funds Pioneering, innovative and leading the way Structuring and restructuring advice in global business solutions, the British Regulatory and corporate governance advice Virgin Islands (BVI) is an internationally Ongoing advice to fund managers and respected business and �nance centre promoters with a proven committment to connect Listings and ongoing obligations markets, empower clients and facilitate Fund liquidation investment, trade and capital �ow.

3rd Floor, Cutlass Tower Road Town, Tortola British Virgin Islands VG1110 T: +1 (284) 852-1957 E: info@bvi�nance.vg W: www.bvi�nance.vg | www.bviglobalimpact.com DIRECTORY

KPMG in the British Virgin Islands (BVI) is a professional services firm located in Tortola delivering audit, tax and advisory services to clients worldwide. As one of the first international accounting firms to establish an office in Tortola, we have the experience, knowledge and depth to provide value to our local and international clients. We want to inspire confidence in the world around us and deliver the innovative solutions our clients need. Achieving that means building diverse teams of talent. Not only does this reflect the nature of our clients’ businesses, it allows us to express different viewpoints, drive innovative solutions and bring well-rounded perspectives to our clients.

www.kpmg.vg Contact: Jacques Roux | [email protected] | +1 284 494 1134

Ogier’s BVI team provides a seamless, round-the-clock service to clients from its offices in BVI, Cayman, Guernsey, Hong Kong and Jersey. We act for leading global financial institutions, investment managers and corporate entities, instructed by leading law firms and other intermediaries on many of the noteworthy and complex transactions and cases that involve BVI law across sectors including financial services, investment funds, energy and infrastructure, consumer goods and retail, life sciences, leisure and entertainment, manufacturing and real estate.

www.ogier.com Contact: Michael Killourhy | [email protected] | +1 284 852 7309

O’Neal Webster is a leading BVI-based law firm with offices in Road Town, London, and New York City, serving an international clientele in offshore and onshore corporate, finance, funds, banking, property, admiralty, trust, and private client needs since 1989. The firm is known for its expert handling of transactional, regulatory, and adversarial matters, including complex corporate disputes, asset recovery, probate, and insolvency. With significant experience navigating BVI courts, administrative offices, and enforcement regimes, clients receive prompt and effective representation. Firm members work closely with the BVI Government and others in the development of the offshore finance and trust industries and hold prominent roles in drafting various aspects of BVI legislation which enhances their ability to advise clients on new products and laws that benefit their interests. www.onealwebster.com Contact: Christopher Simpson | [email protected] | +1 284 393 5800

The Tovel Group made up of Tovel Consulting Ltd & Tovel Investments Ltd was established in 2006 by Walter Reich upon his return to BVI. The Tovel Group provides boutique professional services to hedge fund and multi-national entities who wish to establish more robust operations for their offshore based operations (including but not limited to hedge funds and investment management operations) or who wish to add experienced and independent individuals to their respective organisations. Tovel and its directors – Walter Reich, Peter Van Zoost and Alessandro Palladino along with the rest of the Tovel team all reside in the British Virgin Islands and all have the prerequisite backgrounds to provide value added services of substance including directorships, accounting, fund/cash management, financial statement preparation and compliance related services to a limited select group of clients. Contact: Walter Reich | [email protected] | +1 284 542 0099

34 | www.hedgeweek.com BVI REPORT | Nov 2019