The private equity market has fast been gaining traction in Southeast Asia. In the 2018 survey conducted by the Monetary Authority of Singapore (MAS), it was reported that Singapore’s asset management industry registered a relatively good expansion of 5.4 percent to US$2.5 trillion, despite a 4 percent decline in global assets under management to US$74 trillion.[1]

Singapore’s vibrant private equity market and popularity with both investors and fund managers alike has been attributed to, among other things, the country’s stable pro-business environment and favourable tax regime. Other factors such as the availability of ample financing options and Singapore’s position as a services hub for the region also play a part.

Singapore’s importance as a key jurisdiction in the private equity space may continue to increase in the following years, especially following the recent introduction of the variable capital company regime in Singapore.

In this article, we give an overview of some of the various vehicles available and commonly utilized in the private equity space in Singapore.

Limited Partnerships

Private equity funds are typically constituted as limited partnerships comprising a general partner (GP) and limited partners (LP). In Singapore, the Limited Partnerships Act (Chapter 163B) governs the establishment of limited partnerships. The fund manager, as the GP, is responsible for raising funds and managing the limited partnership and takes on unlimited liability for the fund’s obligations. On the other hand, LPs, as the investors of the fund, are not personally liable for the fund’s obligations beyond their agreed contribution, to the extent that they do not “take part in the management” of the partnership.

A key benefit of a limited partnership is that the partnership is mostly governed by the limited partnership agreement and is consequently free from legal constraints that are usually applicable to companies, especially in respect of any return of capital and distribution of profits.

As the limited partnership is not regarded as a separate legal entity, it is regarded as tax transparent for income tax purposes, and each partner is taxed on their share of the income from the partnership.

However, despite (a) both Cayman Islands and Singapore limited partnerships being modelled on Delaware law; and (b) the lack of an inherent advantage of Cayman Islands limited partnership laws over Singapore’s laws, Singapore-based private equity fund managers have historically favored Cayman Islands exempted limited partnerships―a trend that has been attributed to a general resistance to change and the familiarity of both investors and fund managers with the laws of the Cayman Islands. As a result, there is a disjoint between the place of domicile of a fund and the jurisdiction in which the fund’s activities are managed.

A common structure used by Singapore fund managers is the master-feeder fund structure, under which a Singapore incorporated feeder fund is owned by a Cayman Islands limited partnership acting as the pooling master fund. By domiciling the fund entity in Singapore as a company, the fund is able to benefit from Singapore’s extensive double tax treaty network.

Companies

Private equity funds may be structured as companies. This was typically the case with Singapore-based private equity funds created prior to the introduction of the legal regime for limited partnerships in 2009.

Even today, some managers are still comfortable setting up funds in Singapore as private limited companies, as it is a well-known, well-regulated vehicle.

However, restrictive capital maintenance rules under the Companies Act (Chapter 50) prescribe the precise situations in which a company can distribute its capital or pay dividends to its shareholders. Profits are calculated in respect of all the business lines on a consolidated basis. Therefore, even if some business lines are profitable, no dividends may distributed if the company makes a loss on a consolidated basis. Interim dividends may be clawed back. Even when redeemable preference shares have been issued, certain solvency requirements still need to be observed.

The Variable Capital Company

Recognising that Singapore is well placed to benefit from future growth of private equity investments and the inadequacy of present measures, the MAS recently introduced the variable capital company (VCC)[2] to be a new specialized corporate structure for investment funds.

The VCC is similar to variants in other jurisdictions such as the open-ended investment company (OEIC) in the United Kingdom and the segregated portfolio company (SPC) in the Cayman Islands and is propositioned as an alternative to the traditional limited partnership structure of private equity funds for the following reasons:

1. Economies of scale. Under the new legislative framework, the VCC may be established either as a stand-alone entity or an umbrella structure with multiple subfunds. The umbrella structure allows subfunds to reap economies of scale by sharing common service providers (i.e., fund administrators, fund managers, custodians and auditors) and consolidating certain administrative functions (such as the holding of general meetings and the filing of tax returns).
2. Ring-fencing of assets. Notably, the subfunds operate as separate cells but do not have a separate legal personality. Each subfund is constituted by registration with the Accounting and Corporate Regulatory Authority (ACRA) and is allocated a unique subfund number. To prevent cross-cell contagion, the VCC must keep the assets and liabilities of each subfund segregated, and the assets of one subfund may not be used to discharge the liabilities of another subfund. In addition, each subfund must be wound up separately to ensure the ring-fencing of each subfund’s assets and liabilities in the event of insolvency. To that end, any provisions in (a) the VCC’s constitution or (b) agreements entered into by the VCC will be void. This allows subfunds under the same umbrella to pursue different investment objectives, while shielding investors’ liabilities from other subfunds. However, the willingness of foreign courts to recognise and enforce the ring-fencing of assets of a subfund remains unknown. To mitigate this risk, it may be worth considering including express terms that limit the ability of creditors to claim against other relevant subfunds in the underlying fund documentation.
3. Redemptions. The VCC is not subject to the cardinal rule of capital maintenance under the Companies Act and is therefore: (a) permitted to freely redeem its shares at its net asset value; and (b) not restricted to paying dividends out of profits. This feature, which gives fund managers the flexibility to meet dividend payment obligations, enables the VCC to be used as a vehicle for both open-ended and closed-end funds, and for both traditional and alternative strategies.
4. Accounting standards. VCCs are permitted to use either the Singapore Financial Reporting Standards the International Financial Reporting Standards or U.S. Generally Accepted Accounting Principles for their financial statements. This allows fund managers to choose accounting standards that best suit the requirements of the jurisdiction in which the fund’s assets are located.
5. Tax benefits. The VCC is treated as a company and a single entity for tax purposes. Accordingly, an umbrella VCC will only need to file a single corporate income tax return, regardless of the number of subfunds that it has. In addition, the tax exemptions available for Singapore-based funds―such as the Singapore Resident Fund Scheme (Section 13R of the Income Tax Act), the Enhanced Tier Fund Scheme (Section 13X of the Income Tax Act) and the concessionary tax rate under the Financial Sector Incentive Scheme for fund management―will be extended to VCCs that meet certain qualifying conditions.
6. Inward domiciliation regime. Foreign corporate entities with a structure similar to that of the VCC (i.e., OEICs and SPCs) may be redomiciled in Singapore as a VCC by applying to ACRA to transfer their registration. However, the VC Act does not provide for the conversion of Singapore-domiciled funds to a VCC― to achieve this, it is likely that the assets of such funds will have to be transferred to a newly incorporated VCC.
7. Confidentiality. The register of shareholders of a VCC need not be made public and would only need to be disclosed to public authorities upon request for regulatory, supervisory and law enforcement purposes. This level of privacy is lauded as a welcome change by investors who do not wish for their investment activities to be known to the public.

A group of 18 fund managers participated in a VCC Pilot Programme that was initiated by MAS and ACRA in September 2019. All of these fund managers have today incorporated or redomiciled a total of 20 investment funds as VCCs. These investment funds comprise venture capital, private equity, hedge fund and environmental, social and governance strategies, demonstrating the viability of the VCC framework across diverse use cases.

To further accelerate the adoption of the VCC framework, the MAS has launched a Variable Capital Companies Grant Scheme to defray the costs associated with the incorporation and registration of a VCC. Under the scheme, the MAS will co-fund up to 70 percent of eligible expenses (or S$150,000, whichever is lower), paid to Singapore-based service providers for each application, with a maximum of three VCCs for each fund manager. The scheme will run from 16 January 2020 to 15 January 2023.

The introduction of the VCC signifies a move toward the same international standards as other leading fund jurisdictions. It further adds to the suite of investment vehicles currently available and encourages fund managers to consolidate the fund domicile with their fund management activities. If its theoretical advantages are translated into reality, the VCC is highly likely to boost Singapore’s competitiveness as a leading jurisdiction in the private equity market.