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Keeping options open – the growing demand for BVI hybrid funds
BVI funds for families
Managing family wealth through a designated family office has become more popular in recent years. Family offices come in many different shapes and sizes. They can be set up as a single family office or as multi-family office and be based in a number of different jurisdictions across the globe.
The decisive criteria for the best structure and jurisdiction will depend on the particularities of each family and their asset structure. It will also depend on how to best implement asset protection mechanisms and succession planning. Historically, family offices have used trust or foundation structures, maybe combined with special purpose vehicles, to hold and manage the family’s wealth and implement succession planning. Such special purpose vehicles will, in turn, own assets like land, real estate, trading companies, securities and even super yachts and fine art and require very bespoke asset management services.
Investment funds are a viable alternative for such special purpose vehicles, especially for families seeking a structure that offers more transparency for its family members and a robust and clear regulatory environment and, importantly, a tax neutral platform. Other key considerations include confidentiality, data protection and cyber security.
Instead of managing multiple, unrelated, special purpose vehicles or accounts, it is more efficient to pool the assets into an investment fund. This will require the structure to have some regulation. Even where the investors are related, the legal framework of a fund structure provides clarity on the rights and obligations of the investors and the manager.
Two further key elements which might make even a single family office wish to adopt a fund type structure for the assets it manages are, control and incentivisation. A fund structure can provide an element of control to the family office in the same way a fund manager controls a private equity fund - the family office can either own all voting shares in the investment fund or set up a separate investment management vehicle, issue all voting shares to that investment management vehicle and own all shares of that vehicle. The family office will be bound by a clearly drafted investment management mandate, setting out investment objectives and strategies of the investment fund. By extension, a fund structure also permits the family office to be remunerated in a way which is consistent with fund managers and aligns their interests with the families whose assets they manage. This would typically entail charging an annual management fee subject to a high water mark and a fixed fee. This incentivises the family office team to maximise returns. Regular net asset calculations would be provided by third party fund administrators and assets would typically be kept in custody by reputable custodian banks or prime brokers. One of the first steps for setting up an investment fund as a family office vehicle will be to choose a suitable fund domicile. For obvious reasons, there will be a preference for a jurisdiction that does not tax the investment fund itself, i.e. which allows the investment fund to be operated as a tax neutral platform.
The British Virgin Islands (BVI) is one of the most popular and well-established jurisdictions for the formation and operation of investment funds, including those used by family offices. BVI investment fund structures are known globally for their flexibility, allowing investment managers to tailor their offering to the needs of the family office.
Key advantages of BVI investment funds include the following:
• A modern, recognised and robust legal system derived from English common law, including a very flexible corporate statute (the BVI Business Companies Act 2004); • A dedicated and experienced commercial court and a wide pool of experienced investment fund professionals in all major time zones; • Competitive professional and government fees; • Fast turn-around times; • No regulatory restrictions on investment policies, strategies or objectives; and • No requirement to appoint local directors, local functionaries, or local auditors.
Costs for setting up and operating a family office can be quite high. The BVI has created the Approved Fund, a licenced
product that is specifically geared at younger family office structures which are, by their nature, more cost sensitive.
The key characteristics of an Approved Fund are as follows:
• The total number of investors is restricted to twenty investors. • The assets of the Approved Fund must not exceed $100m (or its equivalent in any other currency). Should the assets exceed this threshold, then the Approved Fund can quite easily be converted into a more regulated investment fund. This conversion process requires approval by the BVI regulator, the BVI Financial Services Commission. It is a very straight forward application and the operations of the fund will not be interrupted by this conversion process. • No requirement to have an offering document in place, having a short term sheet setting out the liquidity terms and investment mandate of the fund is still recommended. • No requirement to have third party service providers appointed, except for appointment of a fund administrator which will, in short, provide the Approved Fund with registrar and transfer agent and net asset value calculation services. The fund administrator will also assist with due diligence on investors and any filing statutory obligations. • No requirement to file audited financial statements.
Although not required by law, in practice the Approved Fund will often have a third-party investment manager appointed. It may also consider having reputable persons appointed with the safekeeping of its assets. Also, depending on the domicile of the family members it may be advisable to add further functionaries or features to the fund so that the fund would be recognised by local tax authorities as a tax neutral investment fund.
An Approved Fund must have two directors, one of which must be an individual. Usually, a senior member of the family will sit on the board of directors to control and supervise the management performance of the investment manager. Alternatively, a professional and experienced individual could be appointed to protect the interests of the family office.
The Approved Fund would also need to appoint an authorised representative. The authorised representative acts as conduit between the fund and the BVI Financial Services Commission, ensuring that the fund is being operated in good regulatory standing. Financial statements must be filed annually (which need not be audited) and returns must be submitted to the BVI Financial Services Commission regarding the fund’s status, i.e. the number of investors, total investments, aggregate subscriptions and redemptions, net asset value of the fund and details of any significant investor complaints. The Approved Fund can be set up in different ways, depending on the assets in which the fund will be invested. It is quite common to set up a family office fund with different share classes each being invested in different classes of assets. This allows family investors to pick the investment they would like to make.
Another option is to set up the Approved Fund as a segregated portfolio company (“SPCs”).
In a single family office context, the segregated portfolios can be used to segregate the assets and also the liabilities into distinct pools, maybe by asset class, strategy or geography. Large single family offices with liquid assets may wish to appoint different investment managers to manage each pool of assets and to segregate them from one another in a structure which they control. Also, the family office could simply provide one segregated portfolio of the fund to each family member. Alternatively, some fund managers use a segregated portfolio per asset acquired to facilitate club deals whereby each deal is offered to a pool of investors who can opt in or out of each particular transaction.
There are significant cost benefits to be achieved by utilising a segregated portfolio company structure rather than setting up multiple fund structures. Adding a segregated portfolio to an existing SPC is much more cost effective than forming a brand new legal entity. There are reduced operating costs too because the company secretary, board of directors and other fees are shared across the SPC rather than having separate boards and company secretaries.
Lastly, Approved Funds are open-ended funds which means that investors have the right to redeem their investment subject to any lock-up period mechanisms which may apply.
As family offices develop and grow, regulated fund structures are increasingly necessary and helpful in allowing them to perform their primary role of managing the family assets. The use of a fund structure provides a recognised and well established legal framework, which allows the family office itself to become a multi-family office, fund manager or boutique wealth manager. This is in addition to permitting a family office to have greater control over the assets being managed and providing the opportunity for the family office team to be incentivised in line with their peers in the corporate fund management environment. The application of regulation and the use of independent administrators and non-executive directors gives additional comfort to the family whose assets are being managed that there are appropriate checks and balances, and that the assets are being securely held.
Hatstone
Hatstone is a leading boutique multi-jurisdictional group providing legal, fund administration and corporate and fiduciary services with offices in the British Virgin Islands, Ireland, Jersey, London, Panama and South Africa.
The firm has a very experienced BVI investment funds practice, which is partner-led and commercial in its approach, providing BVI fund formation, fund administration, corporate, director and regulatory services. Clients value Hatstone’s longstanding experience in the area of investment funds and its active role in the market.
Philipp Neumann
Philipp manages Hatstone’s BVI legal practice and specialises investment funds, fin-tech, finance and regulatory advice. He has a particular interest in alternative investment structures, including formation and restructuring of investment funds. He regularly advises international law firms, financial institutions, trust companies, fund administrators, tax advisory firms and private clients on BVI law. He is based in the BVI offices.
Philipp is a solicitor of the Eastern Caribbean Supreme Court (Virgin Islands), a solicitor of the Supreme Court of England & Wales, 2009 (currently non-practising), a Rechtsanwalt (lawyer) in Germany, 2005 and a Notary Public in the BVI. Prior to joining Hatstone in 2018, Philipp worked for other international law firms in the
BVI, France, Germany and Luxembourg advising on corporate, banking, finance, investment funds and regulatory matters. He presents at conferences and client in-house seminars and has published various articles in the professional press in relation to BVI matters.
Calum McKenzie
Calum has in excess of 25 years working in BVI financial services, covering all aspects of the industry. Calum is the Managing Director of Hatstone Trust Company (BVI) Limited and works on a daily basis with structures varying greatly in terms of complexity, asset value and activities. Calum has acted for a number of Investment Managers and Hedge Funds during his career with AUM’s being in tens of Billions of USD.
Throughout his career Calum has been approved by the relevant Regulators to act as a director in a number of jurisdictions, in addition to BVI, including the
Cayman Islands, Barbados, Nevis and Anguilla. He is a present member of the
Council of the BVI Investment Funds Association, a former member of the
BVI FSC Fiduciary and Registry Liaison Committee and a Council member of the BVI Association of Registered Agents. He is also a Member of the Institute of Directors, London a member of the Association of Certified Anti-Money Laundering Specialists and a BVI FSC approved Compliance Officer and Anti-money Laundering Reporting Officer.
BVI funds — no bad options
Flexibility has long been a cornerstone of the British Virgin Islands’ financial services industry. BVI companies are often used as public companies and listed on major exchanges worldwide, but they can just as easily be used as an asset-holding vehicle for an individual or family office. This trend continues with BVI funds which offer a variety of choices to suit different managers, investor types, and structures.
Established BVI fund types
The flagship BVI fund is the professional fund, the typical choice for most hedge funds, funds of funds, and alternative investment funds. The professional fund is ideal for high-networth investors. Investors in professional funds are required to subscribe for at least $100,000 and must have a net worth (alone or jointly with their spouse) of at least $1m or must be institutional investors.
The professional fund must have an investment manager, administrator, custodian, and auditor, with exemptions available for the investment manager and custodian requirement. The fund must also submit a full-offering memorandum with subscription documents to the BVI regulator - the BVI Financial Services Commission (FSC) - for approval.
Private funds are limited to 50 investors and must be marketed on a private basis only. This fund has found favour with family offices because it offers the internal structure of a hedge fund combined with the flexibility and privacy of a private investment vehicle. Private funds do not have any restrictions regarding the make-up of investors and no cap on their assets under management. Any family member can qualify as an investor since there is no net worth hurdle to cross. The fact that the fund cannot market except on a private basis also fits the family office structure as there is no need for marketing to the broader public.
Public funds are retail funds that other jurisdictions would classify as “mutual funds.” These funds are open to retail investors; therefore, there is no net worth requirement for investors. Public funds are the only BVI fund offering available to the general public. The main difference between the public fund, on the one hand, and the professional and private fund, on the other, are their requirements for setup and ongoing compliance.
As might be expected for a public-facing investment entity, the setup requirements are more detailed. The entity must have a prospectus that meets the specific criteria included in the BVI public funds code, such as the requirement to maintain a compliance officer; and is subject to a level of supervision similar to other licensed financial entities.
NEWER FUND TYPES
In 2015 the BVI introduced two new funds: the approved fund and the incubator fund. The approved fund is often considered a light version of the BVI private fund. It is limited to 20 investors and assets under management of $100m and, like the private fund, has no minimum net worth requirement. This makes the fund suitable for smaller family offices or other closely connected investors. The fund is required to have an administrator, but otherwise, no additional functionaries are mandated. An approved fund does not need a detailed offering memorandum. It is sufficient to file a summary of terms, including a description of its investment strategy and the prescribed investment warnings to investors.
The incubator fund is limited to $20m assets under management, 20 investors, and subscriptions of at least $20,000, thus earning the familiar name – the 20/20/20 fund. This fund is very different from other open-ended BVI funds. It is designed to appeal to emerging fund managers looking to build a track record but don’t have access to large amounts of investor capital – often limited to family and friends – and need a low-cost fund to get started. In addition to the fund’s investors and AUM limits, the fund is limited to a two-year existence. At the end of two years, the incubator fund must convert to a private, professional, or approved fund or wind down its operations. The fund can apply to the BVI regulator for a one-year extension, but in the end, it must either convert to a different fund form or wind down. The incubator fund is not required to have any fund functionaries, contributing to its low operating cost. Also, like the approved fund, it is only necessary to file a summary of terms, including a description of its investment strategy, and give the appropriate investment warnings. The fund is not required to produce a full offering memorandum.
Private investment fund regime
In 2019, the BVI introduced the private investment fund regime, which now regulates closed-ended funds as private investment funds.
The requirements for recognising a private investment fund (PIF) are similar to those of professional and private BVI funds. As such, a PIF comes in three types: (a) a PIF limited to only 50 investors; (b) a PIF limited to investment marketing on a private basis; and (c) a PIF whose investors are limited to certain institutional and professional investors, i.e., persons whose net worth is at least $1m.
One departure from the position regarding professional and private funds is introducing the “appointed person,” who is responsible for managing, valuing, and safekeeping fund property. Each PIF must have and notify the FSC of the appointed persons’ details.
NOTEWORTHY SIMILARITIES
So far, we have focused on the differences between the types of BVI funds (see table below), but some similarities are noteworthy.
• All funds must have at least two directors, an authorized representative, and a Money Laundering Reporting Officer. • All funds have prudential reporting requirements. • All funds must have a valuation policy, complying with the particular fund’s relevant regulations. • BVI funds are investment agnostic. There are no restrictions on the type of investment or investment strategy in which a manager might engage. • Funds can be set up as BVI business companies, partnerships, or unit trusts. • Economic substance requirements do not apply to BVI funds.
An important note: When a BVI fund requires functionaries, they must be based in “recognised jurisdictions.” The recognised jurisdictions list includes leading countries worldwide, such as the United Kingdom, United States of America, Singapore, China, Hong Kong, South Africa, Switzerland, Bermuda, and Cayman, among others. Functionaries in recognised jurisdictions do not require FSC approval. However, while a fund may appoint a functionary not based in a recognised jurisdiction, such appointment will require FSC approval.
It is clear that no matter where you are based, the type of investors you want to pursue, or the amount of capital to be managed – there are no bad options when it comes to BVI funds.
Private Investment Fund (closed-ended)
Investor minimums AUM restrictions Required Functionaries Offering document requirements Fund lifespan
50 investors or private marketing only
None None
None
20 investors
20 investors; US $20k minimum investment US $100M
US $20M
50 investors or private marketing only; Net worth of US $1M; US $100k minimum investment None Investment manager, administrator, auditor, custodian Offering memorandum Unlimited
Administrator Summary of terms Unlimited
None Summary of terms 2 years; 3 with approval
Appointed persons Offering memorandum Unlimited
O’Neal Webster
O’Neal Webster holds a decidedly unique position among all British Virgin Islands law firms, being among the first to establish exclusively in the BVI to serve onshore and offshore clients in their corporate, finance, banking, business, real estate, admiralty, investment fund, intellectual property, and trust and estate needs. The firm is recognized for its expert handling of transactional, regulatory, and adversarial matters and is highly-regarded for consistently delivering exceptional service, exceeding expectations in both international and domestic engagements. The firm is ranked in leading legal directories and is the BVI member of Lex Mundi and World Services Group, two top global referral networks. Learn more at onealwebster.com.
Kerry Anderson
O’Neal Webster partner Kerry Anderson advises an international clientele on British Virgin Islands law and regulatory compliance in funds, corporate structures, and joint venture deals and acquisitions. Deeply experienced in the initial structuring and restructuring of investment vehicles, he often provides continuing legal advice and support throughout their operation. His clients include US- and EU-based fund managers, closed-ended funds, open-ended funds, public funds, and segregated portfolio company funds. He leads the firm’s Investment Funds & Regulatory Department.
Christopher Simpson
Partner Christopher Simpson advises leading corporations, financial institutions, and international law firms on all aspects of corporate law and finance, including joint ventures, mergers, arrangements, property and project financing and restructurings. He also advises on investment funds, investment business and regulatory matters, including fintech and digital assets. He has been involved in numerous IPOs and ground-breaking deals, including the first ever BVI court approved corporate arrangement scheme and one of the largest single asset real estate financings in China.
