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The fund finance market in Asia-Pacific has grown significantly in the past few years, and 19 June 2017 marked the launch of the 1st Asia-Pacific Fund Finance Symposium (the “Asia-Pacific Symposium”) organised by the Fund Finance Association in Hong Kong. The Asia-Pacific Symposium attracted a strong turnout from market participants including banks, law firms and sponsors from across the region. The success of the Asia-Pacific Symposium sets a very positive tone to the outlook for the fund finance market in Asia.
In 2016, over 700 infrastructure investments and 400 venture capital investments were made in China alone.1 This can be attributed principally to the promulgation of China’s One Belt, One Road Initiative which is sweeping through the region. The Belt and Road Initiative is expected to bridge the ‘infrastructure gap’ in less developed countries and accelerate economic growth across the Asia Pacific area and Central and Eastern Europe. The proposed size and scale of the investments under the Belt and Road Initiative is impressive. It is estimated that China will spend roughly $150bn a year in the 68 countries that have signed up to the initiative.2 The scale of such investments is likely to turbocharge the number and amount of renminbi and infrastructure-related financings within Asia.
Strong growth and activity in the funds sector often acts as a good backdrop for the continued development of a fund finance market. It is encouraging that Singapore’s assets under management (“AUM”) in 2016 have continued to grow and grew by 7% to S$2.7 trillion – which is in-line with global trends. Over the last five years, Singapore’s AUM has expanded at a 15% compound annual growth rate (“CAGR”). This growth was supported by sustained net fund inflows and broad-based improvements in market valuations. Rather notably, a large portion of the total AUM was sourced from outside Singapore – particularly from Asia-Pacific, North America and Europe. The diverse sources of funds show that Singapore’s reputation as a hub for regional and international investors is growing.3
Looking back, the inaugural Singapore chapter of Global Legal Insights – Fund Finance 1st Edition (2017) noted that the use of Singapore-domiciled fund entities for fund-raising was to be regarded as a relatively recent trend. It is significant that the Asia-Pacific Symposium highlighted Singaporean structures as growing in popularity.4 This shows that Singapore has strengthened its reputation as an asset management hub.
This growth can be attributed to some of the following factors:
1. Strong tax incentives
The Singapore Government has put in place several tax treaties and incentives for fund managers to attract them to operate in Singapore. This is important for a business entity because it is generally liable to tax in a jurisdiction where its activities have created a taxable presence. Due to the varied sources of its funds and investment destinations, a fund manager is likely to have taxable activities in a number of jurisdictions. The tax impact of doing business between Singapore and these other jurisdictions is therefore an important consideration for a fund manager. In this respect, Singapore is an attractive destination from a tax perspective – it currently has more than 82 tax treaties5 with various countries, especially those in the Asia Pacific region. A tax treaty (more specifically, a double tax agreement) between Singapore and another jurisdiction serves to prevent double taxation of income earned in one jurisdiction by a resident of the other jurisdiction. This means that through the provisions of the tax treaty, a fund manager can benefit from the elimination of double taxation between Singapore and the respective treaty country.
A fund manager is generally incentivised to base its activities in Singapore as a Singapore tax-resident fund has access to several tax-exemption schemes. For example, under an offshore fund regime, an offshore fund managed by a Singapore-based fund manager may be exempt from tax on income from designated investments. Such exemptions are also given under a Singapore-resident fund scheme to fund managers to encourage them to base their fund vehicles in Singapore. Separately, Singapore-based or offshore funds may enjoy tax exemptions for income and gains on designated investments made by the fund under an enhanced-tier fund scheme.
In view of the above, it is therefore unsurprising that outside of the traditional offshore funds jurisdictions (such as the Cayman Islands), Singapore is now regarded as one of the most attractive tax regimes for funds and fund managers.
2. Robust regulatory regime
Singapore is also deemed to be a jurisdiction with a transparent and robust regulatory regime for fund management companies. It has an enhanced regulatory regime which requires fund management companies to meet certain enhanced business conduct and capital requirements. These include rules requiring independent custody and valuation of investor assets. If the type and size of investments managed by the fund management companies exceed certain thresholds, it will have to put in place an adequate risk management framework and be required to undergo independent annual audits by external auditors.
A strong regulatory regime increases the administrative burden on a fund manager. However, it also reinforces the high level of professional duty of care that fund managers owe to their investors. In the longer run, such a regime will help strengthen Singapore’s reputation as a trusted fund management jurisdiction.
In view of the above, it is not surprising that the performance of Asia-Pacific fundraisings, in terms of both the number of funds and the average quantum raised, has been robust over the past five years. Preqin estimates that since 2011, average fund sizes in Asia have increased by 23% to US$320m in 2016, with fund raisings in H1 2017 dominated by private equity funds (82%). However, notwithstanding the growth highlighted above, less than 50% of Asian funds have implemented a capital call facility at the outset. These statistics show that there is a huge potential for growth in the fund finance market within the Asia region.6
Singapore is an ideal vantage point for the fund finance market as the market is widely accessible to participants in the industry. The basic concepts of credit and security relating to the structure of a fund finance facility do not differ substantially from those which originate from more developed markets in the US and Europe. A capital call facility is currently the most widely available fund finance product.
A capital call facility, also known as funds subscription finance or equity bridge finance, is a form of short-term financing provided to a fund. Such financings are typically structured as revolving facilities secured on the investors’ undrawn commitments. The duration of the facility may be several years (typically not longer than three years, and often a shorter period). However, as limited partnership agreements typically restrict any borrowing beyond a year, each loan made by the fund must be repaid within a year of its drawing to comply with the limited partnership agreement. A common agreement is that each loan may be outstanding for no longer than six months. This allows the fund to call on its investors semi-annually and also provides comfort to the bank that there will not be too long of a gap between calls on investors.
These capital call facilities originate from the funds markets in the US and Europe where the facilities are commonly used to bridge the gap between when an investment is made by the fund and when capital contributions are received from investors to finance that investment. Loans are repaid with capital contributions once received from investors.
In Asia, such facilities were historically popular with real estate funds. However, as the market in Asia evolved, these facilities became more prevalent in a broad range of specialty funds and sponsors including infrastructure, private debt and other specialty private equity funds. In this respect, asset-backed facilities – where the financing is provided against the asset value of the fund – are now not uncommon. More recently, hybrid structures (which are a combination of a capital call facility and an asset-backed facility) have also begun to emerge.
The governing law for Asian facilities varies, often depending on the identity of the banks, funds and investors. However, the use of US and English law-governed documents appears to be most prevalent. English law is a popular choice for governing law in this region. This is because freedom of contract is widely regarded as a key principle upheld by the English courts. The principle emphasises the importance of upholding the parties’ commercial bargain.
However, many have wondered what the impact of Brexit on English law loan documentation will be. Whilst the situation should be closely monitored as Brexit unfolds, it is unlikely to result in significant changes to loan documents at this stage.
An important feature of a capital call facility is the security package. Most capital call facilities in Asia-Pacific are provided on a secured basis. The security package for Asian funds financings is similar to those in European and North American facilities and typically consists of an assignment of call rights and account security.
The governing law of a security document will typically follow the law of the jurisdiction in which the secured asset is deemed to be located (the lex situs). In most cases, Singapore law will be used if the call rights are documented under a subscription agreement and limited partnership agreement governed by Singapore law and/or if there is a bank account located in Singapore. Fortunately, the principles of Singapore law on credit and security follow their equivalents under English law closely. However, despite the similarities, it is important to liaise with Singapore counsel as there are key practical requirements specific to Singapore law which the parties will need to fulfil to perfect the security.
As a general principle, under Singapore law a legal assignment must be in writing, signed by the assignor, absolute and notified in writing to any persons against whom the assignor could enforce the assigned rights. If any of these formalities are not complied with, it is an equitable assignment.7 An equitable assignment is less desirable from an assignee’s perspective as the assignee can usually only bring an action against the contract counterparty in its own name if it has a legal assignment. With an equitable assignment, the assignee will usually be required to join in proceedings with the assignor. This may be problematic if the assignor is no longer available or interested in participating.
In addition, a registrable charge created by a Singapore company has to be registered under section 131 of the Companies Act (cap 50, 2006 Rev Ed) (the Companies Act) with the Accounting and Corporate Regulatory Authority of Singapore (“ACRA”) within 30 days from the date the instrument of charge was created. A registrable charge that is not registered within the time limit is void against the liquidator and other creditors of the company.
Similar to other common law jurisdictions, the rules determining the priority of charges under Singapore law are fairly complex. However, under general common law and equitable principles, the relevant time for determining priority between charges is the time of creation of the charges. A prior equitable charge will be defeated by a subsequent bona fide legal chargee for value who had no actual or constructive notice of the prior charge.
As the fund finance market is still not well developed in Singapore, it is important to keep an eye on significant regulatory changes which may affect the asset management industry. It is likely that these regulatory changes may impact the development of the fund finance market. Below are a few of the key regulatory changes.
1. New proposed corporate legal structure for funds
Earlier this year, the Monetary Authority of Singapore (“MAS”) announced a public consultation on the proposed introduction of a new corporate legal structure known as the Singapore Variable Capital Company (“S-VACC”).8 The use of the S-VACC as a corporate vehicle is intended to enable asset managers domiciled in Singapore to enjoy more flexibility and to save on costs.
Currently the most commonly used corporate structures for funds are business private limited companies, trusts and limited partnerships. At present, restrictions on the return of capital to shareholders have meant that companies incorporated under the Companies Act are not widely utilised as a form of corporate vehicle for funds in Singapore.
In contrast, the S-VACC as a corporate vehicle for funds is more advantageous as it gives investors the ability to freely invest in and out of the structure. Unlike a company incorporated under the Companies Act, an S-VACC can vary its capital without significant restrictions and its capital will always be equal to its net assets. Such a feature provides flexibility in the distribution and reduction of capital of the S-VACC as a company – and is just one of several other attractive features of the proposed S-VACC structure.9
2. Simplify approvals and requirements for venture capital funds
In Singapore, the venture capital and private equity sector AUM has grown at a CAGR of 28% over the past five years to reach S$157 billion.10 It is generally recognised that the venture capital and private equity ecosystem plays an important role in supporting entrepreneurship and innovation. As part of its broader efforts in stimulating growth in the industry, the MAS is working on a number of initiatives including one to simplify the authorisation process and regulatory framework for managers of venture capital funds (“VC managers”).11
Currently, VC managers are subject to the same regulatory framework as other fund managers. However, there is a general view that VC investors are typically highly sophisticated. Therefore MAS intends to simplify the admission requirements and authorisation process for VC managers based on what it regards as a lower risk of business and market conduct issues associated with VC managers.
As the above proposed regulatory changes relating to the S-VACC and VC managers are currently at a consultation stage, it is premature to determine how this will impact the fund finance market. However, such regulatory changes will generally be well received as they improve Singapore’s reputation as a competitive asset management hub in the region.
3. Financial accountability
In a bid to enhance its reputation as an ideal destination for banking and asset management, Singapore has made concerted efforts in improving the transparency and accountability of its financial system.
At an international level, the Ministry of Finance announced on 20 January 2016 that Singapore had signed up to the Convention on Mutual Administrative Assistance in Tax Matters (the “Convention”). This is an international agreement for bilateral tax cooperation among the Convention’s signatories to combat cross-border tax offences. So far, 92 jurisdictions, including all G20 countries, most OECD countries and major financial centres such as Singapore, Switzerland and Luxembourg, have signed the Convention. Ratifying the Convention will expand Singapore’s network of partners for exchange of information on request across various jurisdictions and prevent regulatory arbitrage between countries. This forms part of various measures which Singapore has adopted over the years to combat cross-border tax evasion.
One of the more significant pieces of corporate legislation which the Singapore Parliament passed this year is the Companies (Amendment) Act 2017 on 10 March 2017. The rationale of this latest legislative amendment is to ensure that Singapore’s corporate regulatory regime adheres to the high standard of transparency. The amendments include the requirement on Singapore companies, limited liability partnerships and branches of foreign corporations to maintain a new register of controllers. Separately, there is a new requirement for nominee directors to disclose their nominee status and nominators to their companies. The objective of these measures is to ensure that the ownership and the control of these Singapore corporate entities are transparent – thereby reducing the opportunities for these entities to be misused for illicit purposes.
Looking ahead, there are a lot of reasons to be optimistic about the fund finance market in Singapore. The asset management industry has continued with its upward growth trajectory this year. Locally, the Singapore Government has made concerted efforts to implement measures to boost the asset management industry. Therefore whilst fund finance facilities are still not very widely utilised by fund managers, there is potential for growth.
2016 was a year marked by unexpected events such as Brexit and the outcome of the US presidential election. Fortunately the focus in 2017 appears to be more on the need to strengthen the liquidity risk management in funds.12 These are encouraging signs for the fund finance market. The increased emphasis on strengthening liquidity, and the current low interest rate environment, is likely to stimulate greater interest by the Asian funds to access the fund finance market. This may be in respect of its traditional purpose as a subscription facility but perhaps, in the future, more widely as a means to manage the overall cash of the fund on an ongoing basis.
1.Data based on figures presented by Preqin at the Fund Finance Association 1st Asia Pacific Fund Finance Symposium.
2.Article on “What is China’s belt and road initiative?” published by The Economist, 15 May 2017, by J.P., Beijing.
3.Information and data from 2016 Singapore Asset Management Survey, Singapore – Global City, World of Opportunities published by the Monetary Authority of Singapore (“MAS”).
4.Cayman structures are still widely regarded as the most well-established fund structures for Asia-Pacific fund managers.
5.Data based on the Inland Revenue Authority of Singapore website – https://www.iras.gov.sg/irashome/Quick-Links/International-Tax/.
6.Data based on figures presented by Preqin at the Fund Finance Association 1st Asia Pacific Fund Finance Symposium.
7.An absolute assignment of a chose in action (i.e. like the call rights documented under a subscription agreement) by way of security is typically registered as a charge over book debt under section 131(3)(f) of the Companies Act.
8.See Consultation Paper on the Proposed Framework for Singapore Variable Capital Companies dated March 2017 published by the MAS.
9.Refer to the Consultation Paper on the Proposed Framework for Singapore Variable Capital Companies dated March 2017 published by the MAS for a full list of the proposed features of a S-VACC.
10.Information and data from 2016 Singapore Asset Management Survey, Singapore – Global City, World of Opportunities published by the MAS.
11.See Consultation Paper on the Proposed Regulatory Regime for Managers of Venture Capital Funds dated February 2017 published by the MAS.
This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this publication to specific issues or transactions.
16 February 2018