Investors, particularly those in the Asia-Pacific region, are standing by for the launch of the Singapore Variable Capital Company (S-VACC), an open-ended investment company. First announced in March 23, 2017, by Singapore Minister for National Development and Second Minister for Finance Lawrence Wong, S-VACCs are intended to promote interest in a domestic fund and position Singapore as an investment hub. The Monetary Authority of Singapore (MAS) is currently reviewing responses from the market to the S-VACC Act, which will ultimately lead to the legislation’s final form and enactment sometime in 2018. For Asian asset managers, this latter goal of S-VACCs is significant and is expected to heighten awareness and interest in other regional investment-related initiatives. These include the Asia Pacific Economic Cooperation (APEC) Region Funds Passport (ARFP) and the Association of Southeast Asian Nations Collective Investment Schemes (ASEAN CIS). S-VACCs also are likely to support the MAS’ objective to encourage financial technology firms’ (FinTechs) further engagement in the region.
“What Asset Managers and Investors Should Know about S-VACCs”
Singapore’s current regulations enable funds to be established as unit trusts, fixed capital companies and limited partnerships. The S-VACC fund affords much more flexibility than these structures. Specifically, S-VACCs:
- Can be open-ended and closed-ended,
- Cover traditional and alternative assets,
- Can be applied for retail and non-retail strategies,
- Can be used for all types of investment funds in Singapore, and
- Supports umbrella and sub-fund structures.
“S-VACCs Overcome Current Challenges”
In establishing S-VACCs, Singapore is working to overcome major challenges currently facing its investment community. Chief among them is the lack of any investment vehicle that accommodates hedge funds, private equity funds, mutual funds and real estate funds. This has created an apparent void for the region. Another challenge is the absence of variable capital structures which prevents many investors from participating. Also presenting obstacles are: the burdensome solvency tests on funds set up by corporations, the requirement that distributions from a Singapore company only be made from profits and not capital, complicated financial reporting requirements, and the lack of privacy on financial instruments and shareholder lists of Singapore corporations. The S-VACC structure addresses these challenges in that:
- Entry into and out of the fund at its net asset value is permitted.
- Distributions can be made and repaid from net assets/capital.
- Shares can be classified as a liability relieving solvency test requirements.
- Financial statements or lists of shareholders must be made public.
“Regulations and Treatment of an S-VACC”
S-VACC will be governed by two laws – The S-VACC Act and the Securities and Futures Act. It requires that an approved custodian be appointed and not a trustee. There must be a Singapore-based licensed or regulated fund manager, unless the manager is exempted under the regulations. As for its tax treatment, an S-VACC will be treated like a company and a single entity with certain tax rules applying (i.e., 13R and 13X). Other tax implications for an S-VACC are a 10% concessionary tax rate which will be extended to approved fund managers under the Financial Sector Incentive-Fund Manager scheme, and Singapore’s existing GST remission for funds which will be extended to S-VACC’s which are incentivized under any tax exemption rules. A fair value basis will be applied to evaluate S-VACC investments.
Singapore has long been on a mission to establish itself as a dynamic investment center for the Asia Pacific region. The S-VACC structure, with its built-in versatility and flexibility, will serve as a valuable catalyst in helping the nation achieve this goal.