VCC Structures Are Positioning Singapore as a Prime Global Location for Wealth Management

By Nicholas Larsen, International Banker

Following a successful pilot programme carried out by 18 fund managers in September 2019, the Monetary Authority of Singapore (MAS) and the Accounting and Corporate Regulatory Authority (ACRA) launched the Variable Capital Company (VCC) framework on January 15, 2020, as a major new type of fund vehicle. Among the MAS’s aims for the VCC is to encourage more funds to be domiciled in Singapore and enhance the city-state’s value as an international fund-management centre. And with more than one thousand VCCs having already been incorporated during the five or so years since the launch of this structure, investors and wealth managers the world over are now enjoying the slew of benefits from having chosen to domicile their investment funds in Singapore through this flexible, low-cost corporate structure.

Incorporated in Singapore, VCCs are structured to gather multiple investment funds under the umbrella of a single corporate entity. Whether those funds comprise venture capital (VC), private equity, hedge funds or even environmental, social and governance (ESG) strategies, the VCC framework is applicable across virtually the entire breadth of the fund universe. The structure can also be created as either a standalone fund or an umbrella entity that can contain multiple sub-funds. Under both scenarios, the assets are brought under a single corporate structure.

Each sub-fund under the same umbrella VCC is ring-fenced, which means that its assets and liabilities are segregated from others, thus allowing each sub-fund to pursue its own investment strategy and have its own set of investors. What’s more, the operation of one sub-fund within the umbrella VCC should have no bearing on the operations of the VCC’s other sub-funds—should one sub-fund be wound up, for example, this will not impact the other sub-funds within the structure.

The umbrella structure also generates potentially sizeable economies of scale, as all underlying sub-funds are under the management of the same board of directors and common service providers, thus minimising certain administrative requirements. “Creating VCCs as an umbrella structure allows for the pooling of investors in broad categories of asset classes which can then be allocated proportionately across further investors,” PwC (PricewaterhouseCoopers) noted in its April 2020 report “Singapore Variable Capital Company: The game changer for asset management in Asia Pacific”. “Such pooling enhances efficiency by removing the need for additional administrative layers across the fund structures.”

The VCC thus offers a versatile, flexible framework for fund managers, enabling them to incorporate new structures or re-domicile existing overseas ones. Indeed, part of the appeal of setting up VCCs is that fund managers can pursue a diversity of investing strategies for the various sub-funds included under a single VCC entity. “Fund managers will be able to constitute investment funds as VCCs across both traditional and alternative strategies, and as open-ended or closed-end funds,” the MAS noted upon the launch of VCCs, referring to open-ended funds that allow investors to redeem investments at their discretion and closed-end funds that prevent investors from doing so.

Given their distinct flexibility and cost-effectiveness compared to other vehicles for managed investment funds, VCCs have enjoyed phenomenal demand since launching in 2020. In June 2023, for instance, DBS Private Bank launched the DBS Multi Family Office Foundry VCC (DBS MFO), the world’s first bank-backed multi-family office leveraging the Variable Capital Company structure, amid rising interest from ultra-high-net-worth (UHNW) families around the world to set up family offices in Singapore. “It offers an alternative option for affluent families to manage their wealth in Singapore, without having to establish their own Single Family Office (SFO),” according to Singapore’s biggest bank. “Through DBS MFO, clients will be able to access a full suite of investment services—from investment management, trade execution, to custody solutions—via a single integrated platform.”

Indeed, the opportunity for family offices and fund managers located all across the world to gain exposure to the Singapore market’s stability is perhaps the most attractive feature of VCCs. A well-regulated, transparent, economically and politically stable jurisdiction based on the English common law system, it should come as no surprise that Singapore is home to a total of 1,029 umbrella or standalone VCCs, as of the start of 2024, either incorporated or re-domiciled in the Southeast Asian city-state for various fund strategies. According to MAS figures, these structures represent 2,158 sub-funds and are managed by 565 regulated fund-management companies, further underscoring how appealing Singapore’s robust regulatory environment is for safeguarding fund managers’ assets across the world.

VCCs are also hugely beneficial as conduits through which long-term residency in Singapore’s developed economy can be achieved, which further explains their immense popularity with worldwide investors of many different types. “The VCC provides an additional structuring option to attract global fund managers to use Singapore as their investment base,” the MAS stated when launching the new structure, underlining the regulator’s goal of bolstering Singapore’s reputation as one of the world’s leading domiciles for funds.

“As global demand for family offices continues to rise, the unique strength of the ‘Singapore Inc’ proposition—a cocktail of attributes including strong rule of law as well as political and economic stability, among others—will continue to appeal to families worldwide,” Lee Woon Shiu, group head of wealth planning, family office and insurance solutions of DBS Bank, remarked following DBS’s launch of its Multi Family Office Foundry VCC in June 2023. “And being Singapore’s leading family office practice, we are very much committed to supporting our clients in their evolving needs and help safeguard their legacy for their loved ones.”

The tax benefits of setting up a VCC for fund managers and investors also cannot be overlooked. For example, as a corporation domiciled in Singapore, both single and umbrella VCCs need to file only a single corporate tax return. Should the funds gathered under a VCC fulfil certain criteria as issued by the MAS, moreover, the VCC may also be eligible for tax exemptions, such as the 13O Singapore Resident Fund Tax Incentive Scheme and the 13U Enhanced-Tier Fund Tax Incentive Scheme.

For instance, the former requires a minimum of S$20 million in designated investments (or assets under management) at the point of application and throughout the incentive period, as well as the employment of a minimum of two professionals, of whom at least one is not a family member of the beneficial owners at the point of application and throughout the incentive period. The latter, 13U, meanwhile, requires a minimum of S$50 million in designated investments and the employment of a minimum of three professionals, again with at least one not a family member of the beneficial owners.

Tax exemptions also extend to dividends issued by VCCs, provided that the VCC is a Singapore tax resident. Indeed, the opportunity for Singapore tax residency is another major attraction for overseas fund managers seeking fund domiciliation in Singapore via the VCC route. Should management of the VCC’s business remain in the hands of a Singapore-licensed fund manager, tax-residency approval for the VCC and all of its sub-funds should be feasible, which, in turn, should provide access to Singapore’s expansive tax treaty network of around 100 countries.

The involvement of a Singapore-licensed fund manager, however, is the key mandatory requirement for gaining approval to establish a Singapore-domiciled VCC. Indeed, the corporate structure must engage a “Permissible Fund Manager”—that is, a licensed fund manager that is domiciled locally in Singapore and regulated by the MAS—to coordinate between the VCC, service providers and stakeholders. The manager can also assign sub-managers or sub-advisors so long as the manager holds the overall responsibility and can resolve issues and conflicts of interest.

Fulfilling such a requirement requires comparably little effort, however, and is a small regulatory hurdle to overcome in exchange for the tremendous upside that investors globally can gain from pursuing the VCC route. “The VCC has become a vital tool in the EAM [external asset manager] toolbox,” Simon Hopkins, at Singapore-based wealth management firm East West Private Wealth, recently explained to Citywire Asia. “The demand has been tremendous, and as a consequence, there are bottlenecks with respect to tax clearance in particular. Nonetheless, they have become the backbone of the revitalised wealth management industry post-pandemic and look set to remain a key feature of Singapore’s unique financial landscape.”