Singapore leads Hong Kong in race to be domicile center

Singapore has gotten a jump on Hong Kong this year in becoming a domicile of choice for public and private investment funds at a time when tax-haven heavyweights such as the Cayman Islands are facing growing scrutiny.

In the less than six months since Singapore's government launched its variable capital company scheme to facilitate the city-state's emergence as a fund domicile center, official tallies show asset managers have established 63 VCC funds, dwarfing the eight funds set up in Hong Kong using the open-end fund company, or OFC, structure the territory debuted more than a year ago.

The comparison isn't entirely apples to apples, as Singapore's VCC fund structure can be used for everything from publicly traded securities to private markets vehicles, while analysts say Hong Kong's OFC is more geared to retail funds and hedge funds. The territory's government is set to launch an upgraded limited partnership fund structure for private markets managers at the end of August.

Money managers and service providers say a well-thought-out and executed plan to promote Singapore as a domicile center is paying off now for the city-state.

The VCC initiative keeps Singapore "a couple of steps ahead of what regulators and investors are demanding," combining the advantages limited partnerships and investment trusts enjoy in easily injecting or withdrawing money with a private corporate fund structure that can "internally segregate assets and liabilities" among subfunds and access tax treaties, said Daniel Yong, a Singapore-based partner with law firm Withers KhattarWong LLP.

Analysts say Singapore's government — spearheaded by the Monetary Authority of Singapore — has rolled out tax incentives over the years that have made the advantages of domiciling a fund in havens like the Caymans or the British Virgin Islands less compelling.

Meanwhile, a new grant scheme under the VCC program, covering up to 70% of fund managers' eligible expenses for Singapore-based VCC service providers through January 2023, is an added attraction, noted Penelope Shen, a Hong Kong-based partner with law firm Stephenson Harwood LLP.

While local boutique firms have dominated the list of managers setting up VCC funds since January, analysts said the absence of big global players so far shouldn't detract from the program's success in getting off the ground just as a deadly pandemic was roiling economies and capital markets around the world.

A MAS spokesperson said Singapore’s flexible corporate VCC framework offers investment funds features “on par” with what they can find in other international fund jurisdictions, adding "we can also expect the VCC framework to create new business and job opportunities for Singapore-based fund service providers such as legal and tax advisors, accountants, fund administrators and fund custodians.”

The cocktail of incentives and grants the Monetary Authority of Singapore is providing has left a lot of predominantly Singapore-based fund managers "quite interested to try this new structure," said Vyasa Arunachalam, a Singapore-based partner with law firm Dentons Rodyk & Davidson LLP. Global managers could take a bit longer, but MAS continues to elicit feedback on the program and will likely stand ready to amend or tweak the VCC structure as needed, Mr. Arunachalam said.

While Hong Kong's OFC structure is similar to the VCC in many aspects, Hong Kong has been a "step behind Singapore in terms of policy support," Ms. Shen said.

There is a perception that Singapore authorities have been much more forward looking, flexible and adaptable in promoting their new fund structure, agreed Scott D. Peterman, a Hong Kong-based partner with law firm Orrick, Herrington & Sutcliffe LLP.

Money managers say Singapore's better-coordinated rollout has made it easier at this point to set up funds in the city-state.

David Ng, chief operating officer with Hong Kong-based CSOP Asset Management Ltd., a $6.3 billion joint venture between Shenzhen-based China Southern Asset Management Co. Ltd. and Hong Kong-based OP Financial Investments Ltd., said CSOP had been looking to set up both a VCC fund and an OFC fund this year but ultimately was able to move ahead first in Singapore.

In March, CSOP launched "our first VCC," a quantitative index allocation strategy, with $160 million, and "we are on target" to launch a second fund there over the coming three months, Mr. Ng said.

With the city-state's entire financial ecosystem — including accounting firms such as PricewaterhouseCoopers, law firms such as Simmons & Simmons, trustees and custodians — "very engaged" in promoting the initiative, the exercise of setting up a VCC fund proved "efficient" and "painless," he said.

CSOP had been working to launch an OFC fund as well, but ultimately "we couldn't work out the details of the deal" and the launch was aborted, Mr. Ng said. CSOP will continue to work toward setting up an OFC fund, he said.

Eric Neo, group chief executive of Singapore-based RF International Holdings, said his firm likewise considered both the VCC and the OFC structures for a fund launch but ultimately chose the Singapore domicile option — citing the flexibility of the program's framework, Singapore's extensive network of tax treaties and the city-state's strong governance backdrop as factors. On May 29, RF announced that its subsidiary, RF Fund Management, had registered its RF Transformation Fund VCC as the vehicle for the firm's inaugural private equity fund, targeting $50 million in commitments.

Singapore's and Hong Kong's efforts come as long-standing pressures favoring the move to "onshore jurisdictions from offshore jurisdictions" have heated up over the past year, noted Dean Collins, a Singapore-based partner with law firm Dechert LLP.

For example, the Cayman Islands this year — in an effort to avoid potential European Union sanctions — put new fund domicile rules in place that made it harder for a manager based out of Hong Kong or Singapore to manage a Cayman structure, and then the EU applied sanctions anyway, Mr. Collins said.

A growing focus by the Organization for Economic Cooperation and Development and other regulators on "demonstrating substance" — i.e., domiciling a fund where its manager engages in significant portfolio management or advisory activities — is resulting in greater pressure now to move out of "letterbox" jurisdictions, said a consulting veteran based in Singapore, who declined to be named.

While it's unclear whether the EU-Caymans standoff will have material consequences, the reputational issues raised have left fund managers and clients more open to considering new arrangements, analysts say.

"The biggest driver of the domicile decision is what a fund manager's investors want" and as market leaders such as the Caymans face greater scrutiny, a growing number of investors in the U.S., Europe and the fast-growing Asia-Pacific region will be comfortable investing into funds set up in Singapore, predicted Jason R. Nelms, a Singapore-based partner focused on fund formation with law firm Morrison & Foerster LLP.

Three years ago, choosing between an established market leader like the Cayman Islands and Singapore would have been relatively straightforward. The Caymans would likely win "just by virtue of familiarity," Dechert's Mr. Collins said. But "that has pivoted quite significantly" over the past year or two, with a growing number of clients open to considering Singapore, he said.

Mr. Ng said CSOP, in opening a Singapore office two years ago, wanted "to establish ourselves as a major player here," so it was an easy decision for the firm to adopt VCC as its fund vehicle. But reputational considerations among the firm's clients, including insurance companies in Hong Kong and China, likewise favored VCC "as a very good alternative to what we have in the Caymans," he said.

Having to deal with only one layer of VCC service providers is an attraction vis-a-vis the additional auditors, lawyers and so on that CSOP has to retain on the ground for its Cayman funds, Mr. Ng said.

Meanwhile, if Singapore is swamping Hong Kong so far this year in fund domicile wins, some analysts say it's too soon to count out the special administrative region, where regulators are moving quickly to tweak its OFC structure and unveil a new limited partnership scheme.

For example, Stephenson Harwood's Ms. Shen said the OFC revamp could provide greater flexibility on the types of intermediaries that can serve as custodians, removing obstacles for private investment funds that typically appoint prime brokers or broker-dealers to serve in that capacity. Introducing a "redomiciling regime" — something the VCC program offers — is another area likely to be addressed, she said.

Interest in Ho Kong should rise following those revisions, Morrison & Foerster's Mr. Nelms said.

Meanwhile, for the fast-growing contingent of mainland-based asset managers and investors, Hong Kong will be the financial center of choice, analysts say.

Mainland Chinese managers and investors will favor funds domiciled in Hong Kong, whether they opt for an OFC structure or the new limited partnership structure due out by Aug. 31, Orrick's Mr. Peterman noted.

Orrick advised Hong Kong-based fund manager Pacific Hawk (HK) Ltd. on the launch of the special administrative region's first OFC fund at the end of August 2019.

As the move toward onshore jurisdictions increasingly offsets the weight of "inertia and historic practice," Singapore and Hong Kong should be positioned to "capture more of the global funds market," Mr. Nelms said.

"Once the ice is broken," the door will be open for more fund managers — with ever-greater numbers of employees on the ground in Singapore and Hong Kong — to make setting up funds in those markets a "well-worn path," he said.