Interest is rising among rich Chinese and Southeast Asians in setting up trusts to pass on their wealth to the next generation, says Orlando Smith, premier of the British Virgin Islands – a trend he expects to benefit the Caribbean territory.
That is one driver behind the BVI’s move to set up a representative office in Hong Kong, which officially opens on Thursday. Another is a desire to attract more investment funds to domicile in the jurisdiction, rather than using the Cayman Islands, the dominant centre for Asian alternative vehicles such as hedge and private equity fund firms.
“There’s a lot of demand for trust structures across Asia, where the number of high-net-worth individuals [HNWIs] is growing faster than other regions in the world, including Europe and North America," Smith tells AsianInvestor. “It naturally follows that the people with the most wealth will want to manage it more effectively.”
He points to the BVI’s “easy to manage, reliable and cost-effective” structures, as well as the fact that it already sources some 40% of its financial services business from Asia.
Specifically, Chinese entrepreneurs planning an IPO for their business are increasingly putting their own shareholdings into a trust, notes Michael Gagie, partner at offshore law firm Maples and Calder. This has become somewhat of an “industry standard approach in terms of pre-IPO planning” for Chinese HNWIs, he says. “A lot of the inquiries [about BVI trusts] have been around those pre-IPO structures.”
Moreover, the same entrepreneurs often want to set up a share-option scheme to benefit their employees post-IPO, says Gagie, and a growing number have, again, been looking at using BVI trust structures over the past couple of years.
“In addition to China, another regional hotspot [for BVI] is Singapore,” says Gagie. “A lot of private client and trust-related work is sourced from Indonesia, as wealthy Southeast Asians tend to bank in Singapore.” The patriarchs of the businesses are often reaching the stage where they are looking at succession structures.
As for BVI’s desire to win a greater share of the fund business, in which Cayman has traditionally been a dominant jurisdiction, Smith says: “We would of course like to see the number of funds increasing in the territory.” He argues that this is likely to happen for similar reasons as those behind the likely growth in use of BVI trust structures – because rich families are increasingly into managing their wealth effectively, and the BVI is very cooperative and well regulated as a jurisdiction.
That said, one practitioner based in Hong Kong argues that the BVI must not only match what Cayman offers, but actually offer a more attractive environment to make funds want to use BVI. Another says that BVI does not have the same level of fund servicing infrastructure as Cayman, something that might prove an issue in an environment where fund managers may need to have more ‘substance’ on the ground in their domicile of choice.
However, Smith points out that all the main offshore BVI law firms have a presence there, while Gagie says the same is true of the main fund administrators and accounting firms. “So I don't think from a consumer perspective,” adds Smith, “you’d have any concerns about how your investment structure is being managed locally.”
Moreover, a growing number of Asian family offices are reaching a size in terms of assets that they want to manage their own funds in-house rather than outsourcing those investments, says Gagie.
In such cases, for those making enquiries about the use of BVI trusts, it’s “not a huge leap of faith” for them to use the jurisdiction for domiciling investment funds, particularly where they already have some exposure to and familiarity with the jurisdiction through BVI business companies in their existing structures.
A further advantage the BVI holds is that it is the “go-to vehicle” for downstream investments by private equity funds, says Gagie. “So even if the PE fund itself is not domiciled in the BVI, if it’s making an investment in Asia, the investment vehicle of choice will usually be a BVI company.”