Family offices embrace Singapore's fund structure to manage money
An increasing number of single family offices are examining the variable capital company (VCC) route for establishing their presence in Singapore, as the country's regulatory landscape evolves and new entities struggle with prolonged family office application processes.
DLA Piper
“The VCC has become increasingly popular for family offices. Typically, a third-party licensed fund manager sets up an umbrella VCC with different sub-funds, which are then offered to various families,” said Victor Sanlorien, associate at Singapore law firm DLA Piper.
“The tax incentive is applied at the level of the VCC, and it is not subject to the stringent conditions applicable to Section 13O / 13U tax incentive conditions for single family offices," he told AsianInvestor.
The variable capital company (VCC) is a flexible corporate structure in Singapore designed specifically for investment funds.
It can be organised either as a single, standalone fund or as a larger "umbrella" entity that comprises multiple "sub-funds."
A VCC can potentially benefit from tax incentives provided they meet certain requirements.
“The system is a unique and efficient opportunity to operate funds out of Singapore and we have onboarded many Korean, Malaysian, and Hong Kong family offices to our funds under VCCs regardless of the more stringent requirements,” Won-Ki Kim deputy CEO of AIP Investment Partners told AsianInvestor.
AIP Investment Partners
The structure offers several advantages to family offices, an important one being confidentiality, where the register of members of a VCC is not required to be open for inspection by the public.
Hrishikesh Unni, managing director atTaurus Wealth Advisors, highlighted another positive.
“One popularity among family offices for using VCC structure is that subsequent KYC checks are easier because the funds and its source have seen a thorough due diligence at the time of setting up of the VCC,” Unni told AsianInvestor.
The Monetary Authority of Singapore has implemented stricter criteria and a more thorough review process for the Section 13O and 13U tax incentive schemes for single family office structures.
These changes, implemented over the last two years, have made the VCC structure more appealing to family offices looking to set up operations in Singapore, especially after a moneylaundering scandal in 2023 reportedly slowed the application processes for new entrants.
ADDING UP THE ADVANTAGES
The VCC route is also being used to access and invest in a wide range of global investment opportunities.
AIP Investment Partners, for instance, uses the VCC platform to co-GP, with family offices, investing in Korean startups in the growth stage.
"This creates a synergy for single family offices to get professional insights into industries they are interested in and get better access to off-market and institutional level deal flow," according to Kim.
Taurus Wealth Advisors
An asset management survey released by MAS in November 2023 showed 21% of VCCs are external asset managers or multi-family offices with a total of 969 VCCs being incorporated or re-domiciled in Singapore for various use cases and funds.
Many families across Asia looking to restructure the ownership of their operating businesses from legacy structures to institutional holding structures domiciled in a legally and politically strong Singapore are also using the VCC fund structure.
CHALLENGES
However, the initial setup fees and operating fees for a VCC in Singapore can be higher than in the Cayman Islands or British Virgin Islands.
“Even as an asset manager, we find that the ongoing costs of operations in the form of fees for fund administration, legal and corporate secretarial services are increasing, to the point that it creates worries of a negative cash flow as opposed to making it easier for profit generation,” said AIP Investment Partners' Kim.
“The implementation costs of a VCC are slightly higher than those of normal private limited companies also, even though the tax incentive application does not differentiate between whether the family office intends to use a VCC or a private limited structure, the same process applies,” said DLA Piper’s Sanlorien-=.
The industry is now pushing for VCC 2.0.
“The industry has pushed for broader management conditions under the VCC Act 2018, beyond Singapore-licensed fund managers,” said Sanlorien.
However, it remains to be seen if this will be included in the next round of the VCC Act 2018.
To boost VCC adoption, streamlining application processing, reducing setup costs, relaxing some economic conditions, and providing regular seminars on VCCs can help, said Kim.