Singapore PE and VC Landscape Series – A Brief Introduction
Singapore’s asset management industry has quickly become a global hub for investors and managers and is central to the country’s financial services industry. In 2020, total assets under management (AUM) in Singapore increased by 17% to S$4.7 trillion, from S$4.0 trillion in 2019. This robust growth was driven by strong inflows into the traditional and alternative investment strategies, including private equity (PE) and venture capital (VC) asset classes. PE and VC AUM grew 54% and 49% to S$375 billion and S$16 billion, respectively, that year. In our view, the size of the industry in Singapore will continue to grow in the years to come.
This industry is of great importance for various reasons, mainly because it fuels the processes of creative destruction that now underlie economic growth and progress (taken in a purely material context). Some of the most important new technologies are made possible or widely available through investments provided by industry. Sometimes existing businesses are restructured to operate more efficiently and maximize their potential while other businesses are sometimes torn apart if the industry considers (sometimes perhaps unfairly) that they lack a clear value proposition.
Legal structure of funds in Singapore
Recent years have seen substantial changes in this area in Singapore. The most prominent refer to the establishment of Limited Partnerships and Open-End Companies in Singapore as new structures available to the private equity and venture capital industries.
Compared to a limited liability company (not to mention the fact that a handful of private equity or venture capital funds still choose to establish themselves in Singapore as limited liability companies), these new vehicles offer a great flexibility, as well as greater confidentiality for investors. This has led to increased interest in establishing fund vehicles in Singapore, as opposed to establishing such vehicles almost exclusively in offshore jurisdictions such as the Cayman Islands and the British Virgin Islands (although these offshore jurisdictions remain relevant jurisdictions and important for setting up fund vehicles).
Here is a brief introduction to these three structures:
Limited partnerships comprising a general partner (GP) and limited partners (LP) have generally been the preferred legal structure for private equity funds managed in Singapore. The Limited Partnerships Act 2008 governs the establishment of Singapore Limited Partnerships. However, given the familiarity of the Cayman Islands’ more established master-feeder structure, private equity funds generally favor the use of the Cayman legal structure. In such cases, a Cayman Islands Limited Partnership is incorporated under the Exempt Limited Partnerships Act of the Cayman Islands to serve as the primary pooling vehicle that holds a feeder fund incorporated in Singapore. By having the fund entity domiciled in Singapore as a company, the fund can benefit from Singapore’s extensive network of double tax treaties.
Variable Capital Companies
To meet the needs of global and regional fund managers seeking to set up fund structures in Singapore and to strengthen Singapore’s position as a premier asset management hub, the Monetary Authority of Singapore (MAS ) introduced the Variable Capital Company (VCC) as a new corporate vehicle for investment funds. Unlike a limited liability company, a VCC is not bound by any capital maintenance requirements, allowing investors to freely redeem their shares, and is authorized to distribute dividends from its net assets or capital. A VCC is also a separate legal entity and shareholders are not liable for the debts of the VCC beyond the amount of share capital they contributed.
A VCC can be set up as a single stand-alone fund or an umbrella fund with two or more sub-funds, each holding a separate portfolio of assets and liabilities. It can be used both for open-end fund strategies where investors are allowed to redeem their investments at their discretion, and for closed-end fund strategies where redemption is limited.
The attractiveness of the VCC framework with greater flexibility in share issuances and dividend payments has resulted in over 400 VCCs incorporated or domiciled in Singapore as of October 2021. (We have received an increasing number of questions about incorporation of VCCs and have assisted in the creation of several funds that leverage the VCC legal structure.) In addition, MAS has indicated that it is in the process of revising its VCC fund structure to expand the group of fund managers who can use the system and to perform fund conversions and facilitates the redomiciliation of several offshore funds.
Limited Liability Companies
Separately, the private equity funds have also adopted the form of a limited liability company incorporated in Singapore. However, the strict capital maintenance limitations imposed under the Singapore Companies Act 1967 made it difficult for these funds to distribute any returns or dividends from their investments.
Fund Manager Licensing Scheme
The other area where significant changes have occurred in the industry is in the applicable licensing regime.
In some areas, the regime has been liberalized, for example by creating a simplified licensing regime for venture capital investments which does not include any minimum capital requirements or years of experience for the relevant professionals of the manager of funds. In other areas, the regime has been made stricter, as is the case with registered fund managers who are only allowed to serve up to 30 qualified investors and have no more than $200 million. Singaporeans. In the past, a simple notice had to be given to MAS 14 days from the date of commencement of activities, but now the ‘registration’ process is somewhat akin to obtaining a full licence.
Despite the changes, there appears to be strong and growing demand for fund management services in the industry, with asset managers keen to establish a presence in Singapore: to date, the total number of asset managers registered and licensed in Singapore increased to around 1,106.
Singapore is undoubtedly one of the leading centers for asset management and private wealth in Asia, recording a double-digit compound annual growth rate in its assets under management over the past five years. Besides the fact that private equity and venture capital funds are a mainstay of the industry, we have seen growing interest in the formation of private debt/credit funds that seek to capitalize on growing demand from South Asia. Sud-Est for non-traditional lending solutions that offer attractive returns in a high growth environment.