Prior to the establishment of VCC as a legal entity form/structure for investment funds, Singapore did not have any corporate form or vehicle that caters to specific needs of hedge funds, private equity funds, mutual funds, or real estate funds.
This resulted in many of the current fund structures set up in Singapore taking the form of trading or investment subsidiaries with fund pooling outside of the country.
The current challenges faced by investors when using a Singapore corporation as an investment fund include:
- Lack of variable capital structure – Singapore corporations are vehicles with fixed capital. Ideally, an investment fund should offer its investors/shareholders the ability to freely invest in and out of the structure through subscriptions and redemptions. Variable capital provision is critical to the operation of an investment fund.
- Solvency test – Funds set up as corporation are required to go through administrative processes such as solvency tests before the repayment of the capital. This can be challenging administratively and can result in legal liability issues for the board of directors and the company secretary.
- Accounting classification of redeemable shares – Both the International and Singapore Financial Reporting Standards (IFRS and Singapore FRS) requires that funding instruments prima facie be classified as a “liability” when a Singapore fund is capitalised or invested in using redeemable preferred shares. This can pose as a challenge when conducting the required solvency test prior to the capital reduction/redemption exercise.
- Distributions – Unlike a typical investment fund where redemptions would be funded at the net asset value of shares and units held, distributions from a Singapore corporation can only be made out of profit and not capital.
- Financial reporting – Other complications in financial reporting include the consolidation of underlying portfolios if certain shareholding thresholds are met.
- Privacy – Investor privacy can be an issue for private investors and institutions looking to invest in Singapore. As financial statements and shareholder list of Singapore corporations are to be made publicly available.
Hence, the VCC will make significant changes to tackle these challenges. Some of the key features of the VCC include – allowance of both entry into and exit from the fund at its net asset value, shareholder lists and financial statements will not be required to be made publicly available, the VCC will not be subjected to declaration of solvency, the VCC will be able to repay out of its net capital and classification of its shares as a liability would not have consequences following the relief from solvency test.
The VCC does indeed avail entities in Singapore to relief from rules relating to the Singapore Companies Act. It will make future administration of this type of entity easier simply because the nature of operating a fund differs from that of a company.
Privacy is also another key winner for the VCC. At present, shareholder information of Singapore companies are readily available online, which is a bane for many.