now loading...
Wealth Asia Connect Middle East Treasury & Capital Markets Europe ESG Forum TechTalk
Sponsored Article
Asia-Pacific lures asset managers with new corporate fund structures-Part 2
Weighing the benefits, understanding the challenges
17 Feb 2020
Caleb Wong, Head of Alternatives, Asia-Pacific BNP Paribas Securities Services
Caleb Wong, Head of Alternatives, Asia-Pacific BNP Paribas Securities Services

The introduction of new corporate fund structures by Hong Kong, Australia and Singapore (the OFC, CCIV and VCC respectively) is designed to encourage asset managers to look at domiciling funds in the fast-growing Asia-Pacific region. We assessed these vehicles’ background and key features in part one of this two-part series. In part two, we turn to the factors that asset managers should consider as they decide whether these structures suit their fund manufacturing and distribution strategies.

Benefits drawbacks and challenges to consider
When it comes to fund managers weighing up options around where to domicile, and whether to take advantage of the new Asia-Pacific corporate fund structures, there are no "right" answers. In making their decision, fund managers need to factor in a number of variables, not least the demands of the target investor pool and the regulatory obligations for the fund in question.

Additionally, fund managers need to consider the objectives and specifics of each vehicle, including: the establishment and running costs involved; compliance requirements; taxation elements; and how closely their investment strategies will align with each option. For example, a US-based fund manager who is focused on North American investments would have little reason to domicile their fund in Australia, Hong Kong or Singapore unless they were specifically targeting investors from these or other Asia-Pacific locations.

In addition, a fund manager based in the Asia-Pacific and looking to export an Asian-based investment strategy might consider the advantages of domiciliation in the Asia-Pacific region not only to target APAC investors but also to offer a recognised fund structure to other potential markets.

Furthermore, a domicile like Luxembourg has a long history of hosting funds and a strong track record, and is rightly regarded as well-tested and secure. The UCITS framework, which evolved over 30-plus years in Europe, is considered the dominant cross-border brand globally, and in Asia, more than 100 fund managers have used UCITS-compliant funds (commonly Luxembourg-domiciled SICAVs) to gather in excess of US$250 billion across more than 1,000 separate funds.

Leveraging the UCITS experience, regional governments and regulators are committed to developing Asia-Pacific as an investment management hub, and the evolution of the various passporting schemes and fund structures is, in effect, Asia-Pacific’s response to the dominance of the UCITS brand in the region by offering local alternatives.

As such, the costs and benefits of these new corporate fund structures warrant careful consideration by fund managers and investors, to understand how those might better suit their objectives.

Push and pull factors
In considering whether to use these structures, a number of push and pull factors are relevant.

Investors keen for robust regulatory guidelines might find the corporate structures being propounded by Australia, Hong Kong and Singapore of interest.

This links to the “pull” factors in Australia, Hong Kong and Singapore’s favour. They are well-regarded in terms of their legal and regulatory jurisdictions which reduces risk.

Additionally, each jurisdiction has introduced regulations that have been developed in consultation with the asset management industry and we believe that largely, a fund-friendly approach has been adopted. However, some aspects of the current CCIV drafting create some commercial challenges and further engagement with industry and subsequent refinement would be welcomed.

Another factor is that all are located in a dynamic region that will grow fast in the coming decades. Also, each is based in the same time zone as the investors they are targeting – unlike funds in, say, Europe – and that makes investor interaction easier.

Other key points of attention

As noted in the first part of this analysis, there are a number of differences between Australia’s CCIV, Hong Kong’s OFC and Singapore’s VCC. Some of these differences may drive the appeal of particular jurisdictional structures for regional fund managers. For example, in Australia, the CCIV regime places additional requirements for retail funds versus wholesale funds, notably, there is no depositary requirement for wholesale CCIVs which is mandatory for retail CCIVs.

In addition, the current drafting of the CCIV law for wholesale operators is more onerous than the existing framework for wholesale unit trusts. This could potentially act as a disincentive for fund managers looking to establish a wholesale CCIV1.

Taxation is another important topic. When it comes to OFCs and VCCs, we are awaiting clarity on a number of points2.  In Hong Kong, stamp duty implications associated with OFC are subject to limitations; the transfer of shares in OFC is subject to stamp duty; however, stamp duty is not applicable for OFC shares allotment and cancellation. Private OFCs in Hong Kong are eligible for tax exemption under certain conditions as defined by the Inland Revenue Department3.

And, in Singapore, a VCC will be treated as a company and a single legal entity for tax purposes– with the sub-funds in umbrella VCCs having their name included on the Certificate of Residence4.

In relation to the Australian CCIVs, the current proposal treats sub-funds as separate entities for tax purposes so that a single CCIV can serve as the umbrella for many different investors and investments. Distributions will have both taxable and non-taxable components, with non-resident taxation only applicable to the taxable components. Withholding tax rates continue to be a focus of industry consultation, which is continuing.

Singapore also says VCCs will benefit from its tax incentive schemes for funds under sections 13R and 13X of the Income Tax Act, while approved fund managers managing an incentivized VCC may be eligible from the 10 % concessionary tax rate under the Financial Sector Incentive-Fund Manager (FSI-FM) scheme5.

Key considerations
In summary, fund managers and investors assessing the suitability of these new vehicles must factor in a range of considerations:

The nature of the fund, its assets, and the investor base that is being targeted;

Push factors in jurisdictions where new rules are coming into force – those could make Asia-Pacific offerings more attractive;

And how the laws underpinning the corporate funds account for wholesale versus retail funds, among other factors.

When deciding where to domicile their funds, managers should therefore ask themselves the following key questions:

  • What are your strategic and commercial objectives in Asia-Pacific?
  • What types of assets and investment strategies do you/are you intending to manage?
  • How do you plan to grow your regional footprint and assets under management over the medium to long term?
  • What are the key demands of investor pools for specific funds, and are these more closely met by Asia-Pacific funds than those domiciled outside of the region?

 

BNP Paribas Securities Services is working closely with regulators and key strategic stakeholders to provide feedback and address industry questions on the new schemes. And, thanks to our Asia-Pacific footprint and global cross-border expertise, we can help clients to identify the impact of the different schemes from a cost of administration or ability to support different investment strategies' perspective. We provide support from set-up with trustee, custody and transfer agency services, as well as fund administration.

Call our experts for a more in-depth conversation about cross-border fund distribution.

1 https://www.allens.com.au/insights-news/insights/2018/09/unravelled-are-ccivs-the-beginning-of-the-end-for-the-unit/

2 https://home.kpmg/cn/en/home/insights/2018/06/tax-alert-08-hk-implement-open-ended-fund-companies-regime-july.html

3 Hong Kong Open-Ended Fund Company (OFC) – regulation memo, BNP Paribas Securities Services, op cit.

4 The Singapore Variable Capital Company – regulation memo, BNP Paribas Securities Services, op cit.

5 Ibid.

Disclaimer
BNP Paribas Securities Services is incorporated in France as a partnership limited by shares and is authorised and supervised by the ACPR (Autorité de Contrôle Prudentiel et de Résolution) and the AMF (Autorité des Marchés Financiers).

The information contained within this document (‘information’) is believed to be reliable but neither BNP Paribas Securities Services nor any of its related entities warrant its completeness or accuracy nor accept any responsibility to the extent that such information is relied upon by any party BNP Paribas Securities Services shall not be liable for any errors, omissions or opinions contained within this document. Opinions and estimates contained herein constitute BNP Paribas Securities Services' or its related entities’ judgment at the time of printing and are subject to change without notice. This document is not intended as an offer or solicitation for the purchase or sale of any financial product or service. The information contained in this document does not constitute financial advice, is general in nature and does not take into account your individual objectives, financial situation or needs. You should obtain your own independent professional advice before making any decision in relation to this information. The information contained in this document is not intended for retail investors. Any information contained within this document will not form an agreement between parties. BNP Paribas Securities Services ARBN 149 440 291 (AFSL No: 402467) has been registered in Australia as a foreign company under the Corporations Act 2001(Cth) and is a foreign ADI within the meaning of s 5(1) of the Banking Act 1959. This document is not intended as an offer or solicitation for the purchase or sale of any financial product or service outside of Australia and is intended for ‘wholesale clients’ only (as such term is defined in the Corporations Act 2001 (Cth)).

BNP Paribas Securities Services, acting through its Hong Kong Branch, is regulated by the Hong Kong Monetary Authority and is licensed by the SFC to conduct Type 1 (dealing in securities) regulated activity.

BNP Paribas Securities Services, acting through its Singapore Branch, is regulated by the Monetary Authority of Singapore.

The New Zealand securities services business operates through BNP Paribas Fund Services Australasia Pty Ltd. BNP Paribas Fund Services Australasia Pty Ltd is a wholly owned subsidiary of BNP Paribas Securities Services. BNP Paribas Fund Services Australasia Pty Ltd ABN 71 002 655 674 (‘BPFSA’) is an Australian incorporated company which is registered with the New Zealand Companies Office under registration number 1010736. BPFSA is also registered under the Financial Service Providers (Registration and Dispute Resolution) Act 2008.

Conversation
Sandy Tan
Sandy Tan
head of ecosystems, institutional banking group
DBS Hong Kong
- JOINED THE EVENT -
Exclusive roundtable
Unlocking the potential of sustainable supply chains
View Highlights
Conversation
Jenn Hui Tan
Jenn Hui Tan
global head of stewardship and sustainable investing
Fidelity International
- JOINED THE EVENT -
4th ESG Summit Webinar Series - Part 1
Paving the way toward net zero
View Highlights