VCC – Why use Board Support Services (Solas Fiduciary)

Martin O’Regan of Solas Fiduciary Services explores the evolving governance ecosystem as VCC goes from strength to strength

Q: With the increased emphasis on corporate governance, how will the role of an independent director evolve?

Martin O’Regan (MOR): With current and more rigorous regulatory requirements, the role of independent and knowledgeable directors will shift from a nice-to-have to a must-have.
Investors are demanding better alignment of interests through corporate governance and board composition.

This trend is not specific to fund management (which is highly regulated), but across all industries. With the onset of higher barriers to entry and outsourced due diligence firms being appointed by investors, the board composition is extremely important, especially if the company is to attract third-party investors and be institutional. As a result, the need for independent directorship is on the rise.

With the turbulent performance of funds as an asset class in recent years, corporate governance takes even more precedence. Even if your fund is consistently in the top decile of performers (in which investors may focus more on returns), it is fundamental for funds to have the right governance structure early on, starting with the board composition.

The days of hiring directors for passive roles or to merely ‘check- the-box’ are over. It is no longer an option, but an essential part of corporate governance that regulators and investors will scrutinise. Each director must account for the unique value-add that they bring to the board.

Q: What kind of board members do you foresee to be in demand?

MOR: As the funds being established become ever more sophisticated, directors will need to be more than just financial and regulatory administrators and will need to demonstrate skills in the areas of risk and strategy oversight, compliance, cyber, operations and investment processes. Experience in multi-jurisdictional and cross- border transactions, the interaction of different legal systems and business cultures will become increasingly important.

There will continue to be demand for board members who can also speak Chinese due to the wave of experiences, while growing our portfolio of mainland fundraisers setting up their own funds. Whether the man- agers are from mainland China or elsewhere setting up in Singapore, there will be more capital flowing with China regardless as the country opens up its capital markets. At Solas we have Chinese speaking directors, so we are well placed to cater to this.

Q: How is Solas preparing for the expected growth of funds in Singapore upon the increased demand for the variable capital company (VCC)?

MOR: We are proactively gearing up for imminent growth in funds and are actively improving our in-
frastructure and systems. With the expected regulation of directors in Singapore in the next three years, we want to be ahead of the curve and ensure that our practices are of the highest standard.

We have recently relocated to a larger office space to provide a safe and vibrant environment for our growing team and for anticipated future expansion, we have also strengthened our administrative teams to support our directors.

We have expanded our IT and proprietary systems, including stepping up on cyber-security measures, to ensure that our systems are permanently monitored for external threats. We are one of the early movers in this important area, but we always believe in thinking long term and building for the future.

Human capital is one of our greatest assets, and we have expanded our team to meet this demand. We make it a point to bring in a broader, diverse range

Q: Are there any recent regulatory changes in other juris-dictions and how will they impact Singapore and vice versa, with the onset of the VCC?

MOR: Most international fund jurisdictions have had to re- view their approach to matters such as economic substance, governance and data protection as European and North American authorities increasingly focus on matters such as base erosion and profit shifting (Beps) and increasing standards of corporate governance in the funds industry.

For example, the Cayman Islands changed its rules on licensing with the implementation of the Investment Funds (Private Funds) Bill, 2019, all prior licensing exemptions are removed.

Current statistics for Cayman and Luxembourg show a huge number of funds but with a disproportionately small number of local managers. In Singapore, it’s the reverse – a lot of managers but fewer funds.

The VCC will solve that issue – both the managers and their funds can be in Singapore. Singapore is positioning itself to become an equal or competitive alternative to Cayman and Luxembourg in the future with the onset of the VCC, which is designed deliberately to meet the shifting international regulatory expectations. Over 500 VCC’s have registered since its launch in January 2020. We anticipate a keen second wave of VCCs as the experience of the first movers is absorbed by market players.

There definitely will be an extra push for funds business in Singapore. Naturally, the more funds there are, the more independent directors are needed. This will not just be in quantity, but quality as well. We foresee that MAS will be more stringent in regulating the directors and service providers, so we need a pool of di- rectors with depth and breadth of experience in place. That’s why we chose to build our capacity in advance, with capable and effective ancillary services.

I have also set up and chair the Singapore Fund Directors Association (SFDA), the premise and ethos behind the SFDA is to grow the pool of independent directors in Singapore, develop and nurture thought leadership and advocacy and provide credible accredited training to new and existing fund directors in Singapore. This will be critical for the development of governance around the VCC ecosystem.

MOR: When the VCC was first released two years ago, there was an expectation that this would not attract interest from real estate (RE) or family offices, as the VCC requires the engagement of a licensed manager, whereas historically a large proportion of RE managers have operated under the immoveable assets licensing exemptions. However, we have seen a large number of real estate managers have taken an interest in the VCC, even though obtaining a license will be required. We have seen a significant number of single and multi-family offices becoming licensed to take advantage of attributes of the VCC.

Previously, many private equity and real estate funds established in Singapore have utilised existing company structures, which are cumbersome in managing share issues and redemptions for investments and distributions. Alternatively, they utilised unit trust structures, which provide flexibility in this area, together with the ability to create segregated sub-trusts, but which cannot access the opportunities afforded under Singapore’s myriad of double taxation treaties. The VCC solves these issues.

It will be interesting to see the next phase of the VCC and how widely it is accepted in the market- place. As with most new initiatives, it will take time to settle but we have high expectations for the success of the VCC. The regulator has done a tremendous job in getting the VCC ready and launched. We are seeing keen interest not only from local managers but regionally from places like Australia, Hong Kong, Japan,

We will continue to enhance our capabilities in anticipation of full acceptance of the VCC, and we have the right team and infrastructure in place to do just that.