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THE BVI AND CHINA is for investors,” de Vries says. On the topic of private equity, O’Connell points to one of his clients, the Grail Co. which runs the Chalice Fund, a hybrid private equity <strong>fund</strong>-<strong>hedge</strong> <strong>fund</strong>, which, he says, “uses a very complex structure, with no side pockets, using special purpose vehicle companies to make its investments.” Ogier partner Simon Schilder says his law firm is also seeing more private equity investments by <strong>hedge</strong> <strong>fund</strong>s. “More and more we’re seeing <strong>fund</strong>s set up with side pockets in existence at the time of launch for use where the <strong>fund</strong> makes ‘designated’ – that is, private equity – investments,” he says. “A few years ago we were drafting into the PPM the fact that the <strong>fund</strong> might in due course use side pockets, and then creating the side pocket further down the road when needed. “Now for United States managers the typical structure is for the <strong>fund</strong> to have three classes of shares — one class for investors eligible to participate in new issues; one class for investors not eligible to participate in new issues; and one class for side pocket investments.” He says that the “mechanics” were drafted into the <strong>hedge</strong> <strong>fund</strong>’s PPM and constitutional documents to allow for the conversion of <strong>hedge</strong> <strong>fund</strong> shares into side pockets when the <strong>fund</strong> makes investments that needed to be put into side pockets. “‘Convergence’ has become some what of a buzzword,” says Kieron O’Rourke, partner at law firm Harneys. “We’ve seen some <strong>hedge</strong> <strong>fund</strong>s invest in more traditional private equity type investments and therefore require side pocket advice,” O’Rourke says, although he thinks it’s not as big a trend as some people maintain. SIDE ISSUES Conyers Dill & Pearman’s Briant also says that side letters written into <strong>hedge</strong> <strong>fund</strong>s have become a major issue. Side letters are separate agreements between <strong>hedge</strong> <strong>fund</strong>s and their largest investors. Briant says they started to appear about 10–15 years ago between <strong>fund</strong> managers and investors and involved things such as a manager reimbursing an investor for part of his fees. “<strong>The</strong> envelope has been pushed further now,” Briant says, with the grandfathering of investors so that no adverse change that affected the <strong>fund</strong> would affect particular investors. Side letters also have been written for investors to include redemption rights for particular investors and notification if key people employed in a <strong>hedge</strong> <strong>fund</strong> firm depart. <strong>The</strong> issue of side letters is also slightly contentious, with debate around whether key-man departure clauses linked with performance clauses in side letters could see some investors redeemed early as a top manager left, before performance of the <strong>fund</strong> suffered as a result. <strong>The</strong> debate then ranges around whether those investors left in the <strong>fund</strong> could chase those early redeemers for having ‘inside knowledge’, via their side letters. REDEMPTION RIGHTS According to Briant, redemption rights is a key area the US Securities & Exchange Commission and the Financial Services Authority in the United Kingdom have started focusing on. In the United Kingdom the Alternative Investment Management Association has recommended a disclosure policy for <strong>hedge</strong> <strong>fund</strong>s and the Financial Services Authority said compliance would be beneficial. Briant says, even with the “most favored nation” and “grandfathering” that has been given to some investors, the grants in side letters “are not nearly as aggressive as they were two years ago. <strong>The</strong>y’re not nearly as egregious as they were.” He says, there are “policy statements” now, that the <strong>fund</strong>s have made and “managers will be able to obey them,” he continues. <strong>The</strong>re are lots of “esoteric” vehicles that <strong>hedge</strong> <strong>fund</strong>s are invested in, according to Briant, including real estate investments and including a euro class and a yen class of their <strong>fund</strong>s. He says there are also private equity <strong>fund</strong>s, domiciled in the British Virgin Islands, that invest in real estate that give investors limited redemption rights. Hedge <strong>fund</strong>s are investing in assets from Russia, China, Europe and Asia, according to KPMG. “<strong>The</strong> majority investors are from the United States, from the United Kingdom, Hong Kong and China. “<strong>The</strong> business acquired by the Special Purpose Acquisition Company will be dependent on the management team’s experience and contacts within a given sector. If a SPAC wants to acquire a business in China it should have a management team not only experienced in conducting business in China but also in the relevant sector of the target.” Jose Santos, Maples & Calder “More money is also coming from Eastern Europe,” he says. TRUST ME UP! <strong>The</strong>re’s been an increase in unit trust structures, according to Harney’s O’Rourke. “<strong>The</strong>y’re typically more likely to be used for the Far East market. Our clients are able to use unit trust structures for targeting investors in Japan,” Harneys’ O’Rourke says. Unit trusts are established pursuant to a deed of trust. A unit trust arrangement is not a separate legal entity. It is the trustee who has legal capacity and who holds the assets of the <strong>fund</strong> on the terms of the deed of trust for the investors in the unit trust scheme. Under BVI law the holders of units in a unit trust scheme are the beneficial owners of the trust assets. If the trustee of a British Virgin Islands unit trust is a company incorporated in or operating out of the BVI, then the trustee is likely to require a trust license under the BVI Banks and Trust Companies Act, 1990. It will also have to apply for recognition of the unit trust as a <strong>fund</strong> under the British Virgin Islands’ Mutual Funds Act. VENTURING FORTH <strong>The</strong>re are also a lot of venture capital <strong>fund</strong> arrangements used by BVI-domiciled companies, O’Rourke says. Venture capital <strong>fund</strong>s are not regulated and <strong>fund</strong>s are increasingly using them. A Special Purpose Acquisition Company is another form of private equity investment vehicle which is attractive to investors. Jose Santos, a senior associate in Maples and Calder, says “they’ve been growing in popularity over the last couple of years. “We’re seeing more and more Special Purpose Acquisition Companies (SPACs) being set up in the offshore jurisdictions.” A Special Purpose Acquisition Company is a company that is a “publicly listed shell company that has no operating history”, says Maples & Calder’s Santos. It uses the proceeds of the listing to acquire a yet-to-be identified target business. A BRIEF HISTORY OF SPACS “<strong>The</strong> original SPACs were completed in the mid-1990s by EarlyBirdCapital as a means for individual investors to access acquisition opportunities typically restricted to private equity <strong>fund</strong>s,” says Integrated Corporate Relations in a white paper on SPACs. While the glut of initial public offerings in the late 1990s saw demand for SPACs shrink, after 2003, investors’ interest in them grew again and as of 2006, 41 of them had gone public, raising $2.6bn in the process. Examples of the successful use of SPACs thus far, have included in the merger of International Shipping with Navios, Services Acquisition’s merger with Jamba Juice and Stone Arcade with Kapstone Paper. Key SPAC players include Citi, Deutsche Bank Securities and Maxim Group LLC. SPACs have a limited life – usually 12 to 24 months – “in which the management team has to find a suitable acquisition target,” says Maples & Calder’s Santos. One reason why many are now being set up offshore is because of the Sarbanes-Oxley law and Securities & Exchange Commission’s regulations, which place more reporting requirements on United S16 | BRITISH VIRGIN ISLANDS SUPPLEMENT HEDGE FUNDS REVIEW | October 2007 www.<strong>hedge</strong><strong>fund</strong>sreview.com
VP Bank (BVI) Limited in cooperation with ATU Fund Administrators (BVI) Limited 3076, Sir Francis Drake’s Highway, P.O. Box 3463, Road Town, Tortola, British Virgin Islands, VG 1110 Tel.: +1 284 494 1100, Fax: +1 284 494 1199, www.vpbank.vg, info@atubvi.com, www.atubvi.com, A member of the VP Bank and ATU Group of Liechtenstein British Virgin Islands, Vaduz, Zurich, Luxembourg, Anguilla, Munich, Montevideo, Moscow, Hong Kong Ask for the Extraordinary. Fund services and banking solutions all under one roof: Fund administration Trust and corporate Custody & brokerage Payment services Asset-backed lending Transfer agent Directorship Pilot by Michal Shalev h
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