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THE BVI AND CHINA Enter the Chinese dragon – via BVI States-based companies, says Santos (pictured below). “<strong>The</strong> business acquired by the SPAC will be dependent on the management team’s experience and contacts within a given sector. Smaller companies in emerging markets are attractive to management teams because of their growth potential and low acquisition costs,” he says. “If a Special Purpose Acquisition Company 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,” he explains. One feature of SPACs that has helped lure <strong>hedge</strong> <strong>fund</strong> investors, is that after the public offering, the net proceeds are put in an interestbearing trust account with a thirdparty custodian. <strong>The</strong> Special Purpose Acquisition Companies cannot buy a company unless they get approval from a majority of investors in the vehicle — so the <strong>fund</strong>s are earning interest and the SPAC’s management can’t invest it in another company without shareholder approval, which is important to investors, according to Santos. “Investors investing in SPACs find them attractive because they provide liquidity,” Maples & Calder’s Santos says. “Investments in SPACs feel their investment is protected as the net proceeds of the initial public offering are held in an interestbearing trust account with such proceeds only being available to acquire a target business with the prior approval of the shareholders. “Unless the investors vote favourably to acquire the acquisition target within the Special Purpose Acquisition Company’s limited lifespan, investors are able to redeem their shares and have management pay them back. “<strong>The</strong> end result is the Special Purpose Acquisition Company is liquidated if a target is not found within the given timeframe,” Santos says. Maples and Calder was the offshore counsel involved in setting up both the China Fortune Acquisition Corp. and the China Discovery Acquisition Corp., which have been set up with a view to each targeting an operating business in China. VANILLA MASTER But there also more plain vanillatypes of <strong>fund</strong> structures that are used for <strong>hedge</strong> <strong>fund</strong>s in the BVI. “We’re seeing side by side, master feeder, minimaster, umbrella <strong>fund</strong>s and all the usual <strong>fund</strong> structures that are typically used in offshore jurisdictions,” says Walkers’ de Vries. <strong>The</strong> single class <strong>fund</strong>s which are set up with a single class of shares giving investors the opportunity “British Virgin Islands companies are big in China. It has become the jurisdiction of choice for joint ventures between Chinese and US companies.” Robert Briant, Conyers Dill and Pearman EXPECTED PRODUCT EXPANSION IN THE NEXT THREE YEARS �� ATTRACTIVENESS OF CHINESE EXPANSION FOR FOREIGN FUND MANAGERS �� to participate in a single investment portfolio are most common. Multi-class <strong>fund</strong>s (sometimes referred to as umbrella <strong>fund</strong>s), issue equity interests in classes to enable investors to participate in a range of investment portfolios. <strong>The</strong> objective is normally to achieve cost efficiency but, since the portfolios are only segregated for internal accounting purposes, a conventional company is subject to the inherent risk of cross-class liability. To deal with this issue, multi-class <strong>fund</strong>s can be incorporated in the British Virgin Islands as Segregated Portfolio Companies. (See page S12 for more on these structures.) <strong>The</strong> master/feeder <strong>fund</strong>s are structured to enable subscriptions made in separate feeder vehicles to be pooled into and managed as a single master <strong>fund</strong> portfolio. MASTERFUL PERFORMANCE A typical example of a master/ feeder <strong>fund</strong> would involve United States-domiciled taxable investors investing directly in an onshore vehicle (often a United States limited partn e r s h i p ) a n d United States t a x - exempt or non-United States investors investing in an offshore vehicle (normally a British Virgin Islands company). Each feeder <strong>fund</strong> then invests all of its assets in an offshore master <strong>fund</strong> (normally a British Virgin Islands company). <strong>The</strong> principal objective is to enable investors that are subject to differing tax or other regulations or with distinct requirements to participate together in the same investment portfolio having common investment objectives. <strong>The</strong> structure achieves economies of scale for portfolio-related activities. Some firms have also set up limited partnerships in the British Virgin Islands, which can be established under the Partnership Act, 1996. A limited partnership is formed in the British Virgin Islands by a general partner and at least one limited partner executing Articles of Partnership and by submitting a Memorandum of Partnership to the British Virgin Islands Financial Services Commission. <strong>The</strong> Articles of Partnership do not have to be filed with the British Virgin Islands Financial Services Commission and are the internal governing document of the partnership dealing with issues such as partnership contributions and withdrawals and the day-to-day running of the partnership. A limited partmnership does not have a separate legal personality distinct from its partners, so the general partner is liable for the debts and obligations relating to the limited partnership. BVI law says a limited partner is not liable for the debts and obligations of the limited partnership (LP) so long as the limited partner does not participate in control of the partnership business. S18 | BRITISH VIRGIN ISLANDS SUPPLEMENT HEDGE FUNDS REVIEW | October 2007 www.<strong>hedge</strong><strong>fund</strong>sreview.com
Notes from the cutting edge <strong>The</strong> BVI has spread its name as far and as wide as Asia in its hunt for new business – it is the world’s second largest investor into China – but as its <strong>hedge</strong> <strong>fund</strong> practitioners tell Phyllis Feinberg, its efforts at home include everything from new <strong>fund</strong>s laws to golf courses being considered… Financial services providers in BVI are of the firm opinion that business on the island in general and the number of <strong>hedge</strong> <strong>fund</strong>s that choose it as a domicile in particular, will increase strongly. <strong>The</strong> new British Virgin Islands Securities Investment Bill, which will change some of the provisions of the Mutual Funds Act of 1996, is seen as a positive development and is expected to balance regulation with the financial services industry’s need for flexibility. “<strong>The</strong> new Act’s regulations and code are basically just to formalise modern day procedures,” says Kay Reddy, managing director of Blenheim Trust (BVI). R&R AND THE BVI <strong>The</strong> BVI also has more pleasures to offer than its business regulations, according to Reddy. She points out that people who like golf often choose Bermuda as a domicile because of its beautiful golf courses. But the BVI could be about to remedy that. A five-star resort with a golf course is being considered on Beef Island, just a quick ride from the Tortola business district. “<strong>The</strong> BVI is trying to position itself on the cusp of a brand new dawn,” says Calum McKenzie, a director of Folio Administrators. “BVI is becoming more sophisticated in what it can service. It will have the new investment law and it can do anything that any other place can do.” According to McKenzie, BVI is saying, metaphorically, ‘we’re here and as good as anywhere else.’” Daniel Cann, marketing director of Folio, says that “BVI has the infrastructure, with the expertise and the personnel, along with a flexible and entrepreneurial spirit,” to continue to grow. He adds that the island also has more capacity, with some other markets saturated. Sherri Ortiz, chief operations officer, BVI International Finance Centre, says that “some would say that innovative and progres- sive legislation combined with the commercial approach to corporate governance and regulation have been the reason for this (the BVI’s) success, while others would cite the close collaboration between the public and private sectors. “Most would probably agree that the combination of both has resulted in a winning formula that has given rise to this premier offshore jurisdiction.” BRAND STRENGTH She points out that “in Asia particularly, the BVI brand has become synonymous with the very concept of an offshore company. From international joint ventures looking for a neutral — but legally secure — home to smaller businesses eyeing the benefits of flexible structures and tax neutrality, the BVI is frequently the first point of call. <strong>The</strong> jurisdiction is currently ranked as the second biggest investor into China and many people report that, both there and in Hong Kong, a reason for not using a BVI has to be provided rather than giving a rationale to use a BVI company. Another factor that will boost the British Virgin Islands, according to Ortiz, is that “it is significantly less expensive to establish and maintain a <strong>fund</strong> in the BVI than in its competitor jurisdictions. CHEAP BUT NOT NASTY “Legal fees and organisational costs to establish equivalent <strong>fund</strong>s tend to be lower and the current annual <strong>fund</strong> and corporate registration fees are considerably less than the BVI’s main competitors.” Where cost is a significant factor, this obviously benefits the BVI and unquestionably makes it the most cost effective jurisdiction for small- to medium-size managers to launch their <strong>fund</strong>s, she says. “However, the British Virgin Islands attracts <strong>hedge</strong> <strong>fund</strong>s of all sizes, because of the ease of incorporation and the flexibility of the regulation.” But Ortiz says that “essential and sound legislation and prudent regulation can only go so far. “It is the on-island professionals who do the hard work and provide the necessary expertise on a day to day basis,” Ortiz says. LEGAL VIRTUOUS CIRCLE She points out that the BVI is the only Caribbean jurisdiction to boast the presence of all six of the largest offshore law firms in the region and the legal profession in the Territory continues to expand and strengthen with a steady influx of lawyers, “In Asia particularly, the BVI brand has become synonymous with the very concept of an offshore company.” Sherri Ortiz, BVI International Finance Centre barristers and solicitors. <strong>The</strong> world’s main accounting and auditing practices are also present in the BVI and have been for quite some time. <strong>The</strong>ir professional service offerings, including not only the traditional accounting, audit and risk management practices, but increasingly specialist areas such as forensic accounting, corporate restructuring and insolvency management services, are being offered from within the BVI. In addition there are of course the many leading international trust and corporate service providers who, through their efficient systems, procedures and people, have helped build the BVI into what some dub the world’s corporate domicile capital, she says. LEADING EDGE Ortiz says that all this growth and success has been supported by the British Virgin Islands International Finance Centre which she says has played a “pivotal role” in the promotion and marketing of the BVI as a leading financial <strong>centre</strong>. <strong>The</strong> British Virgin Islands International Finance Centre has implemented a worldwide programme of roadshows to inform, educate, and discuss with the international pro- bvi’s future fessional and business communities the opportunities for growth in financial services in the jurisdiction. Through this programme, the story of the British Virgin Islands has been taken to many of the leading <strong>centre</strong>s for international business, including London, New York, Hong Kong, Singapore, Miami, Geneva, Zurich and Shanghai, keeping the image and branding the Territory in the minds of stakeholders. Established in 2002, as part of the government’s commitment to support the financial services industry, the aim of the IFC is to give a voice to all segments of the finance sector, making sure the Territory retains the unique balance of a sound regulatory framework, an entrepreneurial business community and innovative legislation. As such, the International Finance Centre’s ultimate objective is to protect and uphold the integrity, reputation and standing which the British Virgin Islands has earned as a place to conduct international business, according to Ortiz. Continuing to spread the positive and message about the territory’s competitive advantage is the central focus of the BVI International Finance Centre. Another function of the regulator, the Financial Services Commission is to protect the public interest by providing statements advising the public against any dealings with certain persons or businesses it considers undesirable. In particular, the Financial Services Commission may issue statements for the purposes of protecting the public, within or outside the British Virgin Islands, against any financial loss that may arise from the dishonesty, incompetence, malpractice or insolvency of persons that are engaged in financial services businesses in the BVI. It also has as its goal to protect and enhance the reputation of the British Virgin Islands as a financial services center; and reducing crime and other unlawful activities relating to the financial services business. To aid it in this task the Financial Services Commission welcomes information from any foreign regulatory or law enforcement authority in relation to BVI-regulated entities to prevent conduct that may hurt the interests of investors and the public in general. <strong>The</strong> source of any such information will be held in strict confidence, the authorities note. www.<strong>hedge</strong><strong>fund</strong>sreview.com October 2007 | british virgin islands supplement <strong>hedge</strong> <strong>fund</strong>s review | S19
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