Private Funds And The Growing Importance Of Private Capital

With investors continuing to search for yield and returns to hedge against inflation, Singapore is well placed to capitalise on, and ride the momentum of, the growth of private markets. In 2021, Singapore’s assets under management (AUM) in the alternatives sector (including private equity, venture capital, real estate and hedge funds) grew 31 per cent from 2019 to reach S$947 billion, as reported by the Monetary Authority of Singapore (MAS) in its 2020 Asset Management Survey. According to MAS, this trend has continued in 2021, with private equity and venture capital seeing robust AUM growth to hit S$555 billion, representing 42 per cent year-on-year growth. As of June 2022, there were a total of 428 private equity and venture capital fund management companies (FMCs) in Singapore, up 27 per cent from the start of 2021. In addition, Singapore has seen significant growth in the private wealth market, with the number of family offices based here growing from fewer than 100 five years ago, to approximately 700 in 2022.

With Singapore looking to further develop as a private markets hub, this article provides a broad overview of the key considerations that general partners (GPs) and fund managers should consider in establishing a private fund in Singapore.

Why Set Up A Private Fund In The First Place?

Given the economic uncertainties and market volatility, many investors are turning to private markets in search of higher returns. Investing in a private fund with a pool of diversified assets allows investors to reduce concentration risk in their portfolios and benefit from the experience and expertise of professional management. Setting up a private fund allows promoters, GPs and fund managers to capitalise on these trends.

For asset owners, injecting their assets into a fund vehicle facilitates the adoption of asset-light strategies and allows them to realise the value of these assets on their balance sheets, while still retaining management control of the assets through the fund manager. It also allows them to share the investment risk across a wider pool of investors, to tap on new sources of capital and to develop business relationships and partnerships with new investors.

In addition, many corporations may already have built-up expertise and track record through making their own strategic investments in enterprises and start-ups that are complementary to their main businesses, and managing their own proprietary capital through their corporate investment or venture arms. Setting up a private fund allows them to leverage such expertise to create a new income stream of management fees and carried interest.

Who Can Manage A Private Fund In Singapore?

Fund management is a regulated activity in Singapore under the Securities and Futures Act 2001 (SFA). Therefore, a FMC in Singapore will need to hold a capital markets services (CMS) licence for fund management or be registered by MAS as a registered fund management company (RFMC), unless it is otherwise exempted. There are different categories of FMCs but managers of private funds (which do not deal with retail investors) would generally fall within one of the following:

• A/I LFMCs: These are holders of a CMS licence for fund management which can carry on business with qualified investors only, which include accredited investors and institutional investors. There is no limit on the number of such qualified investors which an A/I LFMC may service.

 

• VCFMs: These are holders of a CMS licence for fund management which can only manage venture capital funds which meet certain conditions, including (a) having to invest at least 80 per cent of committed capital in securities that are directly issued by an unlisted business venture that has been incorporated for no more than 10 years at the time of the initial investment, and 20 per cent of committed capital in other unlisted business ventures (including through secondary transactions), (b) being closed-end funds, and (c) being offered only to accredited and/or institutional investors. The licence application process for VCFMs is generally slightly simpler and faster and VCFMs are also subject to fewer ongoing capital, compliance, business conduct and reporting requirements.

 

• RFMCs: These FMCs technically do not hold a CMS licence for fund management but are still registered with, and regulated by, MAS. RFMCs are suitable for managers of smaller funds as they are limited to carrying on business with up to 30 qualified investors only (of which not more than 15 may be funds or limited partnerships) and cannot have AUM of more than S$250 million. They are subject to slightly less ongoing capital, compliance and reporting requirements compared to A/I LFMCs.

FMCs in Singapore should take the form of Singapore-incorporated companies and are required to have a permanent physical office in Singapore, with certain prescribed minimum number of directors and full-time professionals and representatives with relevant experience who are resident in Singapore.

Depending on the nature of the investments and/or investors of the relevant fund, there may be certain licensing exemptions under the SFA which a FMC managing such a fund may rely on, including the following:

• Immovable assets exemption: This exemption may apply to FMCs which manage funds that invest solely in immovable assets (or in securities issued by investment holding entities whose sole purpose is to invest in and hold the immovable assets) and where the funds are offered only to accredited and/or institutional investors. This is commonly relied on by managers of private real estate funds.

 

• Non-capital markets products exemption: This exemption may apply to FMCs which manage funds that do not hold any capital markets products (which include securities, units in other funds and derivatives contracts) and where all of the investors are accredited and/or institutional investors. For example, if a fund only invests in physical assets such as commodities or metals, this exemption may be applicable.

 

• Related corporations exemption: This exemption may apply to FMCs which only carry on business in fund management for its related corporations (as defined under the Companies Act 1967 (Companies Act)), i.e. the FMC is only managing proprietary monies of the same corporate group.

What About Family Offices?

Amidst the global geopolitical risks and uncertainties in the past few years, Singapore’s reputation as a safe and stable environment to live and do business in has driven an influx of high-net-worth families to set up family offices in Singapore. While family offices would typically conduct fund management activities, MAS has stated that it is not their intention to license or regulate single family offices (SFOs) which manage the assets of only one family and which are wholly owned or controlled by members of the same family. SFOs typically rely on the related corporations licensing exemption described above or seek a specific licensing exemption from MAS if they are in substance managing funds on behalf of a single family only.

As an SFO builds up its investment track record and becomes more sophisticated and professionally run, it may look to grow into a multi-family office (MFO) and expand its services beyond a single family to manage the assets of multiple families and other external parties. MFOs would not be able to rely on the related corporations licensing exemption and will need to consider the relevant licensing requirements based on its business model.

How Can A Private Fund Be Structured?

Deciding on the structure of a private fund depends on a combination of factors, taking into account commercial, legal, regulatory and tax considerations. Some of the key factors to consider when structuring a private fund typically include the nature and location of the investments that the fund will make and how illiquid they are, whether the fund is closed-end or open-ended, investor familiarity with the structure, confidentiality and tax considerations.

• Limited partnerships: Closed-end private equity and venture capital funds are usually structured as limited partnerships, with a GP that is related to the FMC or its principals being responsible for the day-to-day management and operations. The GP will in turn appoint the FMC on behalf of the limited partnership to provide investment and fund management services for the limited partnership. The limited partnership is a flexible legal form which affords significant contractual freedom for GPs and investors to negotiate and agree fund terms contractually in the limited partnership agreement. International investors are also familiar and comfortable with limited partnership structures. Traditionally, Cayman Islands exempt limited partnerships have been used as closed-end private fund vehicles. However, we observe that fund managers with Singapore-based FMCs are also increasingly making use of Singapore-domiciled limited partnerships for their private funds. This is part of a general trend of “onshoring” private funds from tax neutral offshore domiciles to jurisdictions such as Singapore where the management and operations of the funds may be conducted and where economic substance may be more easily achieved.

 

• Variable capital companies: Introduced at the beginning of 2020, the variable capital company (VCC) is a new corporate vehicle in Singapore that is tailored for use as an investment fund structure. Some of the features that make it suitable for such use include a flexible capital structure which allows redemptions to be made from out of its capital without being subject to capital maintenance rules that apply to an ordinary company, the ability to pay dividends even without having profits, and confidentiality of the identity of its shareholders and its constitution. Owing to its flexible capital structure, a VCC is suitable for both open-ended and closed-end fund strategies. It is also possible for a VCC to make use of an umbrella-sub-fund structure, where a single umbrella VCC can house multiple sub-funds, where each sub-fund’s assets and liabilities are segregated from each other under Singapore law and each sub-fund can hold investments in its own name. Unlike a limited partnership, a VCC is a corporate entity with a separate legal personality and is not a tax transparent vehicle. Despite only being in existence for two years, as of end August 2022, over 600 VCCs have been incorporated or re-domiciled in Singapore according to MAS and it is expected that its adoption will continue to grow as FMCs and investors become more familiar with it.

 

• Unit trusts: While unit trusts are more typically used for retail funds in Singapore, it is possible for a private fund to be constituted as a unit trust, which is established by the execution of a trust deed by the manager and the trustee. Under a unit trust structure, the legal ownership of the trust properties is vested in the trustee, which holds the trust properties for the benefit of the unitholders. An advantage of the trust structure, which in large part is a contractual arrangement, is its flexibility. Singapore trusts are lightly regulated and are not subject to extensive statutory requirements, such as those relating to maintenance of capital or distribution of profits, which allow the fund to structure its redemption and distribution mechanisms to suit the relevant commercial requirements. With Singapore’s growing reputation as a hub for trust listings, an increasing number of Singapore FMCs are considering trust structures for their private funds, especially if one of the exit strategies is potentially to list the private fund as a registered business trust or a real estate investment trust (REIT) on the Singapore Exchange. This avoids having to transfer the assets to the registered business trust or REIT subsequently, which may attract transfer taxes or give rise to other tax liabilities.

• Singapore companies: While ordinary companies can be used as fund structures, they are generally less popular as they are subject to more restrictive statutory requirements under the Companies Act, which may hamper the ability of the private fund to meet the investment objectives of investors. For example, there are restrictions on the return of capital to shareholders, such as requiring whitewash approvals for capital reduction and only allowing dividends to be paid out of profits. This makes it more difficult for investors to exit their investments and realise returns in a timely fashion. In addition, a company will generally need to comply with more stringent administrative and audit requirements, such as holding annual general meetings and filing returns with the Accounting and Corporate Regulatory Authority (ACRA), and the identities of its shareholders are publicly available. Despite these drawbacks, company structures may still be viable for reasons such as ease of establishment and familiarity, and they tend to be used in more joint venture-type club deals with fewer investors. They may also be used as part of a master-feeder structure with offshore feeder funds.

How Is A Fund Taxed In Singapore?

A Singapore FMC could create a taxable presence, regardless of whether the fund it manages is resident in Singapore or offshore. Therefore, income and gains of the fund derived from the activities of a FMC in Singapore may be taxable in Singapore. Nevertheless, the fund may be able to reduce its tax liability by qualifying for tax incentives which exempt the fund from tax on certain prescribed specified income from designated investments of the fund.

Some of the available tax incentive schemes for funds in Singapore include:

• Offshore Fund Scheme under section 13D of the ITA: This scheme under the Income Tax Act 1947 (ITA) is available to offshore funds that are managed by Singapore-based FMCs and exempts the fund from tax on specified income and gains from designated investments such as certain prescribed stocks, shares, securities and derivatives. Offshore funds that are not resident in Singapore may be eligible for this scheme subject to meeting prescribed conditions.

 

• Resident Fund Scheme under section 13O of the ITA: This scheme affords Singapore-resident funds the same tax exemption on specified income from a prescribed list of designated investments, to encourage FMCs to base their funds in Singapore. Use of this scheme by a fund is subject to MAS’ approval. The conditions include the fund being a Singapore-incorporated company, the fund manager being regulated by MAS, and the fund appointing a Singapore-based fund administrator and incurring a minimum annual expenditure.

 

• Enhanced-Tier Fund Scheme under Section 13U of the ITA: This offers the fund a similar tax exemption as the abovementioned schemes and is available to both offshore as well as Singapore funds regardless of the legal form (i.e. applicable to VCCs, limited partnerships, trusts and companies), subject to approval from MAS. Some of the conditions which need to be met are a minimum fund size, incurring a minimum annual local business expenditure and having a Singapore-based manager that employs at least three investment professionals in Singapore.

Family offices managing their investments through fund structures and which meet the conditions for the relevant schemes may also qualify for the tax incentives.

How Can I Market A Private Fund To Investors?

The offering of interests in a private fund in Singapore is likely to constitute an offering of units in a collective investment scheme under the SFA and would be subject to onerous prospectus registration requirements unless certain “safe harbour” exemptions apply. The “safe harbour” exemptions that are typically relied upon by private funds include the following:

• Private placement exemption: This exemption allows offers of interests in a collective investment scheme to no more than 50 persons in any 12-month period. No approval or registration is required to rely on this exemption, although there are certain rules of aggregation which have to be complied with to determine the number of persons to which offers have been made, and there are also advertising and promotional restrictions.

 

• Institutional investor exemption: This exemption allows offers of interests in a collective investment scheme to institutional investors (as defined in the SFA), such as sovereign wealth funds, banks, insurance companies, capital markets services licence holders, etc. No approval or registration is required to rely on this exemption and there is also no limit on the number of institutional investors to which offers may be made under this exemption.

 

• Section 305 exemption: Generally, this exemption allows offers of interests in a collective investment scheme to, among others, an unlimited number of accredited investors (as defined in the SFA). To rely on this exemption, a notification must be made to MAS through its online CISNet platform, and if the relevant requirements are met, MAS will enter the fund into the “List of Restricted Schemes” which it maintains. There are also advertising and promotional restrictions that need to be complied with.

In addition to the prospectus registration requirements above, the act of marketing interests in a private fund to investors in Singapore may amount to dealing in capital markets products, which is a regulated activity under the SFA. Consequently, an entity which markets interests in a private fund (such as a fund distributor or a placement agent) will need to hold a CMS licence for dealing in capital markets products issued by MAS, unless exempted. Licensed FMCs (including VCFMs) and RFMCs are exempt from such licensing requirements if they only market funds which they manage themselves or funds managed by their related corporations. Alternatively, to broaden their potential investor base, FMCs may consider appointing a licensed distributor / placement agent to market the fund more widely. With an increasing number of digital asset exchanges being established in Singapore, we have also observed a trend of some FMCs working with such digital asset exchanges to conduct part of the fund-raising through an offering and listing of tokenised interests in their funds on such a digital asset exchange. Due consideration should be given to the sort of licensing requirements that may apply in such a transaction and the split of the roles and responsibilities between the FMC and the digital asset exchange.

Conclusion

As part of the Financial Services Industry Transformation Map 2025 launched by MAS in September 2022, MAS is taking steps to develop Singapore as a full-service private markets hub, including enhancing the VCC regime and other fund structures to cater to the fund management industry as well as to develop private credit strategies to complement private equity and venture capital funding. This illustrates Singapore’s commitment to further grow and develop itself as a leading fund management hub, conducive for both investment management platforms and as a fund domicile. With its clear and transparent regulatory environment, strong adherence to rule of law and pro-business and stable government, Singapore is increasingly being seen as a fund hub of choice and provides a launchpad for fund managers to expand and invest in the region.