Legal development

Fund Finance Laws and Regulations 2024 – Singapore overview

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    Looking at 2023

    2023 was a challenging year for fundraising in Asia. There was slight optimism at the start of the year as many felt we would finally emerge from the worst of the COVID-19 crisis. There was hope that China, as one of the most influential economies in this region, would lead this rebound as it was finally opening up after an extended lockdown.

    However, unfortunately, 2023 did not start well. Against the backdrop of high interest rates, inflation, geopolitical instability and slumping public market confidence, markets were rocked initially by the United States banking crisis. Then, China’s real estate crisis worsened sentiments in this region.

    Fundraising picked up only marginally in the second quarter and as we drew to the end of the third quarter, 2023 appeared to be poised as the lowest fundraising year for APAC in a decade.

    By the third quarter of 2023, the Asian Development Bank (ADB) downgraded its outlook for the region and trimmed its 2023 growth forecast for developing Asia to 4.7% from 4.8% in July 2023.

    When the tide retreats1

    Despite the challenging backdrop, Singapore’s alternative investment industry remained resilient. Singapore is still widely regarded as an important Asian gateway for the asset management industry.

    Rather positively, the Monetary Authority of Singapore (MAS) reported that a number of global alternative asset managers have also set up their offices in Singapore. At the end of 2022, this amounted to more than half of the top 50 global alternative asset managers and about 40% of the top 50 global hedge fund managers.

    Singapore was also able to draw in top talent. A number of asset managers also have their APAC or Southeast Asia hubs with senior regional leaders based here and many have committed to build their investment, value creation and other capabilities in Singapore. MAS has recorded close to 1,200 asset managers in Singapore, including 425 private equity and venture capital managers.

    Interestingly, of the US$4 trillion assets under management (AUM) held in Singapore at the end of 2021, 78% of the funds originated from outside Singapore, and 90% was reinvested outside the country. The numbers reinforced Singapore’s position as a marketplace for strong capital flows.

    Private equity in Singapore/Southeast Asia2

    The silver lining for Singapore is that private equity deals here and in Indonesia continued to attract the bulk of investment capital for Southeast Asia in 2022, accounting for over 80% of the region’s deal value and deal count. Furthermore, the healthcare, real estate, hospitality and infrastructure sectors, more specifically those in the energy transition space, continue to attract investors.

    Encouragingly, according to Suvir Varma, senior advisor of Bain & Company’s global PE practice, based in Singapore, “SEA remains an attractive place to deploy capital in the long term. The market fundamentals are there, and investors will be able to find attractive opportunities”.

    Rise of private credit

    Private credit has been a source of focus in recent times. In December 2022, global investment firm PAG closed its fifth pan-Asia direct lending fund at its hard cap of US$2.6 billion in capital commitments. PAG Loan Fund V (LFV) is the largest direct lending fund raised in APAC to date.

    Despite the above, the current market share for private credit in Asia is still rather modest. Private credit’s AUM only represents around 6% of the global total. A large portion of fundraisings in APAC still remains in the traditional sectors and is being driven primarily by private equity and real estate funds.

    However, the above is likely to change in the near future. Preqin reported that the Asian private credit market has grown by almost 30 times in the last two decades, from only US$3.2 billion in 2000 to over US$90 billion in June 2022.

    Rather notably, the private credit investments allocated to Southeast Asia global general partners as of June 2022 was US$65.4 billion. This represented an increase of 52% from US$43.1 billion in 2020.3

    MAS stated that Singapore is seeing more private credit managers entering the market. Many alternative managers, including Apollo, Blackstone, HPS and Oaktree, have established or expanded their private credit capabilities here to tap into opportunities in the region.4

    Private credit is gaining popularity because the majority of its lending is in the form of floating-rate investments that change as rates change. Such investments provide real-time interest rate protection compared to investments such as fixed-rate bonds.

    The slowdown in traditional bank lending has created a space for private credit solutions in the market. Regulatory changes such as Basel III, Dodd-Frank and the Volcker Rule have seen some banks reduce their footprint in Asia, repatriating capital back to their home markets or focusing on core business lines. Private capital is able to fill this void, in particular by providing more structured lending solutions in the fast-growing technology sector and by banking the underserved SME space.

    Asia is catching up rapidly with this trend. Investment firm Muzinich & Co. recently announced that it had closed a US$500 million APAC private debt strategy. Private lending yields produce a return of about 10% to 18%, typically for a three-year transaction, said Andrew Tan, Muzinich’s Asia Pacific CEO.5

    Age of technology

    There has been increasing talk surrounding the use of artificial intelligence (AI) and machine learning tools to revolutionise the private funds sector. Some of the world’s largest alternative asset managers, including The Carlyle Group Inc. and Blackstone Inc., have discussed the deployment of AI internally and at portfolio companies on recent earnings. Blackstone CEO Stephen Schwarzman said on the firm’s second-quarter earnings call that Blackstone is “rapidly and significantly expanding” its AI capabilities.6

    Some of the use cases of AI include research, portfolio optimisation, algorithms for high-speed trading, and client enablement. For example, one of the largest AI-based financial asset management firms in the world, Liquidity Group, claims to use patented machine learning and AI technology to enable its capital deployment, making its deal execution faster than others in the market.

    In October 2023, Singapore’s Mars Growth Capital, a tech investor set up by Mitsubishi UFJ Financial Group (MUFG) and Liquidity Group, launched its maiden Asia equity fund with an initial US$500 million.

    Variable Capital Company (VCC)

    One of the more innovative aspects of the investment funds industry in Singapore is the popularity of the Singapore fund vehicle known as the VCC, which the Singapore Government is using to attract local and foreign-based fund managers to domicile their funds in Singapore. The VCC is constituted under the VCC Act, which came into force in 2020, and has been touted as a “game-changer”.

    The VCC is a specialised corporate structure in Singapore that can be used as one or more collective investment schemes. The VCC has the flexibility to be used for either open- or closed-ended funds, which gives fund managers more structuring options when using the VCC vehicle.

    According to MAS, the VCC has found favour with both traditional and alternative managers, with more than 800 VCCs as of March 2023, including a number that were set up for alternative strategies.

    Most fund managers are drawn to Singapore’s stable governance and economy, light regulation, and low corporate tax rates. In addition, Singapore has more than 100 double tax treaties with different countries around the world, which means that most businesses outside of Singapore do not to have to pay their taxes twice.

    Extended Variable Capital Company Grant Scheme

    To support the broader adoption of the VCC, MAS has extended the Variable Capital Company Grant Scheme (VCCGS) to January 2025 to defray the costs of fund managers setting up their first VCC.

    The initial VCCGS lapsed on 15 January 2023, but the extended VCCGS is valid until 15 January 2025. The extended VCCGS co-funds up to 30% of all qualifying expenses paid to Singapore-based service providers, capped at S$30,000 per application, and is only available to first-time qualifying fund managers that have not previously incorporated or re-domiciled a VCC and have not previously applied for the initial VCCGS.

    Proposed framework for single family offices (SFOs)

    More enhancements to the VCC regime are being proposed to extend its popularity to family offices.

    SFOs, which manage the wealth for one family and are wholly owned or controlled by members of the same family, are currently exempt from licensing under the Securities and Futures Act (SFA) under either a class exemption for persons who manage the assets of their related corporations or a case-by-case licensing exemption granted by MAS.

    MAS published a consultation paper on 31 July 2023 proposing to introduce a structure agnostic class exemption for SFOs that meet the following criteria:

    (a) wholly owned (whether directly or indirectly) by members of the same family;

    (b) fund management must be conducted for or on behalf of:

    (i) family members, including family trusts and corporations wholly owned by and for the sole benefit of the family;

    (ii) charitable organisation(s) funded exclusively by the family; or

    (iii) key employees (which refers to the chief executive officer and executive directors of the SFO);

    (c) incorporation in Singapore; and

    (d) establish and maintain business relations with at least one of the specified MAS-regulated financial institutions.

    SFOs relying on the new class exemption will be subject to certain notification and annual reporting requirements, including notifying MAS and confirming their ability to comply with the qualifying criteria under the proposed class exemption within seven days of commencement of their operations in Singapore, as well as obtaining a legal opinion supporting their qualification.

    MAS has not stated when the proposed SFO framework will be implemented but has proposed to provide a transitional period of six months for existing SFOs operating in Singapore to comply. SFOs operating under an existing licensing exemption that do not file the notification within the six-month period will be in breach of the relevant laws and regulations if they continue to operate in Singapore.

    Proposed repeal of regulatory regime for registered fund management companies

    Registered fund management companies (RFMCs) are a category of fund managers in Singapore that are restricted to (a) carrying out fund management for no more than 30 accredited or institutional investors (of which no more than 15 may be funds or limited partnership fund structures), and (b) managing no more than S$250 million of assets.

    MAS published a consultation paper on 24 October 2023 proposing to simplify the regulatory regime and to harmonise requirements for fund managers by repealing the RFMC regime. After the RFMC regime is repealed, existing RFMCs must apply for and be granted a capital markets services licence for fund management via a much more simplified process than that for a new applicant who is not an existing RFMC. An existing RFMC will be required to provide the latest available information on its business activity and confirm that it will be able to comply with the requirements applicable to licensed fund management companies (LFMCs).

    Existing RFMCs that have transitioned to LFMCs will be subject to a licence condition restricting their managed assets to S$250 million but may engage MAS to review the licence condition should they plan to manage more than S$250 million of assets. They will not be subject to a cap on the number of investors or funds managed.

    MAS has not stated when the existing RFMC regime will be repealed but will stop accepting new RFMC applications by 1 January 2024. Thereafter, applicants seeking to conduct fund management must apply to become an LFMC.

    Sustainable funds

    According to a new “Sustainable Reality” report from the Morgan Stanley Institute for Sustainable Investing, sustainable funds saw a better median return in the first half of 2023 of 6.9% compared to traditional funds of 3.8%, reversing their underperformance in 2022.

    Due to declines in performance of equities and bonds, the relatively stronger performance for sustainable funds reflected greater interest in growth stock, such as sustainability-linked assets that prioritise long-term potential.

    The potential for growth is high as the current market share of sustainable funds based in Asia is still in its nascent stage. Asia represents only 7% of total sustainable funds worldwide, the majority being based in Europe (89%) followed by North America (12%).7

    In Singapore, sustainability is still regarded as a key driver of the asset market. In his opening remarks at the MAS-Bloomberg Investment Conference on 9 March 2023, Mr Ravi Menon, Managing Director of MAS, flagged that the most significant financial risk for investors over the long term is climate change. He flagged that, according to McKinsey’s estimates, net zero by 2050 would require about US$9.2 trillion of investment per year, out of which around one-third, or US$3.1 trillion, would be in APAC.

    Southeast Asia has long been regarded as a region with strong potential for climate action. Estimates from Bain & Company show that five sectors – renewable energy, electric vehicles, forest conservation, built environment, and sustainable farming – account for 60% of Southeast Asia’s carbon abatement potential.8

    Regulatory changes

    On the regulatory front, MAS is taking the lead in setting clear supervisory expectations on transition planning for financial institutions.

    Singapore’s Green Finance Industry Taskforce (GFIT) released its fourth consultation paper on 28 June 2023, seeking views on the thresholds and criteria for the early phase-out of coal-fired power plants under the Singapore-Asia Taxonomy. GFIT has previously carried out three phases of consultations and plans to publish the final Singapore-Asia Taxonomy by the end of 2023, targeting a proposed implementation for early 2024.

    The second consultation paper sets out threshold criteria for economic activities in three sectors – energy, transport, and real estate. The paper also provides more details of the application of a traffic light system by sub-categorising activities in the above sectors and proposes detailed benchmarks and thresholds for these activities. GFIT is expected to finalise this Green Taxonomy in 2023.

    Furthermore, on 18 October 2023, MAS issued a set of consultation papers proposing guidelines on transition planning by banks, insurers, and asset managers to enable the global transition to a net zero economy. The guidelines set out MAS’ supervisory expectations for financial institutions to have a sound transition planning process to enable effective climate change mitigation and adaptation measures by their customers and investee companies in the global transition to a net zero economy and the expected physical effects of climate change.

    Security package 101

    In this last section, we consider some of the typical security package considerations for a fund finance transaction.

    The key concepts for the taking and perfection of security common to a fund finance transaction remain unchanged and are fairly consistent with concepts in other established common law jurisdictions such as England & Wales.

    A typical security package for a subscription line facility will consist of: (1) unfunded capital commitments of the fund’s investors; (2) the right to make capital calls from investors and receive proceeds of such capital calls; (3) the bank accounts into which the capital contributions are funded; and (4) the rights within the underlying fund documentation, in particular the right to enforce against such investors of the fund.

    It is important to conduct good and thorough due diligence of the fund documentation to ensure that a financier has as many unfettered rights as possible in respect of the above when its security is enforced. A good lawyer not only advises on what is required under law, but also on best practice in the market or (if unable to adopt best practice) the risks involved.

    An assignment of the rights pursuant to the fund documentation and a charge over bank accounts will be standard forms of security taken under a typical financing. Under Singapore law, an assignment is effective if: (1) it is an absolute assignment; (2) it is made in writing under the hand of the assignor; and (3) express notice in writing has been given to the counterparty (i.e., the investor). Strictly speaking, no acknowledgment is required but it is usually taken (or attempts to ask for it will be made) to incorporate additional protections for the financiers.

    These protections include, for example: (1) an undertaking by the investor to pay directly to the secured account; (2) representation by the investor that it will not exercise any set-off or counterclaim of the amount it owes to the fund entity; and (3) a confirmation that it received no prior notice of assignment or security.

    For charges, registration at ACRA is required if it is granted by a Singapore company or a foreign company registered in Singapore. This will be relevant if, for example, the security is entered into by the general partner of the fund entity, and that general partner is a company incorporated or registered under the Companies Act. The charge must be registered within 30 days of the date of creation of the charge, and an unregistered registrable charge is void against a liquidator and any creditor of the company, such that the creditor would effectively be an unsecured creditor in a liquidation.

    One key point to flag is that the charge registration regime has a public notification aspect to it. The nature of the security and the fact that the fund company has obtained financing will become public knowledge. In addition, it is a legal requirement that a copy of the charge document must be kept available at the company’s place of business for its creditor’s inspection without fee and any person may, upon application to the company and payment of a nominal fee, be furnished with a copy of such instrument.

    What to know more?

    In this article we explore how the rise in green and sustainable lending in recent years has brought about many opportunities for all participants in the financial and loan markets to focus on developing their own environmental, social and governance strategies and to consider how their activities impact climate change.

     

    The article was originally published in Fund Finance 2024, the leading publication on fund finance published by Global Legal Insights (GLI), which provides financial institutions, funds and investors with a comprehensive insight into 21 jurisdictions worldwide.

     

    1. “Growth Opportunities of Alternative Investment Industry and its Ecosystem in Singapore” – Speech by Mr Lim Cheng Khai, Executive Director, Financial Markets Development Department, Monetary Authority of Singapore, at the Alternative Investment Management Association Singapore Forum 2023 on 28 March 2023.
    “Private Credit – The Next Key Driver of Growth in Private Markets” – Speech by Mr Lim Cheng Khai, Executive Director, Financial Markets Development Department, Monetary Authority of Singapore, at the Private Debt Investor’s APAC Forum on 29 March 2023.
    2. Bain & Company’s Southeast Asia Private Equity Report 2023.
    3. Preqin Pro.
    4. “Private Credit – The Next Key Driver of Growth in Private Markets” – Speech by Mr Lim Cheng Khai, Executive Director, Financial Markets Development Department, Monetary Authority of Singapore, at the Private Debt Investor’s APAC Forum on 29 March 2023.
    5. “Asia’s private credit markets thrive as desperate borrowers find lenders” by Rae Wee, 21 July 2023.
    6. “Private equity firms take tentative steps adopting AI for their own use” by Dylan Thomas, published by S&P Global Market Intelligence.
    7. “Sustainable Funds Beating Peers in 2023” by Morgan Stanley Institute for Sustainable Investing, 17 August 2023.
    8. Source: Bain and Temasek, with contributions from Microsoft, Southeast Asia’s Green Economy 2022 Report: Investing behind new realities.

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