Fund Finance 2022 - Overview of the Fund Finance market in Singapore

Looking back

In the previous edition of GLI – Fund Finance, we wrote that Singapore, like most countries, had had a tumultuous start to the year in 2020 due to COVID-19. The Singapore Ministry of Trade and Industry reported then that in the third quarter of 2020, the Singapore economy had contracted by 5.8% on a year-on-year basis. Total employment levels in Singapore fell by 113,500 – Singapore’s largest quarterly decline to date on record.

What we see now

Back then, most people felt that there might be a rebound when we overcome (or look to overcome) the pandemic in 2021. Sadly, an immediate rebound is unlikely. It does appear that the pandemic could already be endemic – and that it is here to stay. More realistically, 2021 should probably be viewed as the year in which we start to see some green shoots and silver linings.

According to the quarterly survey released by the Monetary Authority of Singapore (MAS) in September 2021, there is expectation that Singapore’s gross domestic product (GDP) will expand by 6.6% in 2021.¹ The performance is “not bad” as it is ahead of global growth, which the International Monetary Fund (IMF) is projecting to be 5.9% in 2021 and 4.9% in 2022.

However, these macro-economic projections are one of the reasons why investors continue to be bullish about Asia in the medium term. In the next five years, the IMF projects 5.2% average annual growth for Asia, compared to 3.2% for the rest of the world. By 2025, Asia’s share of global GDP is expected to reach 38%, up from 26% 20 years ago.²

From an asset management perspective, the assets under management (AUM) in Singapore rose by 17% in 2020, which, according to MAS, was driven by strong inflows into both traditional and alternative investment strategies, as well as valuation gains across major asset classes. MAS’s annual report highlighted that the inflows were primarily into alternative investment strategies that included asset classes such as private equity, real estate, real estate investment trust (REITs), and venture capital.

The foremost question asked is whether such inflows came from Hong Kong. In the past year, there have been reports of wealth leaving Hong Kong for Singapore after the 2019 protests and Beijing’s imposition of the sweeping national security law. The answer is: not particularly so. MAS stated that it has not observed significant shifts arising from the situation developing in Hong Kong and that the growth is due to fundamental drivers, not solely due to inflows from Hong Kong.³

The above view is supported by a Bloomberg article, which reported that approximately 76% AUM in Singapore came from diverse overseas sources, underpinning its position and prospects as a global offshore wealth centre. North America and Europe each contribute approximately 17–18% AUM, based on 2019 data, while 33% comes from other Asian countries including China, India and the Southeast Asian nations.⁴

Looking ahead

Southeast Asia is widely acknowledged as the world’s next growth engine after China. It is reported that the Association of Southeast Asian Nations, made up of 10 member states, is projected to continue on its growth trajectory to become the fourth-largest economy in the world by 2025, behind the US, China and Japan.

Key trends impacting the asset management industry

Singapore as the most-preferred offshore wealth management hub

Singapore is widely regarded to become one of the world’s largest wealth hubs in the next few years. It is a destination of choice due to a strong banking sector and progressive legal and regulatory systems, which help to continually boost Singapore’s asset management ecosystem.⁵

According to Knight Frank’s Wealth Report 2021, Asia-Pacific’s population of ultra-high-net-worth individuals is predicted to grow by a third in the next five years – much faster than the global average. Singapore is expected to be the ideal base to meet the needs of the growing offshore asset pools estimated at US$1.48 trillion by 2023.⁶

Singapore’s investment fund vehicle – VCC, a game changer?

One of the more widely talked-about tools to help boost the private funds industry is Singapore’s new corporate structure for investment funds known as the Variable Capital Company (VCC). This came into force in 2020 and is touted as a “game-changer”.

So far, it has lived up to that hype. According to MAS, the VCC has seen strong industry adoption, with close to 200 set up in its first year, for a diverse range of traditional and alternative investment strategies.⁷

With the VCC, the Singapore government hopes to attract more funds to be domiciled and managed from Singapore, thereby creating more opportunities for the players in the country’s funds ecosystem and strengthening Singapore’s position as the Asian hub for fund domiciliation and management.

To encourage industry adoption of the VCC framework in Singapore, MAS launched the Variable Capital Companies Grant Scheme, which will help to defray the costs involved in incorporating or registering a VCC by co-funding up to 70% of eligible expenses paid to Singapore-based service providers for a period of three years. The grant is capped at S$150,000 for each application, with a maximum of three VCCs per fund manager.

The VCC has found favour with fund managers operating different investment strategies such as hedge funds, venture capital funds and private equity funds. It has also drawn many wealth management players, keen to establish fund platforms for their high-net-worth clients, and family offices.

What makes the VCC attractive as a fund vehicle?

The VCC functions as a corporate structure tailored specifically for investment funds. More specifically, it is incorporated under the VCC Act, instead of the Companies Act, to allow it to function as a fund vehicle instead of as a generic corporate entity. Despite being administered by Singapore’s corporate regulator, the Accounting and Corporate Regulatory Authority (ACRA), and unlike other companies registered with ACRA, the VCC’s register of shareholders is not made public.

In addition to the grant mentioned above, there are numerous tax incentives offered to a VCC. These include, in particular, tax incentives under Section 13R (Singapore Resident Fund) and Section 13X (Enhanced Tier Fund) of the Singapore Income Tax Act. In effect, for eligible funds, all income from designated investments will be tax free, resulting in no tax outcome, similar to that of a Cayman fund.

• The Section 13R scheme exempts specified income received by an approved company in Singapore from tax, where such income is derived from designated investments in funds managed in Singapore by a licensed or exempt resident fund manager. It will not be applicable if all of the approved Singapore companies’ issued securities are beneficially owned by Singapore persons. The fund must incur at least S$200,000 a year in global business expenses and the fund’s administrator must be based in Singapore.

• The Section 13X scheme applies to funds with a minimum size of S$50 million that are managed or advised by a Singapore fund manager, which can be an exempted Singapore family office or a licensed multi-family office. The family office must employ at least three investment professionals in Singapore who are substantively engaged in an investment management or advisory role, and the fund must incur at least S$200,000 in business spending in Singapore, which typically covers investment management fees payable to the family office.

In addition, a VCC will have the flexibility to issue and redeem shares without having to seek shareholders’ approval. This allows investors to exit their investments in the investment fund when they so wish, and pay dividends using its capital. This is in contrast to the company structure that has restrictions on capital reduction and can only pay dividends out of profits.

More broadly, the VCC may be established as a standalone fund or as an umbrella fund with multiple sub-funds. The umbrella with sub-funds structure creates economies of scale. Each sub-fund can share a common board of directors and use the same service providers, including the same fund manager, custodian, auditor and administrative agent. As a safeguard for the VCC shareholders and to enhance creditor protection, the assets and liabilities of each sub-fund will be ring-fenced from other sub-funds.

The VCC will allow for a wider scope of accounting standards to be used in preparing financial statements, which helps to serve the needs of global investors. Apart from Singapore accounting standards and recommended accounting principles, International Financial Reporting Standards and US Generally Accepted Accounting Principles can be used by VCCs.

Looking ahead, it has been reported that MAS is in the process of revising its VCC fund structure to expand the pool of fund managers that can use the scheme, and to make fund conversions and multiple offshore fund redomiciliation easier. MAS is keen to expand the reach of the scheme further in order to attract more asset managers to launch new funds using the new vehicle.

All things ESG – it’s COP26

At time of writing, COP26 was underway. The 26th UN Climate Change Conference of Parties (COP26) held in Glasgow brought together parties to help accelerate action towards the goals of the Paris Agreement and the UN Framework Convention on Climate Change. Unsurprisingly, environmental, social and governance (ESG) as a component of asset management is in the spotlight as investors’ desire to prioritise ESG issues gains traction. From an investment perspective, many asset managers have already begun incorporating ESG information into investment decisions to help enhance risk-adjusted returns.

In January 2020, BlackRock announced its commitment to putting sustainability at the centre of its investment process. It declared that integrating sustainability-related information into the investment process can help its portfolio managers manage risk and make better-informed investment decisions. It also states that ESG risk analysis is now embedded in 100% of its regular portfolio risk reviews.

Closer to home, MAS is leading Singapore’s drive to make sustainable finance a defining feature of Singapore’s role as an international financial centre. Over 80% of top asset managers in Singapore are already United Nations Principles for Responsible Investment signatories.

On 22 January 2021, Ms Jacqueline Loh, Deputy Managing Director (Markets & Development) of MAS, highlighted at the Asian Financial Markets Forum (Prelude) the desire for more investment in climate-resilient infrastructure and to insure against climate and disaster risk.

In support of the above, MAS also recently committed US$1.8 billion of its reserves to climate-related investments. These funds will be placed with five asset managers to manage new equity and fixed income mandates focused on climate change and the environment.

The views above appear to signal the future direction of the fundraising market. Sectors such as renewables, social infrastructure and transport are receiving more attention from Asia-Pacific fund managers. Several one-billion target funds appeared on the Asia-Pacific market in 2020.

In July 2021, founding investment partners Ontario Teachers’ Pension Plan and Temasek made major commitments to the US$7 billion Brookfield Global Transition Fund, which is dedicated to accelerating the transition to a net-zero economy.

On the regulatory front and as part of its green action plan, MAS expects asset managers to make climate-related financial disclosures from June 2022. It will consult the industry later this year on how to transition these expectations into legally binding requirements against a single, internationally aligned standard. MAS has also issued guidelines on environmental risk management to all financial institutions, which cover environmental risks besides climate change, such as pollution, loss of biodiversity, and changes in land use.

These regulatory changes should not come as a surprise to asset managers who are attuned to ESG developments globally because they fit in well with similar changes being introduced at EU level. In particular, the European Sustainable Finance Disclosure Regulation (SFDR), which has applied since March 2021, requires the disclosure of how asset managers integrate sustainability risks and factors into the investment process.

SFDR goes hand in hand with the EU Taxonomy, which is another recent European regulation, this time aiming to create a system by which economic activities can be classified as “environmentally sustainable”.

Cryptocurrency – the latest buzzword

It is widely reported that cryptocurrency is fast becoming an investable asset. Some believe that it is already such an asset, with a market capitalisation of around US$2 trillion.

A few of the largest tech-oriented venture capital firms, such as Andreesen Horowitz and Sequoia Capital, are turning their attention towards crypto startups, while other institutional investors have also been hit by the fear of missing out on the next rally. As a result, many venture capital firms have begun investing exclusively in crypto and blockchain startups.⁸

However, investment in this sector is, at best, challenging. It is a market marred by fraud, scandals, insider trading or other illegal activities.⁹ Some regulators around the world appear to be cracking down on this industry – China has recently banned its use, and the US is in the process of implementing measures aimed at reining it in. This stands in contrast with Singapore’s latest approach by which it seeks to be the financial centre of the cryptocurrency market. Regulation of cryptocurrency and in Singapore is overseen by MAS, which has adopted a facilitative approach with light-touch regulation around virtual asset service providers, rather than regulating the digital assets per se. Singapore regulations are aligned with international standards issued by the Financial Stability Board and are primarily focused on addressing money laundering and terrorist financing risks.

Mr Ravi Menon, Managing Director of MAS, is of the view that “… the best approach is not to clamp down or ban these things”. Instead, MAS is putting in place “strong regulation” under which firms that meet its requirements and address the multitude of risks can operate.¹⁰

It was announced on 1 October 2021 that DBS Vickers secured a Singapore licence to offer digital payment token services, while Australian cryptocurrency exchange, Independent Reserve, became the first foreign entity to be granted one. The first licence was issued to Singapore fintech firm, FOMO Pay, in September 2021.

In November 2021, SBI Group, Sygnum, and Azimut Group announced the launch of a venture capital fund incorporated as a VCC that will focus on startups in the digital asset sector across Europe and Southeast Asia. It will focus on pre-series A and series A companies working on blockchain-based or distributed ledger technology infrastructure, decentralised finance solutions, and regulatory tech tools.

This has led to significant interest in Singapore as an Asia-based hub for digital assets, including traditional cryptocurrencies, stablecoins and non-fungible tokens.

For fund managers, digital assets continue to be an area of interest. MAS regulations do not prohibit fund managers from investing in virtual assets generally, and crypto funds are not subject to specific regulations. This is undoubtedly going to be a very closely watched space for the asset management industry as Singapore looks to secure its role as a leading player in the digital assets market.

Singapore fund finance – what to expect

Last but most certainly not least, we turn to look at how the fund finance industry has performed against the backdrop of the above developments.

In the last year, we have seen a steady and significant uptick in fund finance transactions. This is not surprising, as fund formation activity has been increasing steadily post the initial slump when the markets were hit badly in April/May 2020 due to widespread fear of the pandemic.

Generally, the fund finance market in Singapore remains largely borrower-led and relationship-driven. Lenders continue to finance or favour lending to Singapore funds that consist of large institutional investors. We have not heard of any known defaults in this sector.

Loans to Singapore funds are typically upward-looking, capital call facilities, which have historically been bilateral, while asset-based lending is less common. However, there has been an interest in general partner financings where financing is provided to the general partner of a fund in order to fund working capital needs and sometimes its own commitments.

In addition, from a lender perspective, we have seen a number of new entrants enter the market, and existing players re-engaging more strongly in this space, in the past year. This is largely because institutional lending remains high on the priority of banks, which take the view that there are a lot of opportunities in this sector.

These are some of the main considerations of a Singapore fund finance transaction structure:

• Fund vehicle: Most Singapore fund finance transactions involve Singapore limited partnership funds. We see a lot of lending to unit trusts (mostly REITs) and private limited companies (but not on a pure fund finance-type structure). We do expect to see the VCC appear within lending structures in the next few years as its usage becomes more prevalent.

• IBOR transition: The majority of facilities remain denominated in US$, with interest rates linked to LIBOR. The ICE Benchmark Administration, the authorised administrator of LIBOR, published a statement confirming its intention to cease publication of one-week and two-month US$ LIBOR after 31 December 2021, and all other US$ LIBOR tenors (e.g., overnight, one-month, three-month, six-month and 12-month) after 30 June 2023. As such, the transition from US LIBOR to the alternative risk-free Secured Overnight Financing Rate (SOFR) remains a foremost concern for existing fund finance lenders who are either busy transitioning existing facilities to new SOFR rates or pricing new facilities using the new risk-free rate benchmark.

• Committed or uncommitted: Most of the facilities we have seen are on a committed basis, although we have acted on a few uncommitted facilities. We understand that uncommitted lines are priced lower and, in this respect, are preferred by some borrowers. However, uncommitted does mean that the lender will not be obliged to lend (very often without giving any reason why not). Some may flag that there is a reputational issue for lenders who fail to lend without giving reason, but we have seen lenders adopt a more cautious lending position in the early days when COVID-19 hit the financial markets very badly.

• Due Diligence: It is moot to say that due diligence of the underlying fund documentation is fundamental to the financing. From experience, we have seen a lot of “teething” issues in documents from a bankability perspective. In our view, this is largely because funds in this region are starting to transition strongly towards using capital call facilities – and some typically need to upgrade or are in the process of upgrading their pre-existing fund documentation to include key bankability provisions. It is useful to have experienced fund counsel on both sides to try to resolve some of the red-flag issues so that these do not become deal-breakers.

• Governing law: The governing law for Asian capital call facilities can vary and often depends on the identity and jurisdiction of the banks, funds and investors. Most stakeholders are comfortable using either Singapore or English law as the governing law for loan documents.

• Provision of security or guarantee to offshore lenders: Unlike more heavily regulated countries like China and India, there are fewer restrictions on offshore lending structures. Singapore companies are generally not restricted from providing security or guarantees in favour of foreign lenders. However, legal considerations relating to financial assistance, interested party transactions, corporate benefit, priorities and procedures, and formalities relating to the granting of security and guarantee, generally apply.

• Formalities: As a general principle, under Singapore law, a legal assignment must be in writing, signed by the assignor, absolute and notified in writing to any persons against whom the assignor could enforce the assigned rights. If any of these formalities are not complied with, it is an equitable assignment. An equitable assignment is less desirable from an assignee’s perspective, as the assignee can usually only bring an action against the contract counterparty in its own name if it has a legal assignment. With an equitable assignment, the assignee will usually be required to join in proceedings with the assignor. This may be problematic if the assignor is no longer available or interested in participating.

• Registration: In addition, a registrable charge created by a Singapore company must be registered under Section 131 of the Companies Act (cap 50, 2006 Rev Ed) with ACRA within 30 days from the date the instrument of charge was created. A registrable charge that is not registered within the time limit is void against the liquidator and other creditors of the company.

• Priority: Similar to other common law jurisdictions, the rules determining the priority of charges under Singapore law are fairly complex. As a general principle, the relevant time for determining priority between charges is the time of creation of the charges. A prior equitable charge will be defeated by a subsequent bona fide legal chargee for value who had no actual or constructive notice of the prior charge. With regard to an assignment over call rights, the priority of an assignment will generally follow the order in which an assignment is made. However, a subsequent assignee will have priority over a prior assignee, without notice of the prior assignment if the subsequent assignee is the first to give notice of their assignment to the counterparty. It is therefore critical in an assignment over call rights to ensure that the notice of assignment is duly served on the relevant counterparty on creation of the assignment.

• Ipso facto: A more recent consideration for capital call facilities (and loans to Singapore entities generally) is the introduction of Singapore’s “ipso facto” legislation, which came into effect on 30 July 2020 (“IRDA”). Section 440 of the IRDA restricts a person from:

• terminating or amending, or claiming an accelerated payment or forfeiture of the term under, any agreement (including a security agreement) with a company; or

• terminating or modifying any right or obligation under any agreement (including a security agreement) with a company,

by reason only that the proceedings are commenced or that the company is insolvent. The IRDA does set out exceptions to this general principle; however, notably, syndicated and bilateral loan agreements are not among those excluded. Since the IRDA came into effect, lenders have started to mitigate this risk by requiring new provisions to be contained in guarantees that give lenders the right to call on guarantees immediately upon the occurrence of any event described in Section 440 of the IRDA in relation to the borrower.

The year ahead

It is difficult to predict what the future may hold. We used this same line in our chapter last year and the same continues to hold true; however, there is a lot to be optimistic about: fundraising activities have resumed; opportunities are abound as people look towards what works and what can work in the post-COVID-19 environment; and, with its stable political environment and pro-business policies and incentives, Singapore is likely to attract and retain a lot of attention from the asset managers and financiers.

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1. Article by Choo Yun Ting dated 1 September 2021: Private-sector economists raise Singapore’s 2021 growth forecast to 6.6%: MAS survey, Economy News & Top Stories – The Straits Times.
2. IMF, October 2020, “World Economic Outlook”.
3. Article in AsianInvestor by Natalie Koh dated 30 June 2021: https://www.asianinvestor.net/article/assets-under-management-in-singapore-rises-17-to-3-5-trillion/470753.
4. Article by Bloomberg dated 17 May 2021: Singapore’s VCC to boost its wealth ranks, stoke boon for banks – Bloomberg Professional Services.
5. Article by Bloomberg dated 17 May 2021: Singapore’s VCC to boost its wealth ranks, stoke boon for banks – Bloomberg Professional Services.
6. Article dated 25 August 2021: Setting its sights on Singapore as wealth powerhouse – The Business Times.
7. Speech published by MAS dated 25 January 2021: https://www.mas.gov.sg/news/speeches/2021/riding-the-growth-momentum-in-asia.
8. Article dated 11 April 2019: Venture Capital Financing in Crypto, Explained – Bitcoin Insider.
9. Article by Aleh Tsyvinshki dated 5 November 2021: Commentary: Cryptocurrencies could become viable asset class for investors – CNA https://www.channelnewsasia.com/.
10. Article dated 2 November 2021: Singapore wants to be leading player in global crypto economy: MAS chief Ravi Menon, Companies & Markets News & Top Stories – The Straits Times.