12/11/2024 - Information letters

British Virgin Islands (BVI) - A Global Leader in Investment Fund Growth and Innovation

In issue 4/2024 of the business magazine PRIVATE, you will find an informative article on the topic "Global Leader in Investment Funds."

Investment funds continue to play a critical role in the global financial landscape. As financial markets grow more complex and new asset classes emerge, fund managers and investors face a challenging mix of legal, tax and regulatory requirements. In his article which appeared in the latest Business Magazin PRIVATE, Jerome Rubin-Delanchy, CEO, ATU Advisory Services AG in Zurich, explores the evolving landscape of global investment funds, focusing on the British Virgin Islands (BVI), which has emerged as a leading hub, especially for alternative investments and digital assets.

British Virgin Islands (BVI) - A Global Leader in Investment Fund Growth and Innovation

By Jerome Rubin-Delanchy
CEO, ATU Advisory Services AG

Investment funds continue to play a critical role in the global financial landscape. As financial markets grow more complex and new asset classes emerge, fund managers and investors face a challenging mix of legal, tax and regulatory requirements. This article explores the evolving landscape of global investment funds, focusing on the British Virgin Islands (BVI), which has emerged as a leading hub, especially for alternative investments and digital assets.

Growth of investment funds: Emerging markets, technology and ESG trends

The global investment funds market has grown tremendously over the last few decades. This growth is driven by increased investor awareness, better access to global markets and technological advancements that have made investment opportunities more accessible to a broader audience.

The rising demand for investment products in emerging markets, especially in Asia-Pacific and Latin Ame rica, significantly contributes to this growth. Countries like China and India are seeing increased investments from both retail and institutional sectors, thanks to expanding middle classes, greater financial literacy and favourable government policies. For example, China’s financial reforms have opened its markets to foreign investors, while a booming tech sector fuels India’s economic growth.

Technological innovations, especially in fintech, have further expanded access to investment funds. Robo-advisors and online trading platforms have reduced barriers for individual investors, making it easier to create diversified portfolios at lower costs. These platforms allow access to products like mutual funds, ETFs and complex instruments like hedge funds.

Another significant trend is the growing emphasis on environmental, social and governance (ESG) factors. Investors, particularly younger generations, seek more than just financial returns – they want their investments to have a positive social and environmental impact. This trend has led to the rapid expansion of ESG-focused funds, with fund managers increasingly offering products aligned with these values. Recent research by Morgan Stanley1) supports this trend, noting that funds are even considering companies that are not sustainable now but show clear potential for improvement based on shifts in their corporate practices, business models or governance to target better sustainability.

Finally, globalisation has made cross-border investments more accessible, allowing investors to diversify internationally. Global investment funds provide exposure to various markets, including emerging economies and specialised sectors like technology, healthcare and renewable energy.

The role of domicile in investment funds

Choosing the right domicile is critical when structuring investment funds, as it influences the regulatory and tax treatment and the funds’ appeal to investors. Some jurisdictions are more popular for specific types of funds. For example, the Cayman Islands have long been preferred for hedge funds, while Luxembourg and Ireland are well-regarded for UCITS-compliant retail funds. However, less obvious choices, like the BVI, are gaining traction as they modernise their legal framework and offer cost-effective, flexible alternatives for fund managers. The jurisdiction’s regulatory framework is primarily governed by the Securities and Investment Business Act (SIBA) and the Mutual Funds Regulations. These laws provide the legal foundation for forming, operating and regulating funds in the BVI.

BVI funds are classified into different categories, each with distinct regulatory requirements, operating costs and investor eligibility criteria. Here’s a detailed look at the most popular types of funds available in the BVI:

  1. Professional Funds: This is the most common investment vehicle in the BVI and is primarily aimed at professional or sophisticated investors. To qualify, investors must have a net worth of over US$1 million or relevant professional experience. Other than the exempt investors, the minimum initial investment is US$100,000. Professional Funds offer greater flexibility and reduced regulatory oversight compared to funds in the European Union.
  2. Private Funds: Private Funds are designed for smaller groups of investors and limit participation to a maximum of 50 people. These funds operate on an invitation-only basis and are often used by family offices or business networks.
  3. Incubator Funds: A unique feature of the BVI Incubator Funds allows new fund managers to test their strategies at a lower cost. These funds can operate for up to two years, with a maximum of 20 investors, a minimum initial investment of US$20,000 and total assets of US$20 million. Incubator Funds benefit from reduced regulatory requirements and, if successful, they can convert to Professional or Private Funds.
  4. Approved Funds: Similar to the Incubator Funds but without a time limit, Approved Funds allow up to 20 investors and a maximum of US$100 million in assets. These funds are lightly regulated, making them ideal for smaller, family-focused investments.
  5. Private Investment Funds (PIFs): Designed for closed-ended fund structures, PIFs are used for long-term strategies, such as private equity, real estate or venture capital. Unlike open-ended funds, where investors can redeem their interests at any time, PIFs are structured for long-term projects and offer a more flexible, cost-effective structure for managing illiquid assets.

In terms of structuring, BVI funds typically use business companies, which offer flexibility through multiple share classes. Segregated portfolio companies are another popular option, allowing asset-liability separation between different portfolios and providing greater investor protection. For private equity and venture capital, limited partnerships are preferred due to their flow-through tax treatment and ability to have or not have a separate legal personality, which provides flexibility for tax planning and operations.

As of June 2024, the BVI had 2,051 regulated funds, with the majority being Professional Funds (846), Private Investment Funds (379), Approved Funds (355) and Private Funds (286). The BVI is also becoming a global hub for crypto funds, supported by the introduction of the Virtual Asset Service Provider Act (VASP) in 2022, further solidifying the BVI’s position as a leader in digital asset management.

The BVI Approved Manager: A flexible regulatory solution

One of the most innovative aspects of the BVI’s regulatory framework is the Approved Manager regime, introduced in 2012. This regime offers fund managers a streamlined, cost-effective way to manage up to US$400 million in AUM for open-ended funds or US$1 billion for closed-ended funds without the more extensive compliance requirements typically associated with fully licensed fund managers.

The Approved Manager regime significantly reduces the administrative and operational burdens on managers, making it an attractive option for boutique and start-up managers looking for a more flexible regulatory environment.

Additionally, Approved Managers are exempt from local presence requirements under the Economic Substance (Companies and Limited Partnerships) Act. Fund managers do not need to demonstrate significant local operations, such as large offices or local staff. They are only required to maintain a registered office in the BVI and appoint a local representative, typically a service provider. This allows fund managers to focus on managing investments while maintaining compliance with minimal local infrastructure.

ESG funds, digital assets and the future of BVI investment funds

As global investment strategies evolve, two significant trends are reshaping the industry: the rise of ESG investing and the growing demand for digital assets.

Investors are increasingly looking for funds that align with their ethical values, which is driving the growth of ESG-focused funds. Fund managers are responding by incorporating ESG principles into their strategies and offering new products to meet this demand. BVI’s regulatory environment, specifically under SIBA, provides the legal flexibility for fund managers to incorporate ESG principles into various fund structures. BVI’s regulatory approach is less cumbersome compared to more heavily regulated jurisdictions, allowing fund managers to introduce ESGfocused products faster and more costeffectively. This advantage is critical for managers looking to capitalise on the rising demand for ESG-compliant funds, such as green bonds, social impact funds and sustainability-linked investments.

At the same time, the rise of digital assets, including crypto currencies and blockchain-based financial instruments, is opening up new opportunities for investors looking to diversify portfolios and capture growth in emerging sectors. With its progressive regulatory framework, including the VASP Act, the BVI is well-positioned to support these new asset classes, making it a favourable jurisdiction for managers of digital asset funds.

As the investment landscape evolves, fund managers and investors will increasingly need to select jurisdictions that provide flexibility, regulatory stability and cost efficiency. The BVI, with its forward-thinking approach and innovative solutions like the Approved Manager regime, offers a compelling environment for fund managers looking to align their strategies with emerging global trends.

Why ATU

ATU has expertise across all the BVI and Cayman Islands investment fund structures involving diverse investment strategies and various asset types. We offer the full suite of services to establish and administer investment funds, all coordinated by one dedicated team. The quality of the team at ATU enables the provision of customisable services that best reflect the increasingly sophisticated needs of investors and investment managers.

1) An Emerging Trend for Investors to Consider Sustainable Improvers, Morgan Stanley, Sep. 2024 https://www.morganstanley.com/ideas/esg-improversinvesting

For further information, please contact Jerome.rubin.delanchy@atuadvisory.com.

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