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New framework to take Singapore funds industry to new level

A new type of entity - the Variable Capital Company - will allow funds to both manage from and domicile in Singapore

Singapore passed into law on Monday a new type of entity - the Variable Capital Company - that will be a game changer for the Republic's fast-growing fund management industry.

SINGAPORE passed into law on Monday a new type of entity - the Variable Capital Company - that will be a game changer for the Republic's fast-growing fund management industry.

The Variable Capital Companies (VCC) Bill, approved by Parliament on Monday, aims to boost the fund management ecosystem by encouraging funds to both incorporate and operate in Singapore, placing the Republic in the same league as global fund domicile centres like Cayman Islands, Dublin and Luxembourg.

With funds being domiciled here in addition to managing from Singapore, supporting service providers - for example, lawyers, bankers, accountants - are also expected to reap spillover benefits from the new framework. "Beyond fund managers, the VCC framework will create new business opportunities for lawyers, accountants, tax advisors, fund administrators and custodians in Singapore," Second Minister for Finance Indranee Rajah said.

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Speaking in Parliament, Ms Indranee also said that the Monetary Authority of Singapore has estimated that the VCC framework could create over 1,000 new jobs for these service providers in the first two years of its introduction.

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"The introduction of this corporate structure... will be a game changer for Singapore's fund management industry as it will allow us to capture value from the full fund management value chain."

Ms Indranee pointed out that Singapore is already recognised as a leading Asian fund management hub, with assets under management (AUM) growing an average 15 per cent per annum over the past five years to reach S$3.3 trillion at the end of 2017.

Almost seven in every 10 Sing dollars under management are invested into the Asia-Pacific region, reflecting Singapore's role as a key node for global fund managers and investors to invest in the region's growth opportunities.

However, a substantial proportion of funds managed by fund managers in Singapore are domiciled elsewhere, owing to the flexible corporate structures that are available there. Hence, it is common to see funds operating in Singapore but domiciled offshore - the favourite jurisdictions being Cayman Islands, Dublin and Luxembourg.

As a result, most of the economic benefits generated by service providers to these investment funds accrue outside Singapore.

To facilitate fund domiciliation in Singapore, the Bill will provide a re-domiciliation mechanism for existing overseas investment funds constituted as corporate structures similar to VCCs. Existing funds domiciled in Singapore as companies, limited partnerships or unit trusts can also restructure to take advantage of the VCC structure.

Currently, funds can only be registered under the structure of a company, limited partnership or unit trust, but these structures with restrictions are less than ideal for funds.

VCCs are also a suitable corporate structure for both traditional and alternative strategies as they are flexible structures, in that they may be constituted as open-ended or closed-end funds.

Ms Indranee said: "Given the growth in the alternative space, it is also important that the VCC structure can be used by alternative managers. Alternative AUM in Singapore grew by 20 per cent per annum over the past five years, led by the venture capital and private equity sectors; in comparison, traditional AUM grew by 13 per cent per annum over the same period."

She added: "The introduction of the VCC framework will enhance our fund ecosystem and the value proposition Singapore offers to fund managers. The benefits of the VCC are not solely confined to fund managers, but will also extend to local service providers.

"It will benefit the Singapore economy, strengthen Singapore's position as a full-service international fund management centre and create good jobs for Singaporeans."

The fund management industry is also an important component of Singapore's financial sector, contributing 12.4 per cent of the overall financial sector's nominal value-add last year.

Some stakeholders in the fund industry whom The Business Times spoke to agree with Ms Indranee's views that the VCC could significantly transform the fund industry - to Singapore's advantage.

Managing director, co-head of Apac and deputy global head of Government Affairs of the Alternative Investment Management Association (AIMA), Lee Kher Sheng said: "It's potentially game changing. The fund management industry will become stronger, more vibrant and more differentiated; widening the ecosystem."

If offshore funds do re-domicile in Singapore, this would be music to the ears of fund managers here as this would mean no more waking up at unearthly hours to liaise with directors or service providers in a different time zone.

And the benefits go beyond uninterrupted sleep for fund managers. It would also mean more businesses and opportunities for onshore service providers and other stakeholders including resident directors, Mr Lee said.

Avanda Investment Management's chief operating officer Michael Teo believes the VCC presents Singapore as "one of the viable options" to global investment managers, allowing both fund vehicle and business activities to be located in one site.

The experienced fund manager noted that the VCC provides a lot of operational flexibility and efficiency for funds.

Avanda, which is partly seeded by money from Singapore's sovereign wealth fund GIC, currently has a global multi-asset fund and an Asian equities fund.

Key features of a variable capital company (VCC)

  • A VCC is a bespoke corporate structure for investment funds.
  • Shares can be issued and redeemed without shareholders' approval, enabling investors to exit their investments when they wish to, and the fund to pay dividends using its capital.
  • Can be standalone or an umbrella structure with multiple sub-funds with different investment objectives, investors as well as assets and liabilities. The umbrella structure has appropriate ringfencing safeguards.
  • Wider scope of accounting standards in preparing financial statements in order to serve the needs of global investors.

What it means to the fund industry

  • Convenience of both investment vehicle and business activities in one location, Singapore.
  • Potential spillover benefits for service providers.

What it means to Singapore

  • Generates more business opportunities, including for service providers like accountants and lawyers, and creates more jobs.
  • Enhances Singapore's position as a full-service international fund management centre.

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