Building bridges into the future of alternative investment  

Both regulators and stakeholders in Singapore hold grand ambitions to build upon recent successes and capture current opportunities to entice fresh talent and capital to the city 

Singapore has long been considered a premier location for financial market participants to base their operations and has successfully built an environment encouraging innovation within a robust regulatory framework.

It is not only the market participants that can be credited with being forward-looking, however. The Monetary Authority of Singapore (MAS), with the assistance of industry stakeholders such as the Alternative Investment Management Association, recently spearheaded the development of a new corporate entity structure called the Variable Capital Company (VCC).

The VCC launched at an inauspicious time - January 2020 - but nonetheless garnered interest from fund managers and was quickly hailed as a success in making Singapore more competitive as a fund domicile.

The city-state is understood to be welcoming more than a dozen investment funds every month under a new scheme. This includes more than 300 asset managers (including an appreciable number of managers pursuing hedge and private credit strategies) adopting the structure with around 600 VCCs set up since its launch. This provides a strong flow of capital into Singapore and the VCC structure aims to make sure it stays there.

Not content with this progress, the MAS is now rolling out updates to VCC, dubbed VCC 2.0, to further reinforce Singapore's credentials as a leading fund management jurisdiction.

AIMA, and its members, are working closely with the MAS in the development of the VCC structure and continue to coordinate with regulators on the enhancement of the VCC framework to consider regulatory safeguards to allow non-regulated entities such as single-family offices to use VCC and to provide feedback on the usage of another price other than NAV in certain circumstances to facilitate operations of illiquid assets.

Panellists at this year's AIMA Singapore Annual Forum discussed the progress of the upgraded entity and agreed that as the global alternative investment market becomes more comfortable with the VCC structure, it was predicted that the flow of fund formations in Singapore will increase. AIMA's involvement in the launch of the VCC includes proactively partnering with the MAS and providing the industry's perspectives across a range of issues publicly and privately.

AIMA also contributed to a suite of industry-standard forms and guidance notes produced by the Singapore Academy of Law and many of the firms involved are members of our AIMA committee. AIMA further encouraged the MAS to use real money to drive VCC adoption and collected cost-of-setup data for the MAS.

The VCC grant scheme provides 70 per cent co-funding of qualifying formation expenses, capped at S$150,000 per VCC to cover legal services, tax services, administration or regulatory compliance services associated with setting up a VCC. Every manager can get three grants each of S$150,000.

Singapore is a talent magnet

Zooming out as we emerge from the pandemic, the eyes of the world are carefully watching how the various regional financial hubs are approaching the process, with major implications for future investment decisions on where to base key personnel. Singapore has so far been praised for its pragmatic approach to allowing business to continue where possible throughout the pandemic and has recently made clear its intention to work with its key industries to ensure disruption is minimised.

This has not gone unnoticed by decision-makers in other regional hubs that are being less forthcoming and the flows of top talent across the region appear to be all pointed at the city nation. The proactive strategy of attracting top talent was encapsulated by Lim Cheng Khai, Executive Director (Financial Markets Development) at MAS, who used his opening remarks at AIMA's recent Singapore forum to outline the regulator's approach to supporting firms in bringing in global talent with complementary skills and upskilling our local talent pool to support its ambitions for making Singapore a global leader in several key areas including ESG and digital assets.

Singapore aims to follow the EU's example with ESG rules

The European Union has paved the way in sustainable finance regulatory frameworks, and Singapore plans to follow suit. As is the case globally, environmental, social and governance (ESG) adoption in Asia Pacific (APAC) is held back by a lack of data, regulatory consistency, and transparency. As such, Singapore's regulators and policymakers are being encouraged to take a leading role in the region's development of responsible investing and ESG. To achieve Singapore's sustainable finance hub aspirations, MAS says it will work with the industry to "size up" sustainable job demands, skills and knowledge gaps.

The Institute of Banking and Finance in Singapore and MAS launched the Sustainable Finance Technical Skills and Competencies to help empower individuals to perform various roles in sustainable finance and will look to develop career conversion programmes to support mid-career individuals to upskill in sustainable finance.

"Huge" opportunities in digital assets 

MAS's Lim outlined the regulator's aim to embrace the potential of blockchain technology and the tokenisation of traditional assets, stating the growth opportunity is "huge". He highlighted the benefits and risks of tokenisations and encouraged asset managers to adopt this technology in a responsible manner that protects the interests of investors. Although digital assets are still considered a risky asset class, both retail and institutional investors - even conservative pension funds and sovereign wealth funds - are becoming more comfortable with the concept and are exploring the space.

Hurdles remain, however. The worrying uptick in cybercrime linked to cryptocurrencies was noted as a deterrent to adoption that will require cross-border coordination between regulators and government crime agencies to tackle effectively. Much like ESG, which struggles with issues around greenwashing, this emerging market will benefit from more clearly defined regulatory frameworks and a more mature service provider ecosystem. Here, MAS appears to be proactively seeking solutions, and AIMA stands ready to assist wherever possible.

Private credit is a rich growth opportunity in APAC 

MAS's Lim cited two areas of great opportunities: blockchain and the tokenisation of assets, and private credit. He pointed to the global phenomenon of SMEs requiring alternative sources of liquidity as traditional financing sources scale back and restructuring needs to be increased during the pandemic. "Singapore aims to be a full-spectrum private markets hub," he told delegates.

From a regulatory perspective, APAC is fractured, and sourcing and closing on cross-border financing deals are complex, especially in virgin territory for pitching alternative financing. However, market commentators have noted that the full effects of the pandemic are yet to be realised and demand for distressed debt, for example, will spike.

Opportunities in private markets are expected to entice traditional hedge funds into launching products in the space, with hybrid strategies that offer exposure to both public and private markets expected to become much more common in the years ahead.

Across this nexus of arenas affecting the alternative investment industry in Singapore, both regulators and their partners in the industry hold grand ambitions to build upon recent successes and capture current opportunities to entice fresh talent and capital to the city. From the incorporation of responsible investment policies to the exploration of digital assets and greater scrutiny from regulators - to say nothing of the unfolding macroeconomic drama - the traditional hedge fund community faces an interesting time ahead.

Lee Kher Sheng and Michael Bugel are co-heads, APAC, Alternative Investment Management Association 

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