The growth in the BVI fund finance market over the past few years has been driven in part by: expansion into a broader range of fund types; increasing take-up by fund sponsors who had not traditionally used the product in their fund families; record levels of fundraising; and an increasing number of bespoke transaction structures, including net asset value (NAV) and hybrid facilities, as well as equity commitment deals. It is apparent that as the demands and needs of sponsors and funds have diversified, lenders have become more innovative and specialised in their approach. While certain banks have continued to build their book of business, new alternative lenders have also emerged on the scene. The BVI has also seen steady increases in funds focused on climate technology, as environmental, social and governance (ESG) factors become an increasing priority for investors, as well as significant numbers of blockchain and cryptocurrency funds.
Types of investment funds
An investment fund can be structured as a BVI business company, segregated portfolio company (SPC), limited partnership (Partnership) or unit trust. The most popular vehicle for BVI funds has historically been companies, which is largely attributed to the modern and flexible framework provided by the BVI Business Companies Act 2004, as amended (BCA). However, Partnerships are becoming increasingly popular for joint venture funds since amendments were made to the BVI Limited Partnership Act 2017, pursuant to the BVI Limited Partnership (Amendment) Act 2019 (together, the LP Act).
The vast majority of BVI private equity funds are private investment or closed-ended funds, which are defined as companies, Partnerships, unit trusts or any other BVI entities that:
- collect and pool investor funds for the purpose of collective investment and diversification of portfolio risk; and
- issue fund interests, which entitle the holder to receive an amount computed by reference to the value of a proportionate interest in the whole or in part of the assets of the entity.
An open-ended fund is defined as a company, Partnership or unit trust that:
- collects and pools investor funds for the purpose of collective investment; and
- issues fund interests that entitle the holder to receive on demand, or within a specified period after demand, an amount computed by reference to the value of a proportionate interest in the whole or in part of the net assets of the entity.
The categories of open-ended funds are:
- professional fund (open to professional investors only, with a minimum investment of US$100,000);
- private fund (not more than 50 investors and promoted on the basis of private offers only);
- public fund (carrying a higher level of regulatory oversight);
- recognised foreign fund (foreign funds authorised to be marketed in the BVI);
- incubator fund (for start-ups); and
- approved fund (for family offices).
A BVI company is incorporated under the BCA with separate legal personality. A BVI company for use as a private equity fund will typically have a range of share classes, allowing for the shares held by the manager (or its affiliates) to have different rights from those of investors. Shares can be issued with or without a par value. As shareholders in a BVI company, liability will be limited to: (i) the amount, if any, unpaid on the shares it holds; (ii) any liability expressly set out in the articles of the company; and (iii) any liability to repay a distribution.
Segregated portfolio companies
Previously limited to certain regulated entities and open-ended funds, the Segregated Portfolio Companies (BVI Business Company) Regulations 2018 (as amended) allow a private investment fund and other BVI entities to be structured as an SPC. An SPC is a single company whose assets and liabilities can be allocated and ring-fenced between separate sub-funds or segregated portfolios, similar to the concept of “protected cell” or “segregated account” companies in other jurisdictions. Shares may be issued in respect of certain portfolios, and investors will be entitled to receive distributions from that portfolio alone. Similarly, creditors may contract with a particular portfolio, and only have recourse to assets from that portfolio. This development allows private equity funds to house multiple funds within one centralised body, providing cost and administration savings.
While a common structure for funds in other jurisdictions, Partnerships have traditionally been underused in the BVI, partly as a result of outdated and imprecise legislation. The LP Act sought to address this by introducing commercial and flexible provisions, aimed at both private equity and open-ended mutual funds. For example, it is now possible for a Partnership to choose to have legal personality and register security interests.
Under the LP Act, a Partnership can be established either with or without separate legal personality, making them suitable for both funds and carried interest distribution vehicles. For Partnerships established after the LP Act, the choice of whether or not the Partnership has legal personality is irrevocable. All Partnerships in existence prior to the new LP Act coming into force may be re-registered with or without legal personality, at the election of the general partners.
Investors join as limited partners. Subject to the fund’s limited partnership agreement (LPA), a limited partner may, but is not required to, make a contribution to the Partnership. Save in circumstances where limited liability is lost (for example, by holding an office (including a directorship) or acting as a consultant, contractor or agent of the general partner), a limited partner’s liability for the debts and liabilities of the Partnership will be limited to the amount of the limited partner’s contribution or unpaid commitment to the Partnership, if any.
A Partnership must also have at least one general partner, often controlled by the fund manager, who will be responsible for managing the Partnership. Provided the LPA does not provide otherwise, the general partner is liable for the unpaid debts and liabilities of the Partnership incurred while they are a general partner. Where there are multiple general partners, each general partner is jointly and severally liable. There is no requirement for the general partner to be established within the BVI.
In most cases, the general partner will be a company with limited liability, acting as a “liability blocker” to prevent liability from flowing higher up the chain of ownership.
Unit trusts are recognised under BVI trust law. Unit trusts are not separate legal entities and are established by way of a deed of trust. The principal benefit of offshore unit trusts for private equity vehicles (being that units could be redeemed without issuing new shares) has been reduced with the ability of companies to issue shares with no par value and, accordingly, this vehicle is not commonly used.
bvi Fund formation
Once the constitutional documents (being the memorandum and articles of association for a company and a written LPA for a Partnership) and any other commercial matters are agreed between any interested parties, a company or a Partnership can be established relatively quickly (normally within one to two working days). The incorporation of a company will require the filing of the following with the BVI Registrar of Corporate Affairs (Registrar):
- memorandum and articles of association; and
- a document from the proposed registered agent, consenting to their appointment.
If the company is to be incorporated as an SPC, prior approval from the BVI Financial Services Commission (FSC) must be obtained. We would expect this to take one to two weeks.
The formation of a Partnership will require the filing of the following with the Registrar:
- a statement confirming the Partnership’s name, address, registered agent, name and address of each general partner and a confirmation of whether the Partnership has an unlimited duration or a fixed term;
- if desired, an election by the general partners for the Partnership to be formed without legal personality (the default position being a Partnership with legal personality); and
- a document from the proposed registered agent, consenting to their appointment.
The LPA is not filed and is not otherwise made public.
A registered agent, within the BVI, will need to be engaged in order to establish either a company or Partnership. Only a registered agent is permitted to file registration documents with the BVI Registry of Corporate Affairs (BVI Registry). Provided the Registrar is satisfied that the registration requirements for the company or Partnership (as applicable) have been complied with, it shall issue a certificate of registration, being conclusive evidence that the requirements have been met and that the company or Partnership (as applicable) has been established.
Private investment funds (whether companies or Partnerships) do not have any minimum capital requirements.
Regulation, licensing and registration
The Securities and Investment Business Act 2010 (as amended) (SIBA) is the primary legislation regulating funds in the BVI and is monitored by the FSC. SIBA is supplemented by various regulations, including the Private Investment Funds Regulations (PIF Regulations) and the Financial Services Commission (Securities and Investment Business Fees) Regulations 2010 (as amended). Further regulations apply to open-ended funds. As the vast majority of private equity funds are closed-ended, this chapter focuses primarily on closed-ended structures.
Prior to 2020, private investment funds (or closed-ended funds) were not regulated in the BVI. On 31 December 2019, the BVI amended SIBA to bring “private investment funds” into the scope of the regulatory regime.
As a BVI entity, a fund (whether open- or closed-ended), if structured as a company, will be registered with the BVI Registry and its corporate affairs will be governed by the BCA. BVI entities structured as a Partnership will be registered with the BVI Registrar of Limited Partnerships and its corporate affairs will be governed by the LP Act.
In order to obtain recognition, the fund is required to submit to the FSC an application in the approved form, accompanied by copies of:
- the fund’s constitutional documents, register of directors (where applicable) and certificate of incorporation;
- formation or registration;
- the fund’s valuation policy;
- the fund’s offering document or term sheet, where the fund intends to issue such document; and
- CVs or biographies of each director, general partner or trustee, or the underlying individuals where such entities are corporate entities.
Where the fund does not intend to issue an offering document or term sheet, the fund must provide its reasoning for doing so and explain how investors will receive pertinent information concerning the fund. Any offering document or term sheet must include information prescribed by the PIF Regulations (including a disclaimer, the investment objectives and details of any fees).
Once an entity is incorporated, it can operate as a private investment fund for a period of 14 days before submitting the application to the FSC for recognition. In order to be recognised by the FSC, BVI private investment funds must either:
- be authorised to have no more than 50 investors;
- invite investors to subscribe for, or purchase, fund interests on a private basis only; or
- only issue fund interests to professional investors, each with a minimum initial investment of US$100,000 (or the equivalent in any other currency and subject to certain exemptions to be outlined by the FSC).
The fund’s constitutional documents must specify which of these restrictions apply to the fund.
Registration of investment advisers and fund managers
Where fund managers, advisers, administrators or appointed persons are established outside the BVI, they (and their directors and officers) will not normally need to be registered or licensed in the BVI, provided that they have no physical presence in the BVI and the fund has no presence in the BVI save for its registered office and agent.
Where a manager, adviser, administrator or appointed person is either BVI-incorporated or physically operates within the BVI, such persons will normally be required to obtain an investment business licence under SIBA. Licensees under SIBA are subject to requirements to, among other things, file audited financial statements and seek approval from the FSC for any change in its directors, officers or significant interest holders, for any business carried on outside the BVI and any establishment of a subsidiary.
For BVI-incorporated investment managers or advisers, an alternative option to SIBA licensing is to register as an approved manager under the BVI Investment Business (Approved Managers) Regulations, which impose lighter requirements (including no requirement to appoint an auditor). The approved manager regime is available for BVI-incorporated investment managers or advisers to closed-ended funds whose aggregate assets under management do not exceed US$1 billion (or its equivalent in another currency).
Registration under either SIBA or the approved manager regime will require payment of an initial application fee and recurring annual fee.
BVI security package
The BVI is an attractive jurisdiction for financing structures with lender-friendly insolvency laws (modelled on the English legal system) and a simple, yet robust, regime for secured financing transactions.
Under the BCA, and subject to the constitutional documents of a BVI company or Partnership, the BVI entity may, by an instrument in writing, create a mortgage, charge or other encumbrance over any of its assets situated in any part of the world in accordance with the law of relevant jurisdiction, and the mortgage, charge or other encumbrance will be binding on the BVI entity to the extent, and in accordance with the requirements, of the chosen law. Assuming that the execution and delivery of a foreign law security document (Foreign Security Document) creates a valid charge under the chosen foreign law, then such security interest will be recognised in the BVI. Upon registration of the Foreign Security Document with the Registrar, all registrations, filings and other actions necessary or desirable to protect priority of the Foreign Security Document in the BVI will have been taken, subject to any priority afforded to pre-existing registered charges.
With the majority of BVI investment funds being structed as companies, a BVI security package will typically include an equitable mortgage or charge over shares in the BVI company. Under BVI law, there are no steps required to “perfect” a security interest; however, in order to protect a security interest granted by a chargor over shares that it holds in a BVI company, the chargor should deliver to the secured party a signed but undated share transfer form and signed directors’ resolutions authorising the registered agent of the company to register the name of the secured party in the company’s share register. The BVI company’s register of members is prima facie evidence of title, so it is important to ensure that steps are taken to include the entry of the secured party’s name in the BVI company’s register of members. If the security is granted over 100% of the BVI company, or a significant enough percentage to allow the shareholder to control the board of directors, it is prudent to also request signed but undated letters of resignation from the current directors (should the secured party wish to change the board upon enforcement of the charge).
A BVI chargor will typically also grant security over:
- bank accounts into which any distributions are placed from the underlying investments;
- contract rights under any custodian agreement (including security over the relevant custodian accounts); and
- any other asset security.
We would not normally expect the relevant security instruments for the above assets to be governed by BVI law because these assets are generally not located in the BVI.
Where a BVI investment fund or obligor grants security over any of its assets, to establish the priority of a security interest created by that BVI company, the secured party should request that particulars of the security interest are publicly registered with the Registrar, in accordance with the BCA. Public registration of security is not necessary to perfect the security interest under BVI law; however, where there are two security interests that relate to the same collateral, the timing of the public registration of the security interest will, in the majority of cases, determine priority. Public registration in the register of registered charges also provides constructive notice to third parties.
As previously noted, a Partnership may be constituted with or without legal personality. Where a Partnership does not have legal personality, the Partnership merely reflects a contractual agreement between the partners, where the general partner is vested with certain duties and powers with respect to the Partnership’s business and assets. Conversely, a Partnership that is registered with legal personality, which is the default position unless the general partners elect not to have legal personality on registration, will be able to grant security over its assets. The legal treatment of a Partnership and the corresponding role of the general partner will therefore have a number of implications for lenders offering subscription credit facilities to BVI vehicles when structuring the related security package. Subject to the LPA, a Partnership with legal personality may, by an instrument in writing, create a charge over the assets of the Partnership, including uncalled capital commitments (Uncalled Capital). The contractual obligation of a limited partner to make capital contributions, to the extent that they have not already been called, and the corresponding right of the general partner on behalf of the Partnership to call for any Uncalled Capital (Capital Call Rights), are at the core of the typical subscription credit facility security package. Security over the Uncalled Capital and/or Capital Call Rights would be granted in respect of a BVI obligor’s contractual obligations/rights under the subscription agreement (rather than the memorandum and articles of association or LPA). We note that security over contractual rights is granted only by way of an equitable assignment because it is not possible to grant a legal assignment of contractual rights under BVI law.
Access to information
Since December 2019, the FSC has maintained a register of recognised funds, which identifies each fund’s service and business addresses (within and outside the BVI), authorised representative, date and status of recognition, whether the fund is up to date with its FSC fees and such other information the FSC considers appropriate. Such information will be available for public inspection, for which the FSC may charge a fee.
Other than as set out above, limited information is available publicly about entities established in the BVI and, where information is available publicly, such documents are generally only accessible through the FSC’s online database, which requires registration with the FSC to access and the payment of fees. Such available information includes registered office and agent details, name and registered number and any publicly registered charges over its assets. For companies, the memorandum and articles (and any resolutions amending these) will also be available. For Partnerships, the identity of general partners will be available (but not the LPA). Entities are required to keep filed information up to date and any failure to do so may result in a fine.
A BVI company is also required to file a copy of its register of directors (and any changes thereto within 30 days) with the Registrar. The register of directors has not previously been publicly available, except on an order of the court, on a written request by a competent authority (for tax compliance or other law enforcement purposes) or at the election of the company. However, since 1 January 2023, certain authorised users of the BVI Registry’s system (generally, only BVI service providers) will be able to search for the names of the current directors of a BVI company. We note that the search results are limited in scope to include the name of the current directors: accordingly, it will not be possible to obtain the date of birth, nationality, address and other personal information of a director or the names of former directors.
The identities of shareholders in a company and limited partners in a Partnership, and the amounts of their capital commitments, are not publicly available. However, both a limited partner and a member of a company are entitled to inspect, on giving written notice, the records, the register of limited partners (in the case of a Partnership and subject to the LPA) and the registers of members and directors (in the case of a company). For a Partnership, the LPA may restrict these inspection rights. For a company, subject to its memorandum and articles, a director may refuse an inspection request if they are satisfied that it is contrary to the company’s interests. The articles of a company, or the LPA for a Partnership, may allow for further inspection or information rights for investors.
In 2017, the BVI introduced a centralised system for recording the beneficial owners of BVI entities (being persons who ultimately own or control more than 25% of an entity). While open-ended mutual funds and any licensed BVI entities are exempt from this regime, closed-ended funds are not. The system is not available to the public and can only be accessed following a formal request from the BVI Financial Investigation Agency, the FSC, the BVI International Tax Authority or the Attorney General’s Chambers, who will in turn be bound by strict confidentiality rules. Non-compliance can result in a fine, imprisonment or both.
Economic substance regime
The BVI introduced the Economic Substance (Companies and Limited Partnerships) Act 2018, as amended, and the Economic Substance (Companies and Limited Partnerships) (Amendment) Act 2021 (together, the ES Act), which applies to all companies and Partnerships incorporated or registered in the BVI (these are referred to as “relevant entities”). All relevant entities that are classified as “resident” in the BVI and as carrying on a “relevant activity” will need to demonstrate that they have “adequate substance” in the BVI or they will be subject to administrative penalties and, ultimately, strike-off for failure to comply.
The ES Act lists nine “relevant activities”, the most relevant of which for the purposes of this chapter being “holding company business” and “fund management business”; however, “investment fund business” is excluded from this list.
A corporate entity that carries on “holding company business” is defined as a “pure equity holding business” (meaning a BVI entity that only holds equity participations in other entities and only earns dividends and capital gains) and is in scope of the ES Act, but is subject to a reduced economic substance test. In practice, this should be met by its ongoing compliance with existing statutory obligations.
“Fund management business” includes taking decisions on the holding and selling of investments, calculating risk and reserves, taking decisions on currency or interest fluctuations and hedging positions and preparing regulatory and other reports for government authorities and investors. This means that it is likely that an investment manager would be classified as carrying on fund management business and will fall in scope of the ES Act.
The exemption for legal entities that carry on “investment fund business” means that: (i) most BVI entities in a fund structure will not be classified as carrying on a relevant activity under the ES Act; and (ii) equity funds, which would otherwise have been considered a pure equity holding business, are also out of scope.
For completeness, the activities of an approved manager would need to be reviewed on a case-by-case basis to determine whether it will fall within the definition of fund management business and, therefore, whether there is an obligation for the approved manager to have substance in the BVI (other than to have a registered office and authorised representative).
Compliance should, nevertheless, be initially assessed by lenders’ counsel and all corporate vehicles should be monitored on an ongoing basis to ensure compliance with the ES Act.
The year ahead
The forecast for private equity fundraising over the next few years remains optimistic and, given the ability of top US-based sponsors to raise money from institutional investors based in the US, we anticipate that the North American market will continue to dominate. The BVI will remain relevant for North American and Asia-focused funds in particular, while continuing to be a popular jurisdiction for UK managers establishing offshore funds with a transatlantic nexus. As the industry matures further, the demand for fund finance solutions throughout the lifespan of the fund will likely increase, as will the need for its underlying portfolio companies to be supported. We anticipate that the types of fund-level financing and the purposes for which such financing is used will continue to diversify in 2024 and we expect an increase in not only subscription facilities, but the more bespoke NAV facilities, management fee facilities and hybrid facilities. Continued focus on ESG will inevitably lead to an increasing number of funds and lenders incorporating ESG into their strategies.
Given that strong credit performance remains the norm in this market, the relatively low-risk profile of the product will continue to make it attractive for lenders. The strength of the fund finance market is bolstered by strong collaborative relationships between lenders and fund sponsors alike. Continual development and innovation will likely remain a feature of the industry, with the BVI market ever willing to evolve and adapt to meet the requirements and expectations of our onshore counterparts.
We anticipate that the BVI will maintain its position as one of the most popular offshore fund jurisdictions, for reasons including the range of vehicles that can be utilised to meet a fund’s structuring requirements, investor familiarity with the jurisdiction and a proportionate and adaptive regulatory framework. Due to the popularity of the BVI as a fund jurisdiction, coupled with the growth of the finance market generally, we expect 2024 to be another extremely busy year in the BVI fund finance market.