How VCCs will help Singapore become the ‘Luxembourg of Asia’

Alpadis Group CEO Alain Esseiva’s latest article in Singapore’s Business Times newspaper, outlining the role the latest Variable Capital Company (VCC) framework will play in growing Singapore’s asset management industry

IN 1988, the Grand Duchy of Luxembourg became the first country to implement the Undertakings for the Collective Investment in Transferable Securities (UCITS) Directive into national law, after the European Union issued the original UCITS regulations in 1985 creating a harmonised regime throughout Europe for the management and sale of mutual funds.

This first mover advantage established Luxembourg as a leading fund management hub, as international fund managers were able to leverage the significant cross-border opportunities and grow their fund management businesses throughout Europe and the rest of the world.

Today, Luxembourg has over 4.8 trillion euros (S$7.7 trillion) in assets under management (AUM), second only to the United States. The small European duchy handles 62 per cent of cross-border investment funds worldwide from over 70 countries, and 98 of the top 100 asset managers globally have funds domiciled in Luxembourg.

Of course, UCITS are not the only reason behind Luxembourg’s success. It is a developed financial centre with a wealth of expertise and service providers, it is in the heart of Europe, is financially and politically stable, has a multilingual citizenry and a low and stable tax regime, among other advantages.

Fast forward 32 years and travel 10,436 km east, and you will arrive at another small financial centre, with a stable political and economic climate, a low and predictable tax regime, located in the heart of a fast-growing region, that is positioning itself as an asset management hub – Singapore.

Prior to 2020, Singapore was already a leading asset management hub in the region. In 2019, the asset management industry in Singapore grew by 15.7 per cent to reach S$4 trillion in assets supervised by Singapore-based managers, according to the Monetary Authority of Singapore (MAS). There are now 895 registered and licensed asset managers making the city state their home and seeking opportunities in Asia.

However, in January 2020, the Accounting and Corporate Regulatory Authority (Acra) launched the Variable Capital Company (VCC) framework, a move that could well set Singapore on the way to becoming the Luxembourg of Asia. The VCC is a new corporate entity tailored for investment funds. It allows funds to be set up as a standalone, or as an umbrella entity with one or more sub-funds with different investment objectives, assets, debts and investors.

Already, the introduction of this new structure is having an impact. Within seven months, 109 VCC funds have set up in Singapore, surprising many who predicted no more than 150 within the first year (and especially surprising given the disruption of the Covid-19 pandemic). While these offices start off small, they are sure to grow and we will see AUM significantly rise over the coming years.

While the flexibility of the VCC framework as well as Singapore’s general ease of doing business and stability are key reasons for this growth, there are other factors in play that will put Singapore’s asset management industry on a sustainable growth trajectory.

Singapore is considered a mid-shore jurisdiction, not an offshore one. This matters to external asset managers (EAM) given that the global drive for transparency has put a spotlight on offshore jurisdictions and increased regulations have made them less attractive. Singapore also has a number of double tax agreements with other nations which EAMs can take advantage on.

While Singapore and Luxembourg may seem worlds apart, the similarities between the two nations are striking. The new VCC regime will allow Singapore to emulate Luxembourg’s rise as a fund management hub, and in the near future pit itself against other international fund domiciles on the world stage.