27 March, 2019
Jean Woo and Shen Mei Bolton cover legal trends and developments in the Singapore fund finance market. This article was originally published in the Singapore chapter of Fund Finance 2019, the leading publication on fund finance by Global Legal Insights which provides financial institutions, funds and investors with a comprehensive insight on twenty jurisdictions worldwide.
Singapore is widely recognised as a leading fund management hub in Asia. In a seminal speech to the Singapore Parliament on the importance of the fund industry, Ms Indranee Rajah, Singapore’s Second Minister for Finance and Education, highlighted that Singapore’s assets under management (AUM) have expanded at a 15% compound annual growth rate over the last five years, reaching S$3.3 trillion (approximately US$2.4 trillion) at the end of 2017. She also noted that, at present, approximately seven out of every ten Singapore dollars under management are invested into the Asia-Pacific region, reflecting Singapore’s role as a key node for fund managers and investors to invest in the region’s growth opportunities.
Leading the charge are venture capital, private equity and corporate venture funds which, in the first eight months of 2018, accounted for some US$5.8 billion worth of investments made in South-east Asia.1 Within this pot, venture capital investments accounted for US$3.16 billion, surpassing the US$2.7 billion invested in the same sector for the whole of 2017.
The verb “to eclipse” has been used to describe the pace of continued growth of the venture capital industry in Asia-Pacific economies in 2018 as compared to the other regions.2 Asia-focused venture capital assets under management have more than doubled since December 2014 (US$88 billion in 2014 vs. US$221 billion in 2017), rivaling those of the US in their scale and diversity.
In this chapter, we will provide an overview of the funds markets in Singapore in 2018.Then we will examine some of the important attributes of Singapore as an asset management hub. Next, from a legal and regulatory perspective, we will look at some key considerations of a fund finance structure in Singapore and highlight the main regulatory developments for the year. Finally, we will conclude by looking ahead to the outlook in 2019.
Growth of the unicorns – in Singapore
In finance, a unicorn is a privately held start-up company with a current valuation of US$1 billion or more. The term was coined in 2013 by venture capitalist Aileen Lee, who chose the mythical animal to represent the statistical rarity of such successful ventures. Due to the recent success of a number of start-ups, it is becoming less of a rarity but more of an industry accolade to be termed as a unicorn.
Southeast Asia (and in particular, Singapore) currently has the most number of unicorns in Asia after China. These include Grab, Go-Jek, Lazada, Razer, Sea Ltd., Traveloka and Tokopedia. It was reported that Singapore received the most funding from VC investors (accounting for 67% of the total investment in Southeast Asia of US$14.9 billion), followed by Indonesia at 22%.3
The ride-hailing industry attracted the most attention from VC investors in the third quarter of 2018. The two most notable deals were the US$1.5 billion investment in Go-Jek by investors including Google Inc., Temasek Holdings, Meituan-Dianping, Tencent and JD.com, and the US$2 billion raised by Singapore-based Grab in new funding from investors Didi Chuxing, SoftBank, Toyota, OppenheimerFunds, Ping An Capital, and others. The above Grab funding is currently the largest single funding round that has ever been raised by a start-up in Southeast Asia.
Based on most recent valuations, Grab has now joined the ranks of an exclusive category of so-called “decacorns” – which is a term given to start-ups that are worth US$10 billion or more. There are approximately around 15 decacorns worldwide. These include Uber ($68 billion), Didi Chuxing ($50 billion), Xiaomi ($46 billion), Airbnb ($29 billion) and Palantir Technologies ($20 billion).4
What does this mean for Singapore?
As we look further afield at the wider ecosystem, it is unsurprising that the surge in venture capital investments has gone hand-in-hand with the exponential growth of the fintech and e-commerce industry in Singapore. According to the KPMG Pulse of Fintech report, Singapore achieved a record high of US$299.1 million of fintech funding in 2017. This was attributed to two of Asia’s top 10 biggest deals taking place in Singapore in Q4 2017 – GoSwiff’s US$100 million purchase by Paynear Solutions, which boosted deal volume to an unmatched high over the prior three years, and Smartkarma’s US$13.5 million series B round.
The Singapore Government has been instrumental in encouraging fintech development in the country. In 2016, the Monetary Authority of Singapore (MAS)5 followed closely in the footsteps of the UK Financial Conduct Authority (FCA) by establishing a regulatory sandbox framework for financial institutions and companies to test their innovative products in a safe and controlled environment. The objective of a “sandbox” is to enable fintech experiments to take place within a controlled environment where legal and regulatory requirements are relaxed in certain specified ways in order for the new technology to be tested before being applied on a wider scale.
PolicyPal, a digital insurance broker that enables customers to manage and purchase their insurance policies through its app, became the first company in Singapore to graduate from the sandbox in 2017. Graduation from the sandbox means that PolicyPal is now a licensed insurance broker.6
Singapore success as a key asset management hub
Singapore’s success as a key asset management and VC hub can be attributed to some of the following factors:
Strong tax incentives
The Singapore Government has put in place several tax treaties and incentives for fund managers to attract them to operate in Singapore. This is important because a business entity is generally liable to tax in any jurisdiction where its activities have created a taxable presence. Due to the varied sources of its funds and investment destinations, a fund manager is likely to have taxable activities in a number of jurisdictions. The tax impact of doing business between Singapore and these other jurisdictions is an important consideration for any fund manager.
Singapore is an attractive destination from a tax perspective – it currently has more than 82 double tax treaties with various countries, especially those in the Asia Pacific region.
A double tax treaty between Singapore and another jurisdiction serves to prevent double taxation of income earned in one jurisdiction by a resident of the other jurisdiction. Through the provisions of the tax treaty, a fund manager can benefit from the elimination of (or reduction in) double taxation between Singapore and the respective treaty country.
A fund manager is also generally incentivised to base its activities in Singapore as a Singapore tax-resident fund has access to several tax-exemption schemes. For example, an offshore fund managed by a Singapore-based fund manager may be exempt from tax on income from designated investments. Such exemptions are also given to fund managers to encourage them to base their fund vehicles in Singapore. Separately, Singapore-based or offshore funds may also enjoy tax exemptions for income and gains on designated investments made by the fund under an enhanced-tier fund scheme.
In view of the above, it is therefore unsurprising that outside of the traditional offshore funds jurisdictions (such as the Cayman Islands), Singapore is now regarded as having one of the most attractive tax regimes for funds and fund managers.
Robust regulatory regime
Singapore is widely seen as a jurisdiction with a transparent and robust regulatory regime for fund management companies. These include, for example, rules requiring independent custody and valuation of investor assets. If the type and size of investments managed by the fund management companies exceed certain thresholds, it will have to put in place an adequate risk-management framework and be required to undergo independent annual audits by external auditors.
A strong regulatory regime may increase the administrative burden and cost on fund managers. However, it has the benefit of reinforcing the high level of professional duty of care that fund managers owe to their investors. In the longer run, a robust regulatory regime will help strengthen Singapore’s reputation as a trusted fund management jurisdiction.
Rule of law
Singapore’s economic success is built on the familiarity and stability of its legal rules and system. The legal system of Singapore is based on the English common law system.
The general view is that investors find Singapore a safe and business-friendly destination because they are protected equally under Singapore law.
Singapore sits at the very top of the World Bank’s global ratings – No. 1 of 189 countries – for its effectiveness in enforcing contracts and protecting minority investor rights. It is ranked second in the world in both the Heritage Foundation’s Index of Economic Freedom and the World Economic Forum’s Global Competitiveness Index, with high marks for its protection of property rights and freedom from corruption.
General credit and security considerations in Singapore
Singapore has branded itself as a global hub for finance. According to the latest World Bank annual ratings released in 2018, it is ranked number 2 among 190 economies in the ease of doing business. One of the key indices of this ranking is the effectiveness of collateral and bankruptcy laws in facilitating lending. Below is an overview of some of the credit and security considerations when structuring a financing transaction in Singapore.
1. Foreign currency exchange: There are generally no exchange controls in Singapore. However, MAS does issue guidelines and notices in relation to lending in specific currencies. For example, there is currently a limit on the amount which banks in Singapore may lend Singapore dollars to non-resident financial institutions.7 Fortunately, such restriction (which is targeted at bank-to-bank lending) is not particularly applicable for most commercial lending transactions, where lending is to a corporate vehicle.
2. Provision of security or guarantee to offshore lenders: Unlike more heavily regulated countries like China and India, there are fewer restrictions on offshore lending structures. Singapore companies are generally not restricted from providing security or guarantees in favour of foreign lenders. However, legal considerations relating to financial assistance, interested party transactions, corporate benefit, priorities and procedures, and formalities relating to the granting of security and guarantee, generally apply.
3. Agency and trust concepts: These are recognised in Singapore and, accordingly, a security agent or a security trustee may hold security on trust for a group of lenders.
This is important, as it facilitates security being granted in favour of a security trustee who holds the security property on trust for the “floating” group of lenders, which may include the new transferee lender.
4. Withholding, stamp and other taxes: Matters relating to tax differ on a case-by-case basis. However, from a lending perspective, parties typically have to consider costs relating to withholding and stamp duties taxes. Fortunately in the Singapore, these costs are not typically regarded as being substantial.
- Withholding tax: Payments of interest and other payments in connection to loans to non-Singapore tax resident lenders are generally subject to Singapore withholding tax. The current withholding tax rate is 15% of the gross payment. However, the repayment of principal sums will not be subject to Singapore withholding tax. Here are some notable exceptions and exemptions:
Payments of interest, and other payments in connection to a loan given by a Singapore tax resident lender or Singapore branch of a non-Singapore resident financial institution, are exempt from Singapore withholding tax.
If the non-resident bank is a tax treaty country, the Avoidance of Double Taxation Agreement may provide for a different/reduced tax rate.8
- Thin capitalisation rules: In general, interest payments are tax-deductible if incurred on capital employed in acquiring the income. Singapore does not have thin capitalisation provisions to limit the amount of tax-deductible interest.
- Stamp duties: Stamp duty is payable on a mortgage, equitable mortgage or debenture of any immovable property and stocks or shares. A legal mortgage is subject to ad valorem duty at the rate of 0.4% of the amount of facilities granted on the mortgage of immovable property or stocks and shares, subject to a maximum of S$500. An equitable mortgage is subject to ad valorem duty at the rate of 0.2% of the amount of facilities granted on the mortgage of immovable property, subject to a maximum of S$500.
5. Notarisation: Not required for security documents which are executed and used in Singapore.
6. Corporate power: Unless otherwise limited or restricted by the provisions of its own constitutive documents, a company has full capacity to perform any act, including entering into lending, security or guarantee documents (though the disposal of all or substantially all of the assets of a Singapore incorporated company will require a special shareholder resolution to be passed). Care needs to be taken, however, in relation to companies with old forms of constitutive documents as they may contain restrictions and limits which will continue to apply.
Fund finance in Singapore
1. What is a capital call facility?
A capital call facility, also known as funds subscription finance or equity bridge finance, is a form of short-term financing provided to a fund. Such financings are typically structured as revolving facilities secured on the investors’ undrawn commitments. The duration of the facility is typically not longer than three years (and often shorter). However, as limited partnership agreements typically restrict any borrowing beyond a year, each loan made to the fund must be repaid within a year of its drawing to comply with the requirements of the limited partnership agreement. Capital call facilities originate from the funds markets in the US and Europe, where the facilities are commonly used to bridge the gap between when an investment is made by the fund and when capital contributions are received from investors to finance that investment. Loans are repaid with capital contributions once received from investors.
In Asia, such facilities were historically popular with real estate funds. However, as the market in Asia evolved, these facilities became more prevalent in a broad range of specialty funds and sponsors including infrastructure, private debt and other specialty private equity funds. In this respect, asset-backed facilities – where the financing is provided against the asset value of the fund – are now not uncommon. More recently, hybrid structures (which are a combination of a capital call facility and an asset-backed facility) have also begun to emerge.
2. Governing law
The governing law for Asian capital call facilities can vary and often depends on the identity and jurisdiction of the banks, funds and investors. However, the use of US and English law-governed documents are the most prevalent. In particular, English law is a popular choice for governing law in this region. This is because freedom of contract is widely regarded as a key principle upheld by the English courts. The principle emphasises the importance of upholding the parties’ commercial bargain.
3. Security package
An important feature of a capital call facility is the security package. Most capital call facilities in Asia are provided on a secured basis. The security package for Asian funds financings is similar to those in European and North American facilities. It typically consists of an assignment of call rights and grant of security interest over the account to which any capital call proceeds are to be paid.
The governing law of a security document will typically follow the law of the jurisdiction in which the secured asset is deemed to be located (the lex situs). In most cases, Singapore law will be used if the funds documentation is governed by Singapore law and/or if the relevant bank account is located in Singapore.
The principles of Singapore law in respect of the creation of security over these assets are similar to the common law concepts established under English law. However, despite the similarities, it is important to liaise with Singapore counsel as there are practical and procedural requirements specific to Singapore law which the parties will need to fulfil to perfect the security, which may differ from English law or other common law regimes.
As a general principle, under Singapore law a legal assignment must be in writing, signed by the assignor, absolute and notified in writing to any persons against whom the assignor could enforce the assigned rights. If any of these formalities are not complied with, it is an equitable assignment. An equitable assignment is less desirable from an assignee’s perspective, as the assignee can usually only bring an action against the contract counterparty in its own name if it has a legal assignment. With an equitable assignment, the assignee will usually be required to join in proceedings with the assignor. This may be problematic if the assignor is no longer available or interested in participating.
In addition, a registrable charge created by a Singapore company has to be registered under section 131 of the Companies Act (cap 50, 2006 Rev Ed) (the Companies Act) with the Accounting and Corporate Regulatory Authority of Singapore (“ACRA”) within 30 days from the date the instrument of charge was created. A registrable charge that is not registered within the time limit is void against the liquidator and other creditors of the company.
Similar to other common law jurisdictions, the rules determining the priority of charges under Singapore law are fairly complex. As a general principle, the relevant time for determining priority between charges is the time of creation of the charges. A prior equitable charge will be defeated by a subsequent bona fide legal chargee for value who had no actual or constructive notice of the prior charge.
With regards to an assignment over call rights, the priority of an assignment will generally follow the order in which an assignment is made. However, a subsequent assignee will have priority over a prior assignee, without notice of the prior assignment if the subsequent assignee is the first to give notice of their assignment to the counterparty. It is therefore critical in an assignment over call rights to ensure that the notice of assignment is duly served on the relevant counterparty on creation of the assignment.
Key regulatory developments
The Singapore Parliament passed the Variable Capital Companies (VCC) Bill on 2 October 2018 to create the legal framework for a new type of Singapore legal entity – the Variable Capital Company (“the VCC”). The new legislation is regarded by some as a game-changer for the Republic’s fast-growing fund management industry, as it is a separate and bespoke legal regime developed specifically for a funds vehicle. The VCC has features which make it more attractive to fund managers to operate it as a funds vehicle on an ongoing basis.
At present, a substantial proportion of funds managed and operated by fund managers in Singapore are domiciled in more established offshore jurisdictions like the Cayman Islands, Dublin and Luxembourg. Repetition breeds familiarity and familiarity breeds investor confidence.
Investors choose these jurisdictions to incorporate their funds due largely to the familiarity which investors have with regards to the legal and regulatory regime in these jurisdictions. As a result, most of the economic benefits generated by service providers to these investment funds accrue outside of Singapore.
The Singapore Government’s strategy is simple. By attracting funds to be domiciled and managed from Singapore, supporting professional service providers – for example, lawyers, bankers, accountants – will also benefit from the activity generated by a vibrant funds industry.
To encourage the existing pool of funds to switch to Singapore, the Bill provides for a redomiciliation mechanism for existing overseas investment funds constituted as corporate structures, similar to VCCs.
In addition, to facilitate existing funds to switch to a VCC structure, those funds using corporate structures like private limited companies, trusts and limited partnerships can take advantage of the new VCC regime to restructure and become a VCC.
Key features of a variable capital company (VCC) – and its benefits as a funds vehicle
- The VCC is incorporated under the VCC Act instead of the Companies Act (CA). This enables the VCC to function as a corporate structure tailored specifically for investment funds.
- A VCC will have the flexibility to issue and redeem shares without having to seek shareholders’ approval.
- This allows investors to exit their investments in the investment fund when they wish to, and pay dividends using its capital.
- This is in contrast to the company structure that has restrictions on capital reduction and can only pay dividends out of profits.
- The VCC may be established as a standalone fund or as an umbrella fund with multiple sub-funds.
- The umbrella with sub-funds structure creates economies of scale.
- Each sub-fund can share a common board of directors and use the same service providers, including the same fund manager, custodian, auditor and administrative agent.
- As a safeguard for VCC shareholders and to enhance creditor protection, the assets and liabilities of each sub-fund will be ring-fenced from other sub-funds.
- The VCC will allow for a wider scope of accounting standards to be used in preparing financial statements, which helps to serve the needs of global investors. Apart from Singapore accounting standards and recommended accounting principles, International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (US GAAP) can be used by VCCs.
The year ahead
According to Hank Paulson, the ex-chief of Goldman Sachs and former US Treasury Secretary, we live in a time of unprecedented risks. He commented that:
“Over the course of my 50-year career, with the exception of the 2008 financial crisis, I have never seen the public and private sectors buffeted by so much risk. These new risks are not financial, but they are unprecedented in their character, not just their scope.”9
Despite the above, the outlook for the funds finance and funds formation market for Singapore still looks strong. The IMF and the World Bank chose to hold their annual meetings in Indonesia this year to demonstrate how the region has grown in the 20 years since the Asian currency crisis. There are certain headwinds. The US-China trade war is rattling the international markets and Asia is likely to be caught in the crossfire. Both the United States and China have already imposed US$34 billion of new tariffs on each other’s imports in a tit-for-tat tariff row that shows little signs of abating. It is estimated that every 10% drop in China’s exports could reduce the growth rate of Asian economies by an average of 1.1 percentage points.10
Closer to home, domestic politics in the surrounding region are likely to weigh heavily on growth prospects for Singapore. Election uncertainty in Indonesia and Thailand are issues which the market is monitoring closely.
In light of the above, some may feel that the challenges above may trigger capital outflow from the region, but others believe that it may unearth opportunities for savvy investors.
For further information, please contact:
Jean Woo, Ashurst
1. Based on data released by Singapore Venture Capital & Private Equity Association (SCVA) in October 2018.
2. Asia’s Venture Capital Eclipse: A Preqin and Vertex Ventures Study – October 2018. “A Word from Preqin’s CEO” – Mark O’Hare.
3. Asia’s Venture Capital Eclipse: A Preqin and Vertex Ventures Study – October 2018. Article on “Can Southeast Asia Emulate China?” by Chua Joo Hock, Managing Partner, Vertex Ventures Southeast Asia & India. Figures based on Venture Capital Investments in Key SEA Countries (2010–2017).
4. Forbes article by Zack Friedman, dated 30 May 2017 – https://www.forbes.com/sites/zackfriedman/2017/05/30/tech-unicorns/#58f8f7611792.
5. Singapore’s central bank.
6. Lessons From Singapore’s Fintech Sandbox by Fintechnews, Singapore, 14 November 2017 – http://fintechnews.sg/14352/fintech/lessons-singapores-fintech-sandbox/.
7. MAS Notice 757 “Lending of Singapore Dollar to Non-Resident Financial Institutions” provides that banks in Singapore may only lend Singapore dollars to non-resident financial institutions as long as the aggregate Singapore dollar credit facilities do not exceed SGD5 million per entity. If the aggregate exceeds SGD5 million per entity, then certain restrictions and conditions apply.
8. Section 12(6) read with section 45 or 45A of the Singapore Income Tax Act (Cap. 134).
9. Article by Hank Paulson entitled “We live in an age of unprecedented risks”, dated 6 November 2018 – https://www.ft.com/content/a55e705e-dcfc-11e8-b173-ebef6ab1374a.
10. Article by Bloomberg dated 25 May 2018 – https://www.bloomberg.com/news/articles/2018-05-25/who-loses-in-asia-if-trump-dents-trade-not-china-chart.