VCC Structure vs Traditional Funds: Key Advantages & Disadvantages

The financial sector has witnessed many notable transformations in fund structures. A particularly recent development that has garnered attention is the Variable Capital Company (VCC). Fund managers and investors alike must then understand the differences between VCCs and conventional fund structures to successfully fulfil their roles.

Explore the pros and cons of VCCs in contrast to traditional fund structures, offering perspectives on the advantages and obstacles each entails.

What is a VCC?

The VCC is a specialised corporate framework for investment funds. This structure provides high flexibility and efficiency when managing and organising funds. It enables the creation of multiple sub-funds within a single entity, with each sub-fund having its distinct assets and liabilities. By offering such versatility, the VCC structure has the potential to strengthen Singapore’s standing as a prominent hub for fund management.

5 Advantages of VCCs

1. Flexibility in Capital Structure

The capital flexibility offered by the VCC structure is one of its most prominent advantages. Unlike conventional companies with fixed capital, a VCC enables capital to be increased or decreased without requiring approval from shareholders. This attribute proves to be highly advantageous for open-ended funds, where frequent subscriptions and redemptions occur.

2. Efficient Fund Management

The VCC structure supports the incorporation of multiple sub-funds under a single umbrella, each with distinct investment objectives and policies. This segregation simplifies fund management and reduces administrative costs. Traditional fund structures often require separate legal entities for each fund, leading to higher operational complexities and expenses.

3. Tax Incentives

VCCs in Singapore benefit from the same tax exemptions and incentives as traditional funds domiciled in the country. These include exemptions under the Income Tax Act for specified income derived from designated investments. Moreover, VCCs can access Singapore’s extensive network of double taxation agreements, enhancing tax efficiency for investors.

4. Streamlined Regulatory Framework

The regulatory framework for VCCs is more streamlined than traditional fund structures. The Monetary Authority of Singapore (MAS) provides a single regulatory regime for the VCC and its sub-funds, simplifying compliance requirements. Traditional fund structures may have to navigate multiple regulatory frameworks, increasing the burden on fund managers.

5. Enhanced Confidentiality

VCCs offer enhanced confidentiality for investors. The shareholder registers of VCCs are not required to be publicly disclosed, protecting the identity of investors. This approach contrasts with traditional fund structures where shareholder information might be more accessible to the public.

4 Disadvantages of VCCs

1. Initial Set-Up Costs

The initial set-up costs for VCCs can be higher than those for traditional fund structures. The process involves incorporating the umbrella VCC and registering each sub-fund, which can be time-consuming and costly. Fund managers must weigh these initial costs against the long-term benefits.

2. Regulatory Compliance

While the regulatory framework for VCCs is streamlined, it is still evolving. Fund managers must stay abreast of regulatory changes and ensure compliance with ongoing requirements set by the MAS. Failure to comply can result in penalties and reputational damage. Traditional fund structures might have more established compliance processes because of their history.

3. Limited Jurisdictional Adoption

Currently, the VCC structure is primarily recognised and adopted in Singapore. This limited jurisdictional adoption might pose challenges for global fund managers when dealing with international investors more familiar with traditional fund structures. The worldwide recognition and acceptance of VCCs may take time to develop.

4. Operational Adjustments

Adopting the VCC fund may require significant operational adjustments for fund managers accustomed to traditional fund structures. These adjustments include changes in fund administration, reporting, and governance processes. The transition period can be challenging and resource-intensive.

ALSO READ: Fund Vehicles in Singapore – A Comparison

3 Advantages of Traditional Fund Structures

1. Established Framework

Traditional fund structures have a well-established legal and regulatory framework, providing stability and predictability for fund managers and investors. This familiarity can be advantageous when dealing with conservative investors or those unfamiliar with newer structures like VCCs.

2. Wider Jurisdictional Acceptance

Traditional fund structures are widely accepted across various jurisdictions, making them more versatile for global fund managers. This broad acceptance facilitates cross-border investments and fundraising activities, providing a larger pool of potential investors.

3. Lower Initial Costs

Setting up a traditional fund structure can be less costly initially than establishing a VCC. The process is more straightforward and does not require incorporating an umbrella entity and multiple sub-funds. This cost efficiency can be critical for companies with smaller funds or those just starting.

3 Disadvantages of Traditional Fund Structures

1. Inflexibility in Capital Management

Traditional fund structures typically have fixed capital, making it challenging to adjust capital levels without extensive procedures and approvals. This inflexibility can hinder the efficient management of subscriptions and redemptions, particularly for open-ended funds.

2. Higher Administrative Costs

Managing multiple funds under traditional structures often requires separate legal entities, each with its administrative and compliance obligations. This approach can lead to higher operational costs and complexities, reducing overall efficiency.

3. Public Disclosure Requirements

Traditional fund structures may have more stringent public disclosure requirements, including the publication of shareholder registers. This transparency, while beneficial for regulatory purposes, can compromise investor confidentiality and privacy.

Conclusion

The decision between VCCs and traditional fund structures relies on several factors, such as operational requirements, investor preferences, and jurisdictional factors. The VCC structure presents flexibility, efficiency, and confidentiality, making it an appealing choice for contemporary fund management. Nevertheless, it may face challenges due to its higher initial costs, evolving regulatory framework, and limited global recognition. On the other hand, traditional fund structures offer stability and predictability through their established framework and wider acceptance, although they may lack the flexibility and efficiency of VCCs. Aside from knowing what VCC is, fund managers must thoroughly assess these factors to determine the most suitable structure for their needs.

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