Capitalising on Offshore Investment Funds: Shayne Krige, Werksmans Attorneys

Presented by Shayne Krige

May 2012

Capitalising onOffshore Investment

Funds

Werksmans History

Established in Cape Town and Johannesburg in 1900’s

Werksmans Today

One of the leading corporate commercial firms in Africa

4 offices in South Africa, Lex Africa in 54 African countries

Over 200 lawyers

Werksmans Accolades

Expertise and lawyers recognised internationally including:

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Our leadership in M&A has been recognised by DealMakers, Ernst & Young and MergerMarket

Investment Funds Team

Shayne Krige - 12 years heading up investment funds practice of a European law firm based in Paris

Dylan Cunard - 7 years in investment funds with a magic circle firm in London

Doelie Lessing - international tax expert

Ina Meiring - regulatory expert ex-UNISA law lecturer

Work closely with M&A and corporate commercial teams

Opportunities in the offshore fund market

Definitions

Offshore regulation of funds

Offshore regulation of managers

International Developments

Presentation Overview

Opportunities in the Offshore Fund Market

Tax Changes

Exchange Control Changes

Interest in Africa

Opportunities - Tax

‣Two Tax Issues:

‣Residency - place of effective management

‣POEM results in tax on worldwide income

‣ Source - permanent establishment

‣SA manager creates PE in SA

Steps towards an investment management exemption

2012 Budget Speech

“This [tax] risk has deprived local fund managers of foreign investment business and has even forced certain local fund managers to relocate abroad. It is proposed that a legislative carve-out be created for foreign investment funds so that these funds are not inadvertently subject to worldwide taxation.”

Opportunities - Tax

Excon changes driving demand for offshore products

Companies can invest R500m offshore

Individuals can invest R4m offshore

Opportunities - Tax

An increasingly popular investment destination

Private Equity - energy, renewables, infrastructure, property

Hedge fund interest growing

Opportunities - Africa


Definitions





What is Offshore?

Tax Havens?

Outside South Africa

What is a Fund

Investment Club

Closed-ended Collective Investment Scheme

Open-ended Collective Investment Scheme

Private Fund

Public Fund

What is an Investment Manager?

Talkers

Investment Advisor recommends (non-discretionary)

Doers

Investment Manager implements (discretionary)


Definitions


Regulatory overview

Fund structures

Popular jurisdictions




Offshore Fund Rules - General

Unregulated Fund - no regulation if no right to redeem (“closed-ended”)

Regulated Fund - private, professional, public and administered regimes

Unregulated Fund Loophole

Closed-Ended Open-Ended

Investors Redemption Rights

Right to demand redemption.

Redemption in the discretion of directors.

Form of Redemption Notice

Redemption Request Redemption Instruction

Regulation Not regulated Regulated

Suited To Private Equity, Real Estate, Private Funds

Liquid funds, Hedge Funds, Public Funds, Retail Funds

Examples Morgan Stanley China A-Share Fund, Alpine Total Dynamic, Adams Express

T. Rowe Price, Fidelity Investments


Definitions


Regulatory overview

Fund structures





Fund Structures - Corporate Structure

Management Agreement


Offering Memorandum

Investors

MShares

PShares

Assets

AdministratorBank

RegisteredAgent

Custodian

Advisor

Advisory Agreement

Custodian Agreement

Banking Agreements

Registered Agent

Agreement

Administration Agreement

Onshore Manager

OffshoreManager

FundCompany

Fund Structures - Limited Partnership


Investors

Assets

AdministratorBank

Custodian

OnshoreAdvisor

Advisory Agreement

Custodian Agreement

Banking Agreements Administration

Agreement

Onshore Manager

Offshore GeneralPartner

Limited Partnership

Limited Partnership Agreement

Offering Memorandum

Unlimited Liability Limited Liability


Definitions


Regulatory overview

Offshore fund structures





Considerations When Choosing Fund Jurisdiction

Type of investors targeted

Home country of targeted investors

Public image of jurisdiction in home country

Predicted size of fund

Tax rules in manager jurisdiction

Popular Offshore Fund Jurisdictions

CaymanIslands

BVIChannelIslands

Mauritius MaltaEU Listed

Luxembourg

Ireland

Regulation & Tax

Popular Offshore Jurisdictions

No. of Co.’s No. of Funds

Currency GDP Growth Rate

BVI 775,000 2,600 USD $0.9Bn 11%

Cayman 70,000 10,000 USD $1.9Bn 6.5%

Jersey 32,000 578 GBP $5.1Bn 3.8%

British Virgin IslandsBritish Virgin IslandsBritish Virgin Islands Cayman IslandsCayman IslandsCayman IslandsCayman Islands

Fund Type Public Fund

Private Fund

Professional Fund

Licensed Fund

Registered Fund

Administered Fund

Exempt Fund

Regulation High Low Low High Low Low None

Investor Type

Retail “Club” Institutional, high net worth

Retail Institutional, high net worth

Retail Retail

Number of Investors

Unlimited

50-300 Unlimited Unlimited

Unlimited Unlimited <15

Min. Investment

None None $100,000 None $100,000 None None


Jersey Isle of ManIsle of ManIsle of Man

Fund Type COBO Only Authorised Scheme

Professional Investor Fund

Administered Fund

Regulation Flexible High Medium Low

Type of Investor

Generally professional. No more than 50.

Retail Professional “Experienced”

Investment Restrictions

Few Few None None

Min. Investment

None but £250,000 for PIRS

None $100,000, $1m net worth

None

Local Service Providers

None Licensed Manager, Trustee Bank

Day-to-day operations

Custodian


LuxembourgLuxembourg IrelandIrelandIreland

Fund Type UCITS Sophisticated Investor Fund

Retail Fund Professional Investor Fund

Qualifying Investor Fund

Regulation High Medium High Medium Medium

Type of Investor

Retail Institutional, high net-worth

Retail Institutional, high net-worth

Institutional, high net-worth

Investment Restrictions

Comprehensive Yes but more flexible

Comprehensive if UCITS



Min. Investment

None €125,000 None €125,000 €250,000

Local Service Providers

Administrator, custodian, (manager)

Administrator, custodian, auditor

Administrator, custodian



Popular Onshore Jurisdictions

Other Contenders

Advantages Disadvantages

Malta EU Member State Lack of precedent

Flexible Regime Limited service providers

Accessible Regulator EU rules

Low Tax

Mauritius African investment New regime

Potential Excon advantage International image - due diligence

Close to South Africa Limited service providers

Low Tax Far from Europe and USA


Definitions





Offshore Regulation of Managers

Discretionary investment management is invariably regulated

Non-discretionary investment advice is often not regulated

Attributes of a Good Jurisdiction

Manager Fund

Convenience of location - schools, lifestyle etc.

Meets investor requirements

Appropriate regulatory environment Appropriate regulatory environment

Appropriate tax for company and owners

No tax, low setup and running costs

Access to quality service providers Convenience -travel, time zone, currency, language

Compatibility of vehicle with strategy


Definitions






BVI - Securities & Investment Business Act

Codifies existing practice

Investment Advisors now regulated

Local representative required

Private and professional funds must have offering memorandum, auditor, manager, custodian and administrator

$100,000 minimum in professional fund for ALL investors


Alternative Investment Fund Managers Directive (AIFMD)

Dylan Cunard

What is the AIFM Directive?

Aims to introduce a harmonized regulatory framework across the EU for EU-established managers of alternative investment funds (AIFM).

Designed to regulate hedge funds and private equity funds which were blamed for some of the instability in the financial crisis.

Supported by countries like Germany and France and has been criticized by the UK.

Marketing Passports available for EU-established AIFMs (from 2013) and possibly for Non-EU AIFMS (from 2015) to allow marketing across the EU once authorization is granted in one Member State

Main requirements for EU AIFMs

AIFMs must be authorised and subject to supervision in their home member state;

Minimum capital of at least EUR125,000;

Reporting requirements such as annual reports;

Restriction on delegation of manager’s duties;

Independent valuation of assets required;

Stricter regulation of depositories;

Restrictions on manager’s pay (Similar to the restrictions we have seen for bankers).

CARVE OUTS – e.g. de minimis for small funds, supranational institutions, pension and social funds

Summary of Legislative ProcessTimetable Key Milestones

29 April 2009 Draft Directive published by EU Commission

1 July 2011 Publication of the Directive in the EU Official Journal of the European Union

23 February 2012 ESMA published a discussion paper on the key concepts of the AIFMD

14 March 2012 HM Treasury consultation paper on the transposition of the AIFMD into UK law, open until 4 May 2012

22 July 2013 AIFM Directive must be transposed

22 July 2013 Final transposition into Member State law

22 July 2014 AIFMs need to be authorised

2015 ESMA to report on functioning of the passport system for EUAIFs and AIFMs national private placement regimes and extension of passport system to non-EU AIFs and AIFMs

2015 Commission to adopt implementing legislation setting date when passports for non-EU AIFs and AIFMs will be available

2018 ESMA to publish report on passport functioning plus possible end to private placement regimes

2018 Commission due to adopt further implementing legislation setting date for end of private placement regimes


United States Foreign Account Tax Compliance Act (FATCA)

Funds are “invited” to enter into an agreement with the IRS

Procedure to identify US customers and report investments to IRS

Obtain a waiver from each investor (including non-US). If investor refuses, fund must forcible redeem

Penalties - 30% withholding on all payments from US payors (not just US revenue) and US FSP’s must close account of fund that fails to sign agreement (exclusion from US securities market)

Implementation 2012 onwards


Definitions





Fund Issues We’re Working On

MF Global Collapse

SA fund restructurings

Offshore fund setup

Foreign Managed Account Distribution

UCITS Distribution

Illiquidity Issues

Fund Migrations

ETF Structuring

SIBA regulations in the BVI

THANK YOUShayne Krige

[email protected]

May 2012Nothing in this presentation should be construed as formal legal

advice from any lawyer or this firm. Readers are advised to consult professional legal advisors for guidance

on legislation which may affect their businesses.

© 2011 Werksmans Incorporated trading as Werksmans Attorneys. All rights reserved.

Capitalising on Offshore Investment Funds: Shayne Krige, Werksmans Attorneys

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Transcript of Capitalising on Offshore Investment Funds: Shayne Krige, Werksmans Attorneys