Singapore Private Equity and Venture Capital Landscape Series – Limited Partnerships

Limited partnerships (LPs) are commonly used around the world as fund vehicles for private equity (PE) and venture capital (VC) funds. In Singapore, limited partnerships were established as a business vehicle by the Limited Partnerships Act 2008 (the Act), which came into force on May 4, 2009 as part of Singapore’s efforts to become a center fund management.

These efforts have been complemented by a myriad of other measures, including (a) the creation of Variable Capital Companies (VCC) by the Variable Companies Act 2018, which only came into force on 14 January 2020; (b) the establishment of several categories of fund management licenses, including the venture capital fund management license; and (c) a favorable tax environment that includes a flat income tax system, no capital gains tax and an extensive network of double tax treaties, as well as several incentive schemes and subsidies. We will go into more detail about these measures in other articles.

Shift to “offshoring” private equity and venture capital funds to Singapore

For now, we would like to point out that the Singapore measures seem to be working to some extent. In the past, given industry players’ familiarity with established tax-neutral offshore jurisdictions and their laws governing private funds, fund managers in Asia have traditionally chosen to incorporate their fund vehicles in offshore jurisdictions, especially the Cayman Islands. As a result, there was a disjunction between the place of incorporation of a fund and the jurisdiction in which the activities of the fund were managed. However, in recent years, we have seen a growing trend of fund managers “offshoring” private equity and venture capital funds to jurisdictions in the Asia-Pacific region, particularly Singapore.

This trend may also be driven by changes in the global legal and regulatory environment for private equity funds and their managers. Global efforts to combat base erosion and profit shifting, money laundering and terrorist financing have resulted in increased regulatory regulation and oversight of private equity funds in various jurisdictions. For example, where private closed-end funds established in the Cayman Islands were previously largely unregulated, the introduction of the Private Funds Act 2020 now requires such funds to be registered with the Cayman Islands Monetary Authority. There are also ongoing compliance requirements, including assessment procedures and frequency, retention and retention standards, and annual audit requirements.

Finally, Singapore has benefited from being fast and nimble, as it was one of the first players in the region to put in place a legal framework conducive to the creation of funds for the private equity and private equity industry. risk. In Hong Kong, the financial center to which Singapore is regularly compared, the concept of LP suitable for private equity funds was only recently introduced in the form of the Limited Partnership Funds Ordinance (Cap 637) in 2020. As mentioned above, Singapore had established the Singapore LP more than ten years ago and is currently in the process of further modernizing the regime: the Accounting and Corporate Regulatory Authority (ACRA) of Singapore has released a consultation paper seeking comments on proposed changes to the law in October 2021, clearly showing how Singapore remains committed to making Singapore LP an attractive vehicle for funds.

Singapore vinyl records in numbers

Even though the Singapore LPs were created in 2009 and the VCCs in 2020, it should be noted that as of May 2022, there were 580 LPs registered in Singapore while there were 567 VCCs registered.

See the following snapshot on the Singapore ACRA website:

There could be several reasons for this:

  • Natural Death: Some of the LPs created earlier may have already disbanded. The lifespan of funds tends to be limited in time, typically up to a decade. On the other hand, all VCCs are still newly constituted.
  • Money: The Monetary Authority of Singapore (MAS) currently administers a scheme which covers qualifying expenses incurred for the incorporation or redomiciliation of VCCs in Singapore. The program works roughly as follows: if you are an eligible fund manager, MAS will co-fund 70% of eligible expenses (legal, tax and administrative or regulatory compliance services), up to a maximum of $150,000 for each CCV that you incorporate or domicile in Singapore and a cap of no more than three CCVs per eligible fund manager. Parties interested in taking advantage of this program should be quick, as it expires on January 15, 2023.
  • Hype: CCVs are new and many fund managers want to be early adopters.
  • Usefulness: VCCs are indeed very useful corporate vehicles, particularly in the context of umbrella funds. We will expand on the benefits of VCCs in our next article.

The future will tell if this trend will take root. However, Singapore LPs remain a leading vehicle for the creation of private equity and venture capital funds. We briefly discuss their key features below.

Key Features of Singapore LPs

Most of the key features of Singapore LPs would be well known to anyone familiar with this type of vehicle in other jurisdictions. They include the following: Unlimited liability for general partner (GP) and limited liability for limited partners.

Two points to note here:

  1. General practitioners can be companies. Corporations have a limited liability, which is rarely ignored or “break through”. Additionally, GPs are often just special purpose vehicles without any substance. Therefore, the unlimited liability of the GP does not provide any assurance to creditors. However, we have seen cases where licensed money managers are actually the GP. This might be attractive to creditors and potential creditors of the limited partnership (including limited partners), but is understandably a much riskier option for the GP fund manager.
  2. The limited liability of the limited partners will be respected so long as they do not participate in the management of the LP and do not have the power to bind the LP. In this regard, the law sets out a (long) list of issues that will not lead to the limited partners being considered as participants in the management of the limited partnership. These matters include (i) voting rights which are usually agreed upon in side letters with major limited partners and (ii) even advising the LP on the LP’s business, affairs or transactions. A consultation paper released by ACRA in October 2021 proposed to further clarify and expand the scope of these issues.

Contractual flexibility

The establishment of Singapore Limited Partnerships is governed by law. However, the law barely regulates the content of the LP agreement between the GP and sponsors, allowing greater contractual flexibility compared to other vehicles. In particular, the law allows the limited partnership agreement to stipulate any increase or reduction in the agreed contribution of a limited partner and there are no restrictions on reduction of capital or distribution of profits during the term of the partnership.

The parties also have the opportunity to agree on various points of the LP agreement, such as:

  • Capital commitments of limited partners (including situations where the fund has multiple closures);
  • LP distribution policy;
  • Rights and obligations of the GP (including the circumstances under which the GP may be removed);
  • Transfer restrictions and procedures for transferring corporate interests; and
  • Requirements and conditions if the parties wish to dissolve the fund.

Tax transparency

Singapore limited partnerships are treated as tax transparent vehicles where tax is not levied at the level of the limited partnership. Instead, Limited Partners may be taxed on their respective share of the Partnership’s income, depending on the relevant tax rules applicable to each Limited Partner.

A tax return must be filed annually by the LP with the Inland Revenue Authority of Singapore (IRAS) and includes a report on the capital contribution of the partners. The obligation to file the tax return is generally assumed by the GP. Distributions of profits by the limited partnership to partners are not subject to withholding tax, whether the partner is a local or foreign partner.

Privacy Considerations

Singapore Limited Partnerships are not subject to prescribed auditing requirements and are not required to file accounts with ACRA. Each GP must however ensure that all accounting documents, which document the transactions and the financial situation of the LP are kept and kept for a period of at least five years after the completion of the transactions or operations to which they relate.

Further, in the case of an investment fund structured as an LP which is managed by a fund manager licensed under the Securities and Futures Act 2001, details of limited partners are not required to be made public. . These characteristics are aligned with and recognize the nature of private funds, where confidentiality and privacy are often a primary concern.

Changes proposed in the ACRA consultation document

Some of the other changes to the Act proposed in ACRA’s consultation paper include the following:

  • Introduction of a redomiciliation regime for LPs, which is currently planned for corporations and VCCs. If introduced, it would benefit existing offshore LPs looking to take advantage of the many benefits of being a Singapore-based LP; and
  • Introduction of additional forms that a GP or sponsor can take, in addition to an individual or company as is currently the case. These would include an LP registered under the law and a non-Singaporean LP with or without legal personality.

Conclusion

Singapore has established itself as an attractive location for fund management and ranks high in terms of political stability, business-friendly policies and tax certainty. Combined with a well-established and “lightweight” LP legal framework, these factors provide a viable alternative for fund managers considering Singapore as a base to domicile their funds and exploit the investment opportunities that lie in the Asia-Pacific region and the -of the.

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