Download The emergence of protected cell structures

The emergence of protected
cell structures
Background
The process of setting up an investment fund can be long, complex and expensive with
annual running costs capable of reaching £100,000. In some jurisdictions, the pre-launch
set-up process can take up to 12 months with the typical cost of this ranging from
£50,000 to £200,000. As a result, SPCs (Segregated Portfolio Companies), sometimes
referred to as protected cell companies, have become more and more prominent in the
market as new investment managers look to shorten the set-up and launch time and
reduce operational challenges and upfront costs.
What is an SPC structure?
An SPC is a fund structure which offers segregated “sub-funds” or “cells” to several
managers under one company. It segregates assets and liabilities of different classes, or
sometimes a series of shares, from each other and from the general assets of the SPC,
with each sub-fund being independent.
Originally, SPCs originated in the Channel Islands and the US but are now being used in
almost all relevant fund jurisdictions. By having a number of different sub-funds within
the same legal entity, the fund manager’s costs can be greatly reduced when compared
to the costs that would be incurred were each fund to be set up as a separate entity.
Who is using SPC structures?
Originally SPCs were used as umbrella funds and for the formation of captive insurance
companies but they have also been used to set up collective investment schemes and
sometimes as asset holding vehicles. While these set-ups have mostly been used for
internal purposes by larger asset managers, today, umbrella fund structures have been
made available to the wider market by specialised fund operators who operate the
structures for their underlying managers.
Benefits associated with SPC structures
A number of benefits are associated with the use of SPCs, the most important of which
being the relative ease of forming and launching sub-funds in jurisdictions where SPCs
are available for incorporation. As many as 30 different counterparties will need to be
appointed for a stand-alone fund, requiring the capacity and operational experience that
many fund managers do not have. Through a sub-fund structure, fund managers can
rely on predetermined critical counterparties such as independent directors, auditors,
lawyers or legal counsel, administrators, depositaries and other banking relationships,
allowing the time to market to be reduced to as much as four weeks compared to the six
to 12 months required to form stand alone fund structures.
London
134 Buckingham Palace Rd
London, SW1W 9SA
United Kingdom
New York
30 Wall Street, 8th Floor
New York, NY 10005
United States of America
Boston
Ten Post Office Square,
8th Floor,
Boston, MA 02109
United States of America
Hong Kong
Time Square Tower 2
1 Matheson Street
Causeway Bay
Hong Kong
Phone: +44 207 305 5810
Phone: +1 212 537 9095
Phone: +1 617 207 4116
Phone: +852 2165 4109
www.lawsonconner.com
The emergence of protected
cell structures
In addition to this, servicing costs are reduced as it will be sufficient for the SPCs to have
one board of directors, one administrator and one audit firm, rather than having to
duplicate these functions for separate entities.
Other advantages include the easier process of obtaining authorisation from the relevant
regulator and the possibility to set-up additional sub-funds without the need for a
complex application process.
Risks of SPCs
New managers are advised to obtain clarity on the structural set-up of segregated
sub-funds and the master fund structure and inquire with the relevant operator about
the laws regarding investment funds. This is recommended as the structure is a critical
component of avoiding any potential consequential cross-contamination of liabilities in
case of an onshore bankruptcy.
Some jurisdictions fully recognise the segregation and have not registered any conflicting
cases. For example, under Cayman Companies Law, the sub-funds are held exclusively
for the benefit of the owners and any counterparty to a transaction linked to those
sub-funds. Only persons who have entered into transactions with a sub-fund, or who
otherwise become creditors, will have recourse to that sub-fund’s assets. Any asset
which attaches to a particular segregated portfolio is not available to meet liabilities
of the SPC or any of the other segregated portfolios. However, courts in jurisdictions
other than Cayman may not be prepared to accept that creditors, in respect of a
particular segregated sub-fund portfolio, are prevented from gaining recourse to the
assets. Therefore, as SPC structures have become commonplace, investors need to be
comfortable with the effectiveness of such structures.
Operational set-up
From an operational perspective, the SPC would enter into an investment management
agreement with an independent investment manager, to act for and on its behalf, to
implement the investment policies and objectives of the sub-fund. Each sub-fund, under
the SPC, would then have a separate sub-advisory agreement between the SPC, the
investment manager and the investor.
The main marketing document in place would be the Private Placement Memorandum
(PPM), which covers the main SPC and each of the sub-funds under it (rather than a new
PPM for each sub-fund), meaning each sub-fund can then have its own supplementation
documentation to the PPM which is focused on its own specific objectives.
London
134 Buckingham Palace Rd
London, SW1W 9SA
United Kingdom
New York
30 Wall Street, 8th Floor
New York, NY 10005
United States of America
Boston
Ten Post Office Square,
8th Floor,
Boston, MA 02109
United States of America
Hong Kong
Time Square Tower 2
1 Matheson Street
Causeway Bay
Hong Kong
Phone: +44 207 305 5810
Phone: +1 212 537 9095
Phone: +1 617 207 4116
Phone: +852 2165 4109
www.lawsonconner.com
The emergence of protected
cell structures
Conclusion
As setting up an investment fund can be expensive and a long and complex process,
SPCs are a popular alternative as managers look to increase efficiency and reduce costs.
However, not all jurisdictions view these structures in the same regard and therefore it
is important that managers become familiar with the full implications of these structures
before moving forward.
London
134 Buckingham Palace Rd
London, SW1W 9SA
United Kingdom
New York
30 Wall Street, 8th Floor
New York, NY 10005
United States of America
Boston
Ten Post Office Square,
8th Floor,
Boston, MA 02109
United States of America
Hong Kong
Time Square Tower 2
1 Matheson Street
Causeway Bay
Hong Kong
Phone: +44 207 305 5810
Phone: +1 212 537 9095
Phone: +1 617 207 4116
Phone: +852 2165 4109
www.lawsonconner.com