Tailwinds and Headwinds for Singapore’s Growth as an Asset Management Hub

This article is produced by CMS Holborn Asia, a Formal Law Alliance between CMS Singapore and Holborn Law LLC.

Despite the onset of a global pandemic, 2020 was a good year for Singapore’s asset management industry. Assets under management (AUM) in Singapore rose 17% in 2020, outpacing the increases of 15.6% and 5.4% in 2019 and 2018 respectively.

The good news comes on the back of various tailwinds that Singapore has experienced over the past few years.

Singapore launched the new variable capital company (VCC) structure in January 2020 in a move to strengthen its position as a leading Asian fund management hub. The VCC, which is a corporate structure that can be established as either a standalone fund or as an umbrella fund with multiple sub-funds (each with ringfenced assets and liabilities), can be used for both traditional and alternative strategies. Response from the industry has been positive, with over 250 VCCs established as of May 2021.

Political unrest in Hong Kong over the course of the past few years, which precipitated a new national security law imposed by Beijing, has also nudged some fund managers there to expand their presence in Singapore, or at least consider that option.

Singapore’s relative political and economic stability have long seen Singapore recognised as a great and easy place to do business. This, in addition to being a platform to explore investment opportunities in Asia, has attracted several high profile individuals to establish family offices in Singapore. The growing list of names includes Google co-founder Sergey Brin, hedge fund manager Ray Dalio, and vacuum-cleaner mogul James Dyson.

While Singapore’s momentum has been good, it seems that there is much to do in order for it to maintain its position as a prime asset management hub. To quote Lewis Carroll’s Red Queen, ‘it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!

One key challenge is competition from other major fund jurisdictions, which are undoubtedly seeking to improve their value propositions to investors and managers alike. Hong Kong recently introduced a new ‘Limited Partnership Fund’ vehicle, together with a tax concession for carried interest, which makes it more attractive as a fund domicile for venture capital and private equity funds. Singapore currently has no equivalent tax policy and it remains to be seen how it will respond.

Furthermore, with the increasing interest in digital assets, Singapore will also need to keep pace with other jurisdictions that are further ahead in digitalisation. Among these are Luxembourg, which in January 2021 explicitly recognised the possibility of using distributed ledger technology (DLT) to issue tokenised units in a fund, and Jersey, which has long been popular for funds with a focus on digital assets. Tax rules are, as ever, key and for now gains from investments in cryptocurrency and digital assets (tokens) do not qualify for Singapore’s range of fund management tax incentives.

Singapore also needs to address the supply of financial technology (or fintech) talent in Singapore to ensure that the finance industry remains competitive internationally. The shortage of talent in fintech has been an issue since 2019, but has been further exacerbated by an increasing focus on digitisation in the wake of the COVID-19 pandemic, as well as the growing number of tech giants, including Tencent and Bytedance, expanding here.

Nonetheless, there are good reasons to believe that Singapore’s growth is set to continue.

The MAS has demonstrated strong support for promoting innovation through its FinTech Regulatory Sandbox, which could enhance its status as a financial services hub. Among the successes of its Sandbox graduates is local fintech company BondEvalue, which partnered with NASDAQ-listed Northern Trust to complete the first trade of a fractionalized blockchain-based bond last year. That the MAS is forward-looking is also apparent from its report release in July 2020 examining the use of DLT in commercial applications across different industries. Of particular interest is its conclusion that DLT can be used to create fractional and tradeable digital assets, which could in turn enhance the liquidity of private equity assets – perhaps tokenised funds in Singapore may not be too far off.

Furthermore, given the strong interest in both the VCC structure and from family offices setting up in Singapore, Singapore should see ever increasing capital inflows, especially if it decides to allow single family offices to utilise the VCC structure. This is not permitted under current regulations, but the MAS is presently considering relaxing this requirement.

In addition, the recent crackdown on the cryptocurrency industry by China and the UK has also put Singapore in the spotlight as a digital asset-friendly regulatory environment for groups that operate cryptocurrency exchanges, although it remains to be seen whether Singapore can rival the first-mover jurisdictions insofar as digital asset funds are concerned.

Singapore has certainly been doing all the running it can to get to where it is today. Yet, with its sights set on being a leading international wealth management hub and an Asian hub for fund management and domiciliation, one can expect it to be ‘running at least twice as fast’.