ASIAVIEW: To be or not to be exempt

The wait is over. After more than two years and two consultation papers, the Monetary Authority of Singapore (MAS) finally has determined what investment managers active in the Lion City need to do in order to be a registered or licensed fund management company.

Since August 7, financial advisors have been scouring Singapore with a view to offering the city-state’s 720-plus financial institutions – representative of more than S$1.34 trillion (€847 billion; $1.03 trillion) of investments – advice on its impact and, subsequently, how they should respond. 

Indeed, managers of open-ended vehicles such as hedge, currency or index funds have a fair bit to chew over. Yet, thanks to a late legislative tweak concerning fund management companies responsible for immovable assets, real estate fund managers have a much simpler decision make.

As of August 7, existing or aspiring managers of immovable assets in Singapore – domicile of many of Asia’s private equity real estate investment vehicles – can choose either to pursue official registration or they can opt out altogether without fear of reprimand. The upshot is that the city-state’s enhanced regulatory regime for alternative investment managers, specifically managers of sophisticated capital from sources such as financial institutions, pension plans and high-net-worth individuals (not the man on the street), now has lower regulatory thresholds than its equivalent for managers of retail capital (the man on the street). 

Under the regime’s prior incarnation, real estate fund managers could choose to pursue a licensed fund management company status or file for a licensing exemption. Either way, there was a formal process to endure.

Why has the MAS effectuated an exemption for real estate fund managers (and other managers of immovable objects, like infrastructure)? There seems to be no clear policy reason, but it would be fair to suspect that Singapore regards groups focused on more volatile products like hedge funds, which account for a meaningfully larger segment of its financial universe than real estate funds, as requiring a stricter regulatory environment as it looks to protect investors’ capital. 

Furthermore, real estate funds typically attract large institutional investors. Tickets of $50 million or more are commonplace, and groups capable of cheques that large carry out very robust due diligence themselves and are less reliant on a stringent regulatory environment for their managers.

That question, however, should not concern real estate fund managers. The real question dealers in bricks and mortar should ask themselves is: ‘Just because my firm can be exempt under this enhanced regulatory regime, should it be?’ Of course, the answer resides in each individual manager’s particular circumstances but, regardless, there is a general debate to be had here.

Let’s take a fund manager looking to manage assets from Singapore for the first time. One of the first items to address if you are seeking a license is a risk-based capital requirement. Now pegged to the revenue generated through its Singapore office, the more revenue generated, the higher the risk-based capital needs to be. MAS provides the ratio and formula. 

Then, there are compliance requirements. If a firm manages more than S$1 billion (€632 million; $813 million), it is required to have a compliance function and staff on the ground. The firm also needs to undertake an internal audit. This can be outsourced to an overseas affiliate (if the firm in question is fortunate enough to have one) but, nonetheless, it is a practical and financial consideration.

Finally, there’s now an ongoing requirement to disclose to investors the fund’s strategy, gearing levels, fees, documentation provisions, counterparties and brokers, among other potentially sensitive items. Admittedly, some of this disclosure already may be market practice and is often considered less sensitive for real estate fund managers. Indeed, investors in real estate funds have been asking for such information ever since the global financial crisis struck in earnest back in late 2008. 

Of course, all of this has costs associated with it. Licensing and filing costs are minimal, but internal auditing and compliance arrangements often means hiring people and submitting to maintaining the required risk-based capital can incur big costs if lots of revenue is booked in Singapore. Then, there are ancillary costs such as legal and advisory fees – hiring from the ‘Big Four’ doesn’t come cheap. In fact, PERE garnered cost estimates of between $1 million and $3 million for a modest-sized operation signing up under the enhanced regime.

All that said, there are other considerations beyond just processes and costs. Consider, say, a US institutional investor looking to invest in Asian real estate for the first time. Which firms will it favour – registered or unregistered – particularly at this point in the investment cycle when transparency is desired? 

The lesson here is: Just because firms can now opt out of Singapore’s enhanced regulatory regime reproach-free, doesn’t necessarily make it the right call to do so.