Across offshore financial centres there are a number of “incubator” fund models that have been created for start-up fund managers looking for a light-touch, short-term investment vehicle.
These vehicles were created to provide the ability to set up and run a cost-efficient legal entity for trading an investment strategy with flexibility of operations.
The British Virgin Islands (BVI) incubator fund is an example of a successful start-up vehicle. Rules enacted in 2015 incorporate a ‘20-20-20 criteria’ – an incubator fund can have a maximum of 20 invited investors, each of whom must make a minimum initial investment of $20,000, and the fund cannot exceed a cap of $20 million in relation to the aggregate value of its investments.
The BVI incubator fund was created as a mechanism to launch a fund with minimal initial requirements so as to enable the manager to build a record and minimise costs. It has no requirements to appoint an administrator, custodian or manager, and there is no requirement to have an auditor.
When the incubator fund model was created, the intention was to adopt its use to invest in traditional and alternative asset classes, including equities, hybrid debt instruments and distressed assets. These ordinarily demand an investment horizon of years. With the rise of cryptocurrencies and exchange platforms, the horizon has shortened dramatically. In the past two years, we have seen Bitcoin soar 2,980% to $19,311 and then fall 355%. Similarly, Ethereum commenced at zero and grew to more than $1,300 in a matter of months.
Speed is essential in investing in crypto-assets. BVI incubator funds, with the ability to be launched within days, are uniquely suited to the crypto-asset class. The BVI incubator fund must convert within 24 months (or 36 months if regulatory approval is attained) to another form of BVI fund, usually a professional or private fund. That period is optimal for a pioneer crypto-asset fund manager to build a track record prior to having to convert and then comply with more regulated fund structures.
BVI incubator funds have gained significant traction in the start-up manager sector. That traction is gaining momentum with crypto technicians and issuers seeking to use these vehicles. The asset managers using crypto incubator funds are often very experienced asset managers (portfolio managers and analysts) that have branched away from larger, respected asset management houses to set up their own bespoke firms.
The interest in crypto is very broad. Recently we worked with a Scottish asset manager to set up a fund with 50% investment portfolio targeted to Bitcoin and 50% targeted to other cryptocurrencies. For global investors, offshore incubator crypto funds allow them to invest without having to set up a wallet or directly purchase tokens themselves. These parties may not want to use crypto but they want to invest in it.
There are no certainties in crypto-asset investment. It is an immensely fluid asset class which has a great number of questions posed of it. However, two certainties that we face are change in general and growth in the digital environment. If digitisation of the world is an inevitability, then surely there is a place for digital currency. If that is the case, then crypto-funds will be the investment vehicle of a large number of the next generation of fund managers.
Jeffrey Kirk is managing partner at Appleby BVI
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