A flexible approach to funds and asset management

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2020-02-04

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This article was originally published in the Bermuda Business Review 2019-2020

Although Bermuda’s share of the global funds industry is smaller than its share of the international insurance and reinsurance industry, there is a credible business case for optimism in 2020 and beyond.

Over 600 regulated investment funds continue to be registered in Bermuda, in addition to closed-ended investment companies, private equity funds, limited partnerships and single-investor structures and the jurisdiction hosts over US$200 billion in fund assets.

Investment managers of specialist Insurance Linked Securities (ILS) funds, such as Nephila Capital, Mt. Logan Re, New Ocean Capital, Pillar Capital, Aeolus Capital, AlphaCat, Axis Re Ventures, Kinesis Capital and RenaissanceRe Holdings, remain active in Bermuda.

The arrival of new entrants to the ILS market has demonstrated continued investor confidence in Bermuda as a domicile. Early in 2019, PIMCO launched an ILS business in partnership with its parent, Allianz and subsequently established a new commercial insurer in Bermuda, Newport Re, with a focus on the area.

A large number of substantial private equity fund managers with a presence in the USA, Canada and Europe do significant business in, or from, Bermuda, with firms like Apollo Global Management and Onex Partners participating actively in the Bermuda insurance and reinsurance markets through companies like Athene Holding, Aspen Insurance and Convex Group. Athene Life Re’s sidecar vehicle for life and retirement investment opportunities, Athene Co-Invest Reinsurance Affiliate, has recently raised $3 billion of capital. The success of its launch has been credited to Bermuda’s innovative approach in the collateralised reinsurance and ILS space.

The Carlyle Group has also recently announced its acquisition from AIG of a majority interest in Fortitude Re, with Japan’s T&D Holdings to acquire a substantial minority interest. Although there has been some consolidation, there has been a significant growth in the resources – and competitiveness – of various professional service providers based in Bermuda, including fund administrators, corporate service providers, compliance specialists and international corporate lawyers.

Bermuda’s financial services regulator, the Bermuda Monetary Authority (BMA) and Bermuda’s Business Development Agency (BDA), have both been active supporters of the funds and asset management industry in Bermuda, recognising the benefits to Bermuda’s economy of diversification.

One example of the BMA’s forward-thinking is its recent ‘green light’ for lawful cannabis-related investment structures and lawful cannabis-related insurance products, as well as its willingness to host a ‘regulatory sandbox’ for companies looking to test new technologies or business models in a controlled environment.

New pieces of legislation have been promoted by the Government of Bermuda and tabled or enacted by Bermuda’s Parliament, which should provide further ammunition for sustained growth in the asset management sector, over and above the strong foundation provided by Bermuda’s Investment Funds Act 2006 and the flexibility provided by the legislation relating to exempt companies, limited partnerships, segregated accounts companies and LLCs. It is fair to say, however, that the Economic Substance Act 2018 and certain other regulatory requirements may present challenges and opportunities in equal measure.

Some of the most significant new legislation from a funds perspective includes the Incorporated Segregated Accounts Companies Act 2019 (facilitating the establishment of separate cells or sub-funds with separate legal personality), as well as the Digital Asset Business Act 2018 and Initial Coin Offering legislation and regulations (supporting the incorporation and regulation of fintech-related businesses).

The BMA has also consulted on and promoted a new piece of legislation designed to regulate fund administrators as a distinct business class, on an improved and updated basis, in the form of the Fund Administration Provider Business Act 2019.

Bermuda’s Court system, including the Commercial Court, the Court of Appeal and the Privy Council, has performed a substantial – and stabilising – role in the resolution of fund related disputes over the past 10 years, publishing a number of significant reported judgments relating to investment funds such as Kingate Global Fund and Kingate Euro Fund (two of the largest Madoff-feeder funds); the Highland Funds; Cornhill Natural Resources Fund; Stewardship Capital Arbitrage Fund; AWH Fund; New Stream Capital; Sturgeon Central Asia Balanced Fund; and Silk Road Fund. This significant body of case law has assisted to clarify a number of legal issues and market practices and it provides a strong legal platform upon which new fund structures can be designed and launched in Bermuda. Given that the Privy Council is the final appellate Court for the Cayman Islands, the British Virgin Islands, Jersey, Guernsey and the Isle of Man, Bermuda’s funds industry has also been able to take advantage of the guidance provided by Cort judgments emanating from disputes involving funds incorporated in those jurisdictions as well. In addition to this, the Restructuring and Insolvency Specialists Association of Bermuda (RISA Bermuda) has been busy in the hedge fund bankruptcy space. RISA Bermuda recently submitted an Amicus Curiae Brief with the United States Supreme Court, addressing a number of legal issues relating to cross-border clawback claims in the context of insolvent funds’ redemption payments, from a Bermuda law perspective. RISA Bermuda has also been active in drafting and promoting certain law reform initiatives designed to facilitate more efficient restructuring and liquidation of illiquid and insolvent funds.

With market and regulatory uncertainties continuing to unfold globally – and in the UK, Europe and Hong Kong in particular – Bermuda remains well positioned to promote and to take advantage of its comparative state of certainty, stability, flexibility, creativity and responsiveness.

The ongoing convergence between the insurance markets and the capital markets, plus the increasing interest and investment in ILS, fintech and insuretech, means that Bermuda has an important role to play in the funds and asset management space, in 2020 and beyond.