January 3, 2024
Private equity regulation is constantly evolving in Singapore as the country looks to keep building a reputation for stable, transparent, business-friendly investment markets.
Singapore is a hub for international private equity (PE) fund managers operating in Asia-Pacific and secured the largest share of PE investments in Southeast Asia in 2022, according to Bain. Singapore attracted US$7.1 billion of investments in non-publicly traded companies out of US$13 billion for the entire region. It also had 97 deals completed versus 176 across the region.
The PE market is challenged in Singapore as in other parts of Asia-Pacific and the world. PE deal count for Singapore declined 10% on 2021 compared to 15% drop in Southeast Asia as a whole. However, Bain said there had been an uptick in Q1 2023.
So, against a regulatory backdrop that encourages business through transparency rather than strict rule making, what does the Singaporean regulatory landscape currently look like?
The Monetary Authority of Singapore (MAS) is Singapore’s regulator of financial markets, including private equity. PE fund managers need a license unless they qualify for exemption.
Private equity managers will often encounter several pieces of legislation during their compliance transactions. These include the Securities and Futures Act, the Takeover Code, the SGX listings rules, the Competition Act, the Companies Act, and the Employment Act.
Singapore banks holding PE investments must also comply with regulations on:
In contrast to the US, which is expanding private equity regulation, Singapore emphasizes transparency rather than rules and aims to retain a relatively simplified regime, especially for venture capital (VC) managers.
It recognizes the lower risks given VC managers’ sophisticated business model and investor base, which should mean they are tightly controlled through their own contracts and practices.
MAS’ regime therefore simplifies and shortens the authorization process for VC managers, and does not subject them to the capital requirements and business conduct rules that apply to other fund managers.
MAS retains regulatory powers to deal with errant managers, however, there have been no significant reported fines or penalties against any PE firms in recent years.
In Singapore, there are no explicit regulations dictating the taxation of carried interest. Typically, for funds under Singaporean management, carried interest is often organized as investment returns. These returns are then distributed as dividends or partnership distributions, especially when recipients of carried interest have invested a substantial amount of capital, demonstrating alignment of interest with investors. Although less frequent, an alternative structure involves treating carried interest as a performance fee payable to the Fund Management Company (FMC).
Several legal and practical developments in Singapore have impacted private equity markets.
In 2020, the regulator introduced the Variable Capital Company (VCC). This investment fund structure can be used for a wide range of funds and aims to enhance managers’ operational flexibility and cost savings. According to the latest reports, there were 1,000 VCCs in Singapore by Q2 2023, a quarter of which were PE funds. In January 2023, MAS also extended its VCC grant scheme.
In September 2021, Singapore’s exchange (SGX) became one of the first in Asia to allow special-purpose acquisition companies (SPACs) - companies formed to raise acquisition capital through public offerings. The aim is to attract more firms to raise funds, though only a few have used the structure thus far. SPACs must meet additional admission criteria, including minimum market capitalization, public float and minimum issue price.
In 2022, the Singapore Venture Capital & Private Equity Association updated its standardized Venture Capital Investment Model Agreements (VIMA 2.0) for seed and early-stage funding. This development of practice rather than law aims to smooth the investment process by helping investors and investees align their interests.
According to an update from legal firm Rajah & Tann, another PE-related trend in Singapore is the increasing number of fund managers moving towards illiquid alternative investments, including a significant rise in private credit funds.
According to Reuters, a surge in private credit funds across Asia is due to increasing demand, particularly from start-ups that want to avoid raising equity capital at a significant discount to their valuations.
There was a 76% increase in private credit funds targeting Asia in 2022, to a record US$11 billion. In the first half of 2023, at least US$2.5 billion in new private credit funds were launched or in planning. Experts predicted the trend towards private debt will likely gain momentum in the second half as investors continue to reevaluate traditional equity funding for start-ups in the challenging global market.
The increase in private credit activity in Asia mirrors a similar trend in North America, where private debt capital grew from US$49 billion in 2012 to US$150 billion in 2022. If Singapore can grow at a similar rate, the potential is huge.
MAS has pledged to support private credit managers in their Asian expansion. In March 2023, it said Singapore can support private credit by:
Despite its short-term challenges, the Singapore private equity market is dynamic and has sound fundamentals. The country’s regulators are clearly alert to its evolving potential. They will likely continue their many initiatives aimed at supporting the smooth, transparent and flexible function of PE funds looking to operate there and across Asia.