JTC (Mauritius) Limited Director Ganessen Soobramanien examines the fundamentals of how Mauritius Protected Cell Companies operate and the advantages they offer.
Fund managers find it more efficient to set up and maintain just one multi-class structure to host multiple strategies or several sizeable assets than to form several fund vehicles. Multi-class funds can in effect be formed as companies, partnerships or unit trusts. However, all suffer from one significant lacking: risk contagion, i.e., assets in one class may be affected by liabilities originating from other classes. This is why, in many instances, we recommend that a multi-class fund is formed as a protected cell company (PCC), also known as segregated portfolio company (SPC). PCC laws provide that risk contagion is not permitted, subject to appropriate structuring of the PCC and of the transactions entered into.
How does the PCC work?
In simple terms, a PCC is a company whereby the share capital is constituted of cellular shares and non-cellular shares (a.k.a. the core shares). When cell shares are issued for capital received, this particular cell capital is then used to acquire assets, or run a business, attributable to that respective cell only. So we have cellular share capital and cellular assets that pertain solely to a particular cell of the company. In the same vein, any liabilities contracted in relation to cellular asset of a particular cell or for the purpose of running the business attributable to that particular cell can be made attributable only to that cell. Hence we now have cellular share capital, cellular asset and cellular liabilities attributable only to a particular cell. So, shareholders and creditors of a cell may not have a right to assets of other cells in the company – this protection which we call ring-fencing is explicitly provided for by the PCC laws. In this sense, a PCC has a powerful advantage over a normal multi-class company. Indeed in a multi-share class company we generally cannot protect assets attributable to a particular class of shares against any creditors of the company who financed assets attributable to another share class.
What are the applications of the PCC?
A few popular examples are:
(a) A father sets up a PCC and hosts different assets into different cells where he identifies each cell for a particular child or heir of his. While the assets sit in the identified cell, the father alone has voting control of the entire structure as he holds voting non-cellular (core) shares.
(b) A PCC is set up to hold different assets in different cells. Some assets are leveraged, others are not. Because an asset belongs to a specific cell, a secured creditor having a lien on that asset has only access to other assets that are attributable to that same cell. Hence assets that are in other cells are legally protected from creditors which is useful where some assets are leveraged. This structure is popular with alternative funds, including private equity, real estate funds.
(c) A corporate or individual investor wants to acquire different assets and wants to avoid setting up different special purpose vehicles or companies. A PCC is more cost-efficient than setting up many companies.
(d) An investment adviser, a private bank or a portfolio manager has many customers. It sets up a single PCC for all its customers and hosts the investments of each customer in one cell. This substantially reduces the cost and legal-administrative burden for each client to maintain their investment.
(e) An independent financial advisor (e.g. in the UK) has many non-connected customers but each wants to hold their investment in a broadly held structure. The IFA may set up a PCC which it controls and offers separate cells to separate customers.
(f) A fund manager wants to launch three funds with three different strategies: conservative, medium risk, high risk with leverage. Instead of setting up three different funds, he launches a PCC with three different cells. The debt involved in the high risk strategy will not affect the portfolio assets in the other two cells. Retail funds with multiple strategies offered by the largest banks are often PCC structures.
(g) A captive insurance company which is structured as a PCC can rent cells to different clients to run their individual captive business. Otherwise it will be too onerous for individual clients to satisfy capitalisation requirements under insurance laws for their individual captive insurance vehicles.
(h) Life assurance companies can segregate the assets of life, pension and individual policyholders by using a PCC. Similarly insurance companies issuing portfolio bonds can legally hold sizeable assets of each bond holder in different cells of the insurance company.
How much does it cost?
The cost varies with the application of the PCC, complexity and volume of transactions. One of the core attractions of PCCs is the cost efficiency as it can avoid the use of multiple structures. Please get in touch and we shall be pleased to discuss.
A summary of the basic features of a Mauritius PCC can be accessed here
Should you wish to discuss the advantages of a Protected Cell Company structure, please contact Ganessen directly.