Rising standards in the funds industryBy Leon Santos
There is a current trend in offshore fund and deal structuring towards more compliance and corporate governance. This is evident across two strong investment themes in which our clients are involved.
The first is investment across South East Asia, which has been one of the top emerging market destinations for private equity capital. In 2013, around two-thirds of emerging market funds raised were for investment in emerging Asian economies.
As India and China have faced regulatory and market challenges, the focus has shifted to ASEAN economies for untapped opportunities. Amidst competition for deals, over-priced valuations, and lately a general easing in growth numbers, private fund managers have also been dealing with increased regulation.
The strengthening of the fund manager regime in Singapore is one example, which is already driving more robust industry standards.
What this brings is a focus on corporate governance and internal procedures and controls. Most funds are established in offshore countries to take advantage of tax and regulatory benefits.
However, centres for the funds industry like Singapore, Hong Kong, London, and New York are imposing standards which affect offshore funds -- look at the way EU AIFMD remuneration restrictions will shape how investment professionals are remunerated.
There has also been greater scrutiny of tax structuring for funds from China, India, and Indonesia, generally around the concepts of permanent establishment and substance.
These measures add costs to the operations of fund managers. However, regulatory compliance is a mandatory requirement.
Even the smallest fund managers have to dedicate a certain amount of time and money to operational issues. This puts pressure on smaller investment managers and one could argue that there is a minimum AUM emerging for running a fund.
For managers with European investors, it will be critical to consider jurisdictions like Jersey and Guernsey for fund structures, as they have well developed architectures for regulation and corporate governance and are well placed to handle the requirements of onshore laws such as the EU's Alternative Investment Fund Managers Directive.
The second trend is investment by Asian firms in assets located in the West. In particular, there has been a large amount of interest in property assets in the United Kingdom.
Valuations are seen as very attractive relative to prices of assets in the East. This seems a natural result of the financial crisis in the major Western economies and the heightened focus on Asia as an investment destination.
Vehicles used for these types of investments are structured to give the greatest tax efficiency in terms of capital gains and other taxes. On the other hand, governments in England and Western nations have and continue to increase measures for revenue generation.
The new wave of Asian entrepreneurs and businesses looking West for asset acquisitions are involved in complex cross border structures.
The upshot is that there is a real need for expertise in how to run and manage investment vehicles. Certain jurisdictions, like Jersey and Guernsey, will continue to benefit from increased regulatory cooperation with the major financial centres.
All these factors point to a flight to quality. Clients should look not only for confidentiality but also for a degree of regulatory and tax certainty, as investment structures continue to come under the spotlight.