Why wealthy families are turning to pooled investment vehicles during a pandemic

Wealthy families might increasingly seek to invest through a single entity that manages all their money, rather than through a maze of different entities.

Alternative Investment Funds (AIFs) and Limited Liability Companies (LLP) are among the vehicles of choice, experts say as they seek to streamline processes and facilitate documentation amid the Covid-19 pandemic .

“… during the pandemic, families struggled to assess and execute transactions, due to the complex and elaborate paperwork in a large (number) of entities they had to operate,” Nitin said. Jain, Managing Director and CEO, Edelweiss Wealth Management.

He said Edelweiss has advised his clients to use on-call services to consolidate and manage functions. He also suggested using AIFs, which would allow multiple entities to pool money and invest as a single unit. “It also gives … the status of QIB (Qualified Institutional Buyer) and ensures the confidentiality of the last name for strategic transactions,” he added.

A QIB may participate in certain share offerings which are not open to regular investors. Indeed, they are perceived as particularly competent and capable of evaluating such offers.

Some are also exploring the LLP path, said Nipun Mehta, founder and CEO of the multifamily office BlueOcean Capital Advisors. A family office manages the assets and investments of a single wealthy family. A multifamily office provides the same service to a number of these families.

The use of grouped vehicles is part of a natural evolution as people streamline operations and become more aware of existing structures and how they are used, Mehta said. “It’s getting pretty active, I think a lot of people are doing it now,” he said.

An LLP structure combines the flexibility of a partnership with the limited liability of a corporate structure.

According to the Family Wealth Report 2018, published by Campden Wealth and Edelweiss Private Wealth Management, wealthy Indian families have around 645 million dollars (4,700 crore rupees). Data shows that less than a quarter is held in the form of financial instruments. Most of the wealth remains concentrated in operational affairs. Real estate is in second place with 31 percent (see graph).

Legislation has evolved over time to cover these investment vehicles.

The European Union directive on alternative investment fund managers provided for a specific exemption for these vehicles from the standards which would cover other AIFs. The directive covered factors such as remuneration structures, minimum capital requirements and conflicts of interest.

“Investment firms, such as family office vehicles that invest the private wealth of investors without raising external capital, should not be considered AIFs under this directive,” he said.

The Securities and Exchange Board of India’s alternative investment fund regulations cover issues such as the use of leverage, minimum value of investments and employee qualifications. It also mentions an exemption for certain entities managed for the benefit of a family.

“Provided that the following is not considered an alternative investment fund for the purposes of this regulation … family trusts created for the benefit of ‘parents’ …” said Sebi.

The UK Financial Conduct Authority’s Handbook on the Scope of the Alternative Investment Fund Managers Scheme based on the EU Directive as it applied in the UK also spoke of the coverage of these entities.

“Family investment vehicles can be used by large extended families spanning a number of generations and by those born or joining the family before and after the investment arrangements are made. Civil partnership and marriage can be included. A family can include marriage and marriage relationships, as well as blood ties and other immediate family relationships, such as adoption, ”he said.

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The surge in claims shakes Provident Financial

  • The surge in claims threatens the solvency of the consumer credit division
  • Door lender faces new watchdog investigation

In an unscheduled trading update this morning, Financial foresight (PFG) said fourth quarter results for 2020 will likely be ahead of analysts’ expectations.

What fell short of market expectations, however, was the news that the subprime lender intended to enter its consumer credit division (CCD) into a scheme of arrangement, following an increase in customer complaints. .

Management say the program will allow it to distribute £ 50million set aside in redress for what it describes as legitimate customer claims, a process that will result in additional operating costs of £ 15million. However, the Financial Conduct Authority (FCA) opposed the program in its current form, arguing that creditors could receive less than the full value of their claims.

If the regulator rescinds the plans at a court hearing in April, Provident says the division will likely be “placed under administration or into liquidation,” leaving all customer complaints unfunded. A scheme of arrangement is a temporary, court-approved measure that helps a business restructure its capital, assets, or liabilities.

The effect of this on the Vanquis Bank credit card division and the subprime auto loan arm Moneybarn “would not be significant,” management said, while acknowledging that relationships with customers, suppliers and regulators could be damaged by the episode.

Relations with the latter already seem strained. In addition to news from the possible administration, Provident revealed that the FCA opened an investigation into the affordability and sustainability of Caisse centrale’s lending and claims handling practices during the year through February. . While no rule violations have been determined so far, news that the review is set to last until 2022 is making the headache for investors even worse.

CCD, which serves hundreds of thousands of customers through Provvy’s traditional home loan arm and online-only Satsuma loans, was on track to break even “on a monthly basis” before that Covid-19 hit last year.

But a surge in write-downs has been followed by a surge in complaints in the mortgage market, fueled by what management is calling increased activity from claims handling companies. This translated into payments of £ 25million to customers in the second half of the year, while an additional £ 11million in balance cuts added to the bill.

Echoing 2017 – when an overhaul of the consumer credit division seriously backfired and precipitated a dilutive capital raise – shares of the FTSE 250 group fell 30% on this news to 184p, as investors weighed the prospect of spending the next few months placed in regulatory headache.

The Lesson of the Guarantor Loan Group Amigo (AGGO) which, like Provident, pursued a plan of arrangement after witnessing an increase in ombudsman-backed customer complaints and successful claims, is that high-cost credit promises a rate of return Inordinate internals should be compared with a higher risk of shock.

While the industry’s claims to serve underrepresented client groups are not entirely unfounded, high interest loans rightly come with greater regulatory and policy scrutiny. We have long argued that investors have no choice but to accept this, and even invite oversight.

They are also expected to apply big discounts to the industry’s book values ​​and a big pinch of salt to analysts’ earnings forecasts – which Provident says is 10.9 pence per share for the current year. Hold / avoid.

Last seen IC: Hold, 222p, Aug 26, 2020


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