Category: Investment vehicles

RedSwan CRE, a tokenization platform focused on the leading commercial real estate sector, now accepts Dogecoin (CRYPTO: DOGE) as one of its payment options for investing in two multi-family properties.

What happened: The properties are Lakehouse, a 270-unit luxury multi-family development located on Lake Merritt near downtown Oakland, California, and the 251-unit Apollo Apartments in the Seattle suburb of Edmonds, State. Washington.

“Accredited investors will be able to use Dogecoin to purchase fractional ownership in buildings, which can then be traded like stocks,” the company said on its website. “This will be the first time that a major real estate asset will be available for a specific crypto community.”

Investments in properties start at $ 1,000 each, and the company also accepts US dollar and dollar-indexed stablecoins in addition to Dogecoin.

RedSwan CRE added that the combined fundraising for these two deals is $ 36 million, including $ 20 million for Lakehouse and $ 16 million for Apollo.

Related Link: 10 Actions To Consider For The First Day Of Fall

Why is this important: Despite Dogecoin’s growing popularity as an investment vehicle, trading opportunities for cryptocurrency have been relatively limited.

In March, Mark Cuban’s Dallas Mavericks has started accepting Dogecoin payments, making it the largest US company to adopt the asset. Other companies that also accept Dogecoin is the Latvian carrier AirBaltic, UK based web hosting company HostMeNow and Canadian Internet service provider EasyDNS.

But the vast majority of US businesses are excluding Dogecoin payments from their agenda, although a few have acknowledged the presence of cryptocurrency. This week, AMC Entertainment Holdings, Inc. (NYSE: AMC) CEO Adam Aaron Conducted Poll Asking The Movie Chain To Accept Dogecoin As A Payment Option; The company has excluded Dogecoin from cryptocurrency options it plans to make available for online payments later this year.

Elon Musk, who spent a seemingly endless time tweeting about Dogecoin, conducted a similar poll in May asking if people wanted Dogecoin payment options for buying You’re here (NASDAQ: TSLA). Despite overwhelming public support for the idea, Tesla has yet to accept Dogecoin.

Photo: KNFind from Pixabay.

On August 27, 2021, the Australian Government’s Treasury Department (Treasury) has issued a set of documents comprising an Exposure Draft on Legislation and an Exposure Draft Explanatory Memorandum for Industry Comments on the Regulatory and Tax Components of the Corporate Mutual Fund (CCIV) diet (see here for relevant materials). The Treasury has proposed that a commercially viable form of the CCIV scheme be in place as of July 1, 2022.

In the 2016-2017 federal budget, the government announced that it would introduce regulatory and tax frameworks for two new types of collective investment vehicles, namely a CCIV and a limited partnership collective investment vehicle. Since then, the Treasury has overseen a number of periods of consultation and revisions of the CCIV regime. Johnson Winter & Slattery previously published an article outlining the main features of the CCIV diet during industry consultations in September 2017, which can be accessed. here.

Overview

CCIVs must be structured as an umbrella vehicle or an umbrella fund incorporating one or more compartments. A CCIV is a public limited company, most of its powers, rights, duties and legal characteristics are in accordance with those of a natural or legal person. A compartment, on the other hand, will not have legal personality.

CCIVs constitute an alternative vehicle to that of managed UCITS (MIS) with closer alignment with European-type corporate funds (under the European Undertakings for Collective Investment in Transferable Securities (UCITS) Directive). The latter is a popular vehicle in parts of Asia.

It is also proposed that when CCIVs are considered attribution managed investment funds (AMIT) under section 276 of the Income Tax Assessment Act, 1997 (Cth) (Law of 1997), they will be taxed as AMITs. Otherwise, the general provisions relating to the taxation of trusts will apply to CCIV and, in both cases, each sub-fund will be treated as a separate trust for tax purposes.

Regulatory framework

What is a CCIV?

A CCIV is a company limited by shares and the sole director of which is a public company holding an Australian Financial Services License (AFSL) with the appropriate authorizations to operate a CCIV. A CCIV must have a constitution and at least one compartment which has at least one member.

Like the MIS regime, CCIVs can be retail or wholesale, with a more comprehensive regulatory regime applying to retail CCIVs to protect retail investors. However, unlike the MIS scheme, all CCIVs must be registered as a company with the Australian Securities and Investments Commission.

A CCIV cannot transform into another type of company and another type of company cannot transform into a CCIV.

What is a compartment of a CCIV?

A compartment is the vehicle through which the business and operations of the CCIV are to be conducted. When registering CCIV, at least one sub-fund must be established and be identifiable by a unique name and Australian registered fund number (ARFN). Registration of additional compartments after CCIV registration is a separate process.

The securities issued by the CCIV must be attached to a sub-fund. The assets and liabilities of the CCIV must be allocated to a specific compartment. If necessary, the director of the company should convert a single asset that would otherwise be distributed among several compartments into cash or some other form of fungible property to allow separate attribution of the property. Any award made by the director of the company must be “fair and reasonable in the circumstances”. The assets of the CCIV (and each sub-fund) may be held by the CCIV or by another person (such as a custodian) in trust for the CCIV.

What is a corporate director of a CCIV?

The Director General of the CCIV is responsible for the operation and affairs of the CCIV. These functions are attributed to the executive corporate officer by the constitution of the CCIV and the Companies Act 2001 (Cth) (Corporations Act). Since the CCIV itself has no officers or employees who are natural persons, the corporate director is responsible for the conduct of the CCIV. The Law on legal persons imposes a series of statutory obligations incumbent on the director of companies in his capacity as director of the CCIV and on the members of the CCIV.

As indicated above, the company director is required to hold an AFSL with a new type of authorization for the provision of the financial service of “operation and conduct of the affairs of a CCIV”. While a CCIV is expected to provide more than one type of financial service during its operations, the Treasury anticipates that a CCIV will generally provide the financial service of “negotiating a financial product”.

What is a member of a CCIV?

An entity will be a member of a CCIV if it holds one or more shares of the CCIV. As indicated above, each share must be attached to a sub-fund. Each share will have certain rights and obligations. These include in particular voting rights, rights to dividends and distributions of CCIV capital under a sub-fund.

What are the requirements for securities issued by a CCIV?

A CCIV may issue both shares and bonds on the basis that any security issued relates to a single compartment of the CCIV. Subject to its constitution, a CCIV may also buy back redeemable shares, pay dividends to members or reduce the share capital if the sub-fund to which the redeemable shares, dividends or capital relate is solvent immediately before the operation and if the The transaction would not result in the sub-fund becoming insolvent immediately after its closure.

Although they are a form of company, CCIVs are not subject to the disclosure obligations set out in Chapter 6D of the Law on legal persons. Rather, CCIVs must adhere to the product disclosure statement (PDS) disclosure regime contained in Part 7.9 of the Corporations Act as amended by amendments proposed by the Consolidated Revenue Fund. Therefore, CCIVs are required to provide a PDS to retail clients who wish to acquire its securities. This means that retail CCIVs will also be subject to design and distribution obligations under Part 7.8A of the Corporations Act.

Main proposed changes

This section highlights the main changes to the CCIV regime proposed by the Treasury during this last round of consultation.

Depositary requirements

A custodian is a separate company appointed by the CCIV that holds its assets in trust and whose functions include overseeing certain operational activities of the CCIV The Treasury has removed the requirement for retail CCIVs to have an independent custodian on the bank. basis that there should be sufficient flexibility to allow alignment of business models with particular markets and investors as needed.

Cross investment

Cross-investment refers to the practice of a compartment of a CCIV holding one or more shares which are attached to another compartment of the same CCIV. Cross-investing could be used to achieve managerial and operational efficiencies, as well as to enable the possibility of establishing fund-of-fund structures in a single CCIV.

The Treasury declares that cross-investments will allow CCIVs to use fund management structures such as:

• master-feeder building blocks / structures, which involve the creation of multiple compartments that hold particular asset classes (building block compartments) and other compartments that have different levels of exposure to those building block compartments ; and
• hedging structures, which involve the creation of a compartment which holds the basic assets of the CCIV and additional compartments which hold shares and hedging instruments in the basic compartment.

Listing on the prescribed financial markets in Australia

The Treasury proposes that retail CCIVs with one compartment can now be included in the official list of a prescribed financial market operating in Australia from July 1, 2022. However, wholesale CCIVs and retail CCIVs with multiple compartments remain. banned from listing in Australia. These prohibitions do not affect the ability of a CCIV to list a security on a financial market such as the ASX Quoted Assets Market, subject to the financial market’s own rules.

Fiscal framework

While the regulatory framework is designed to provide certainty as to the legal status and operation of CCIVs and compartments, the tax framework aims to ensure that members can obtain the attribution and transfer of income and tax treatment. on the income of a CCIV through either the current AMIT regime or the default trust tax regime in section 6 of part III of the Income Tax Assessment Act 1936 (Cth) (Section 6).

The Treasury explained that despite its registration as a company under the Companies Act, the principles of presumption in proposed subsection 195-C of the 1997 Act will have the effect of considering that there is a relationship trust between the CCIV, the company, the assets and commitments of a compartment and its members for the purposes of applying tax laws. This deeming provision will have the following consequences:

• the assets, liabilities and business relating to a specific sub-fund will be treated as a separate trust;
• the CCIV will be considered as the trustee of each compartment which will be considered as a separate mutual fund known as the CCIV compartment trust; and
• CCIV members will be considered as beneficiaries of the CCIV compartment trust fund.

In addition, each sub-fund of a CCIV will be treated as a separate trust for tax purposes with the relevant tax laws that apply to trustees, trusts and beneficiaries applying to the CCIV.

Subject to meeting the AMIT eligibility criteria for a CCIV compartment, a CCIV compartment may allocate amounts of taxable income, exempt income, non-exempt non-taxable income and tax compensation received. or perceived by the CCIV which have a particular character to the members. These amounts will retain their character and will then be taxed as such in the hands of the members as if the member were directly drawing such amounts.

Unlike managed investment funds qualified as AMIT which may choose to be taxed as AMIT, CCIV sub-funds qualified as AMIT will be compulsorily taxed as AMIT. The CCIV compartments will have no choice.

In cases where a CCIV does not meet the eligibility criteria for the AMIT regime in connection with a specific sub-fund for a particular tax year, the tax treatment will by default be that of the general tax framework for trusts in section 6. .

Johnson Winter & Slattery intends to prepare a new tax analysis of the proposed CCIV model in the coming weeks.

Conclusion

Submissions on this public consultation can be made until September 24, 2021. Please contact us if you would like more information on the regulatory or tax implications of the proposed CCIV regime.

Demand for environmental, social and governance (ESG) investments is accelerating and several key trends are emerging, from climate change to social unrest. The coronavirus pandemic, in particular, appears to have intensified discussions about the interdependence of sustainability and the financial system.

Blockchain has become a powerful and transformative technology in the 4th industrial revolution and is used in an ever-widening range of industries, but its energy footprint has been deemed unsustainable at the current rate. As a result, many ESG-focused investors are still reluctant to participate in this new technology, despite the potential benefits.

2021 is the year ESG investing propelled the biggest shift in capital allocation, and ESG considerations are guiding business decisions in ways that have never been seen. The company’s one-stop bottom line, profit at all costs, is becoming a “triple bottom line” focused on people, planet and profit.

“When investors arrive, they look for an opportunity to invest in an ESG-compliant company before they allocate funds to a specific proposal, project, opportunity, company or business,” said Stefan Rust, CEO and co-founder of Sonic Capital and HydrogenX. , in an interview with Forkast.News.

According to the latest Bloomberg Intelligence ESG Mid-year 2021 outlook report, ESG assets are on track to exceed $ 53 trillion by 2025, which represents more than a third of the $ 140.5 trillion in global assets under management forecast. Bloomberg Intelligence also reported that the S&P 500 ESG Index has outperformed the S&P 500 Index since the start of the year by around 15%.

Despite the bad press, blockchain-based technology and business solutions show significant potential to positively impact society and the environment, and products are hitting the market for the ESG-focused investor.

Blockchain for the planet

The 17 United Nations Sustainable Development Goals (SDGs) aim to address the most pressing global challenges. Climate action is one of them, and the UN target demands a strict reduction in greenhouse gas emissions as well as climate adaptation action or take steps to prepare for the effects of climate change and expected impacts in the future.

Together with Zurich-based Tavis Digital, Sonic Capital launched Sphere, a new investment product that uses the United Nations Sustainable Development Goals framework as a guide while applying ESG investment criteria.

According to Rust of Sonic Capital, a green blockchain industry is evolving. While the market is still nascent, Sphere sees an endless capacity for growth. Its potential is becoming increasingly evident with the rise of blue chip companies entering the space and their desire for a more fluid, efficient and transparent market.

“We break down ESG into three compartments: energy, carbon and other, and if you combine all of these ESG activities, you see a significant movement of companies and businesses into these categories, from all the big tech companies to the multinationals, as well. than local governments trying to move this forward and align this with the 17 SDG goals that the UN has stipulated, ”said Rust.

In Asia in particular, Rust sees sustainable investing largely driven by government support and an effort to foster greater inclusion of groups traditionally under-represented in markets.

“In China, it’s a big mandate. It’s huge. In Korea, the premium for being ESG or SDG compliant is very high, higher than anywhere in the world, ”said Rust. “The more developed markets are very optimistic about this and are taking proactive steps in this direction.”

Through Sphere, investors can capitalize on growing opportunities in the sustainable economy and technology sector by identifying blockchain protocols with positive environmental impact.

“We truly believe in the potential and future of blockchain technology applications impacting impact and their ability to generate positive impact on society and the environment,” said Christian Speckhardt, Partner at Tavis Digital and veteran of impact investing in an email to Forkast.News.

Blockchain is poorly understood

Bitcoin’s blockchain carbon footprint has become a growing concern for environmentally conscious investors. In fact, the recent crypto market crash began in mid-May, when Elon Musk suddenly said Tesla would no longer accept Bitcoin as a form of payment due to environmental concerns.

Blockchains like Bitcoin operate on proof of work algorithms, which must be solved by computers through cryptographic calculations in order to mine BTC tokens. The energy required by miners for these calculations results in high energy consumption.

However, Sphere will focus on investing in the proof of stake blockchain. Staking is estimated to use 99.9% less energy than existing proof-of-work systems. This allows investors to profit while helping the industry move towards greener solutions.

Despite the emphasis on proof of stake, Rust argued that there was actually a lot of misconception in the industry regarding proof of work.

“About 60-70% of the electricity consumed by proof-of-work networks actually comes from renewable energy sources or even wasted electricity that won’t be pumped into the grid,” Rust said. “Essentially, Proof of Work is a lot more environmentally friendly than a lot of people think. “

Sphere is an actively managed certificate (AMC), which are bank securities that can be purchased through a Swiss International Securities Identification Number (ISIN). Investors will be able to participate in impact-related blockchain technologies through their respective crypto assets, which offers the potential for price appreciation in addition to stake rewards, according to Sonic Capital.

The AMC also removes the intricacies of the crypto world for new investors and provides a fixed ramp. By providing the bank with Sphere’s ISIN, investors can subscribe directly through an existing bank account, which is comparable to buying traditional stocks.

As a result of the latest Treasury regulations issued by the IRS under Section 1061,¹ fund promoters should consider investing capital through a blended fund with other investors rather than using their own investment vehicle to invest alongside the fund, which could be subject to the three-year holding period requirement under section 1061.

Section 1061 re-qualifies certain long-term net capital gains with a holding period of less than three years as short-term capital gains at ordinary income rates. Section 1061 applies to an “applicable partnership interest” (an “API”) held by or transferred to a taxpayer in connection with the provision of substantial services by the taxpayer in an applicable trade or business. Deferred interest agreements can constitute an API, which would be subject to the three-year holding period.

However, an “equity interest” in a partnership is generally not an API (the “Capital Interest Exception”). For this purpose, a capital interest is an interest that would give the holder a share of the proceeds if the assets of the partnership were sold at fair market value at the time the interest was received and the proceeds were then distributed. in a complete liquidation of the partnership. . As a result, a participation of a fund promoter may be able to structure part of its investment so that it is exempt from Article 1061 (and the three-year holding period) with respect to its capital. invested under the capital interest exception.

In order for the fund promoter to comply with the capital interest exception, the allocations relating to its capital interest must be reasonably consistent and determined similarly to the allocation and distribution rights that apply to the capital invested by investors. unrelated service providers who have made significant capital contributions (defined as 5% or more of the partnership’s total capital account balance at the time the grants are made). The regulations provide for the following non-exclusive factors for the application of this test: (i) the amount and timing of the capital contributed; (ii) the rate of return on the capital contributed; (iii) the modalities, priority, type and level of risk associated with the capital contributed; and (v) rights to distributions in cash or in property during the operations of the company and in the event of liquidation.

As drafted, it would be difficult to ensure that interest in a fund promoter’s co-investment vehicle qualifies for the capital interest exception, as allowances must be compared to those. made to major unrelated service providers. The Treasury and IRS continue to study the application of the capital interest exception to co-investment vehicles.

Provided the partnership agreement and the books and records of the fund clearly demonstrate the requirements listed above, the fund promoter could co-invest in the investment of the underlying portfolio through a combined fund with unrelated service providers. On the other hand, a fund sponsor who co-invests through its own investment vehicle may not be eligible for the capital interest exception and could therefore be subject to the three-year holding period.

————————————————– —–

¹ All references to the “Section” are to the Internal Revenue Code of 1986, as amended, or to Treasury regulations promulgated thereunder.

[View source.]

Sophisticated wealthy investment funds are looking for ways in which some of their investors could take an additional stake in certain corporate issuers through specially structured deals, in addition to the stake taken by the funds themselves. At least one fund has explored such transactions and efforts have also been made to clarify regulations on this, people familiar with the matter said.

Globally, investors in a private equity fund are allowed to purchase additional equity in companies owned by the program on an individual basis. This …

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To “build back better”, governments must oversee the creation of new infrastructure to decarbonize their economies. In a recent webinar, senior officials from the OECD, Estonia and the Czech Republic discussed how best to fund and manage these changes – and the extent to which COVID-19 has displaced them. Goals. Catherine First reports

Changes to infrastructure and the built environment are an important part of governments ‘efforts to turn their economies to’ net zero ‘by 2050. But contrary to what you might expect,’ building nothing is the way to go. perfect scenario, ”said Dr Kim Yates, Head of Sustainability and Climate Change UK and Europe at Mott MacDonald, design and engineering consultancy.

As overall UK carbon emissions decline, those released from the production of building materials such as steel, concrete and asphalt continue to rise, Yates said. One of the problems is the lack of a policy on how to achieve net zero, she noted. And, although it is catching up quickly, engineers must go beyond compliance to build green infrastructure, Yates explained.

Indeed, sustainability needs to be considered long before construction: Yates argued that big gains in terms of carbon reduction and environmental issues are realized when these factors are taken into account early in projects. “It’s watching what you build. Can you renew an existing asset? Do you really need it? It is a question of integrating this reflection ”, she declared.

Examining what you need to build – and what if – was just one topic covered in a recent webinar on green infrastructure hosted by the Global Government Forum and supported by specialist partner Mott MacDonald. Senior representatives from the Organization for Economic Co-operation and Development (OECD) and the governments of Estonia and the Czech Republic discussed policy approaches, how to shape financial systems and how to mobilize private sector investment for them. finance, and whether the COVID-19 pandemic has altered the challenges faced by policymakers and project managers.

Reduce, modernize and renovate

Rather than building new infrastructure, the Czech Republic is renovating infrastructure as part of its decarbonization strategy, according to Anna Pasková, director of environmental policy and sustainable development at the country’s environment ministry. Since 2009, a retrofit program has made 36,000 buildings more energy efficient by providing insulation subsidies to households, she said. The next phase of the program will also provide funding for solar thermal heating systems, green roofs and water-saving technologies.

In Estonia, the government’s strategy has been to step back from energy production and focus on smarter use, according to Ivo Jaanisoo, head of the construction and housing department at the Ministry of Economic Affairs and of Communications. “We really want to harness the cheapest energy potential, which is the energy saved,” he said.

The renovation of buildings is a key part of this approach. About half of Estonia’s total energy consumption comes from buildings, compared to a European average of 40%, Jaanisoo said. The country’s long-term renovation strategy plans to increase annual renovations of government, residential and commercial buildings from the current level of around 500,000 per year to nearly 2,500,000 by 2035, he said. ..

Along with cost, energy and carbon savings, making buildings more energy efficient can improve indoor air quality, the heritage of older buildings and the flexibility of spaces to adapt to different uses. the future, Jaanisoo said.

Estonia is also experimenting with how real-time data can guide energy efficiency. Real-time energy consumption data could boost a vibrant market for energy efficiency products and services, Jaanisoo noted. “Real-time consumption data opens the door to real-time carbon footprint measurements so that every building owner can see the potential savings when considering upgrading their building,” he said. .

Financing of green infrastructure

But even if efficiency is built into projects, governments still have to fund them from balance sheets torn by the pandemic. For this, many use a combination of public and private sector funding.

The Czech Republic finances the modernization of its green infrastructure through various European funds, including the EU Structural Funds and the Modernization Fund, which supports low-income member states in decarbonization, Pasková said. The funding will support programs such as energy savings, renewable energies, new heating plants, clean mobility and water infrastructure.

The country will also use money from the Just Transition Fund from the EU’s economic stimulus package to support its decarbonization work in former mining areas, which will also reduce inequalities, she said. The European Commission has also stipulated that member states’ investments must pass a “do no harm” test on the climate and the environment. This could be a game-changer in the mindset of countries about how they invest funds, she added.

But governments also need to create the right environment for institutional investors to support green infrastructure finance, said Dirk Röttgers, policy analyst in Green Finance and Investment at the OECD. Pension funds and insurance companies typically devote a very small portion of their portfolios to infrastructure, he noted.

The top four types of institutional investors held US $ 1.04 trillion in infrastructure such as transport, energy, waste, water and construction, according to a study by the OECD. But that is overshadowed by the $ 64 trillion held in corporate stocks and bonds, and only $ 314 billion of the total could be considered green infrastructure.

Recent research by Röttgers shows how policymakers could encourage investors to make their portfolios greener. Governments can intervene to regulate financial markets, or become actors to leverage investments from institutional funds, he suggested, citing as an example the need to ensure that project pipelines that fulfill policy objectives are available for the funds to invest in.

Governments should also be careful not to unintentionally block investments by banning certain financial instruments, such as YieldCos: investment vehicles set up by a parent company to hold operating assets. “It’s a very good instrument that matches the appetite of institutional investors, but they are not allowed in all countries. And there are similar instruments that focus only on fossil fuels, ”he said.

“Make sure that anyone on the private side who wants to invest in these projects can do so, whether they are a very large investor with huge amounts of funding, or a very small one like your private saver. Governments must give private finance a chance to meet their needs, ”Röttgers advised.

Rebuild better?

But it’s not just institutional investors who need to be encouraged to invest in green infrastructure. A recent OECD analysis revealed that governments spend roughly the same amount of salvage money on investments that are positive for the environment as they do on those with negative impacts, according to Röttgers.

“For governments focusing on these investments, it can be helpful to be transparent about what they are actually invested in, to set targets for how much to invest in green measures and to be very clear on what in what not to invest, ”he said. . So far, only the European Commission had established such guidelines, he added.

Other panelists were more optimistic: Yates said she had never seen so much activity on the issue of low carbon in the infrastructure sector. “We saw an upsurge in investigations and work, certainly when Biden arrived. I can’t see him on the agenda because I don’t think the citizens will allow it,” she said. .

But public needs could change dramatically once COVID-19 lockdowns are over, with a hybrid working future predicted by many. Röttgers pointed out that public transport systems may need to be redesigned, as people are already moving further to the suburbs as they don’t have to travel to the office five days a week. Networks could be less dense in now heavily populated areas, but expand further, he suggested.

“There may be a paradigm shift based on what we need for the climate and other environmental reasons anyway. It’s an interesting time, ”he said.

Others were more careful. The effect on office use in the Czech Republic should not be overestimated, Pasková noted, since only 30-50% of office workers had worked from home during the lockdown. In addition, emission reductions resulting from reduced commute to work could be replaced by an increase in those resulting from door-to-door deliveries, she said. Here, as throughout the sustainability agenda, many of the keys to success lie in a better understanding of the evidence for the relationship between economic change and environmental impacts. “We will have to verify the data,” she concluded.

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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A version of this article first appeared in the December 2020 issue of Morningstar fund investor. Download a free copy of Investor Fund by visiting the website.

Mutual funds are in large part the creation of the Investment Company Act of 1940, a well-crafted piece of legislation that laid the foundation for the massive growth of mutual funds. This helped establish principles of transparency, fiduciary duty and independent oversight which allowed trust to grow as fund companies also grew.

Some of the key things that have helped funds grow are daily net asset value, custodian securities, boards of directors, clear disclosure of holdings and fees, and SEC oversight.

But other investment vehicles are also developing, so I thought I would take a moment to explain what they are and how they stack up against mutual funds. I have also included a chart showing the relative attractiveness of each compared to mutual funds.

Source: Morningstar.

Exchange traded funds
ETFs participate in traditional open-ended funds with a few key attributes. ETFs trade throughout the day, and although ETFs are in fact mutual funds governed by the Law of 40, they do some things differently. While individual investors buy and sell an ETF much like a stock, institutional investors can perform in-kind arbitrage on baskets of stocks in the event of a price differential. This keeps the ETF’s prices largely in line with the NAV, and it means the fund doesn’t make taxable gains every time someone redeems stocks.

So, they trade on the stock exchange, but you get a price close to the NAV under normal market conditions. For institutional traders, ETFs often replace futures contracts for their short-term trading needs. So, you have a significant advantage for taxable investors over an actively managed open-ended fund, which will likely pay out capital gains in an upward year. You still have to pay taxes if you sell at a profit, but you are unlikely to do so along the way. The difference to large company open index funds, however, is not great, as they tend to realize losses in a way that spares shareholders capital gains. There are exceptions where zombie index funds have spat big bills.

This brings me to a poorly understood aspect of ETFs. People sometimes view the open-end / ETF debate as active or passive. But of course there are many open index funds and around a fifth of ETFs are actively managed. So, when it is suggested that ETFs are cheaper than open-ended funds, what is really being said is that the liabilities are cheaper than the assets. But ETFs are generally also cheaper to have marketing costs removed. Some open-ended passive funds are cheaper than their ETF counterparts.

Tellingly, Vanguard offers both open and ETF versions of many of its index funds, and in general, the ETF is 1 basis point cheaper. This cost advantage stimulates the flow of Vanguard’s open share classes to its ETFs. ETFs have the advantage of not having to pay broker service fees. Yes, Vanguard provides services at cost, but the rest of the industry wants a profit.

When it comes to active ETFs, one of the challenges is that the normal ETF structure requires a level of portfolio transparency that can enable leaders of large equity strategies. New, less transparent ETFs have popped up to address this issue, but there isn’t much to show for it.

Collective investment funds
CITs act like mutual funds, but with different disclosure and regulation. These are pooled investments, but they do not have any filing requirements with the SEC or boards of directors. As a result, they are generally less expensive than their mutual fund counterparts. On the other hand, you lose transparency, but these are often very similar to a mutual fund. CITs are regulated by the Office of the Comptroller of the Currency and must go through trustees.

Typically, these are found in 401 (k) plans and are managed very similarly to a mutual fund. So, you might want to use this mutual fund as a proxy in monitoring your portfolio so that you can include it in top-down portfolio analysis and get a feel for your CIT’s performance.

Accounts managed separately
They are another close cousin of mutual funds. They are sold in part on the basis of exclusivity. Rather than pooling your money with commoners, you can have an ADM, which is managed for you, provided you have $ 1 million to invest in the strategy. The minimums for SMA platforms and strategies vary by brokerage. Sellers sometimes exaggerate this as a portfolio manager customizing a strategy for you, but mostly that’s wrong. For the most part, ADMs use the same cookie cutter, although you can request to withdraw something like tobacco or companies whose name begins with the letter W.

However, ADMs have some real advantages. One is taxes. When you buy a mutual fund, you are subscribing to a strategy that may already have accrued gains. When mutual funds distribute these gains, they come back to everyone, whether or not they made a profit. So, you have to pay taxes if you hold this fund in a taxable account.

On the other hand, with the SMA, you start with a clean slate on taxes, and the titles are kept in your account. You only have to pay taxes when the SMA Manager sells your holdings at a profit. Considering the current high stock levels, this is a real advantage. No, it is not tax exempt. You will still pay when the SMAs make a profit and when you sell the SMA if it is profitable, but at least you won’t start paying taxes. ADMs also tend to be cheaper because they are less regulated and have large accounts. SMA fees are not fixed, so you will need to take a close look at the fees offered and compare them with some mutual funds of the same strategy.

The only thing ADMs don’t do well are bonds. This is because bonds trade in large amounts that cannot be easily chopped up like stocks. As a result, bond SMAs tend to have targeted portfolios of just 20-30 stocks versus a portfolio of hundreds like the typical bond fund. Most people want their bond fund to provide income and a smooth ride, so having greater issue risk is not a welcome trait. This will double in high yield areas and in other areas where there is a real risk of default.

Closed-end funds
Closed-end funds aren’t that different from open-end mutual funds and ETFs, except the price you get will rarely be at net asset value. Funds can be traded at discounts or premiums and thus add a rather unfortunate element of uncertainty. In general, closed-end funds trade at a discount to their net asset value, which is really disappointing if you bought on the IPO.

Closed-end funds have a defined asset base that the managers then manage as they see fit. This means that the fund is not vulnerable to the impact of flows; this might help when investing in less liquid securities.

But there are downsides. There is less disclosure. Closed funds can change managers and then take their time to tell you. Plus, they cost more than most open-ended funds because they have a fairly small asset base. But maybe the biggest downside is that it’s hard to fire the manager. Some closed-end funds seem to have the function of providing managers with a secure income stream because they don’t use any other vehicle, and they also don’t have an incentive to do a good job because you can’t actually withdraw money.

Finally, it should be noted that closed-end funds can and do use more leverage than most mutual funds. If you see a big return on a closed fund, it’s because it uses leverage and is likely trading at a discount to the net asset value. There are some good companies, like Pimco, that run closed funds, so I’m not saying I would avoid them altogether, but I wouldn’t want a closed fund to be a big part of my portfolio, and I’m sure that ‘it was run by a company I really trusted.

Hedge funds
Hedge funds are a less regulated vehicle for very wealthy individuals and institutional investors. Although their name implies that they cover exposure to equities, there is a wide variety of alternative and traditional strategies.

Some of the smartest minds when it comes to investing can be found in hedge funds. In particular, many of the best quantitative investors are found in hedge lands, as running an effective hedge fund can be incredibly lucrative. Funds typically charge 2% of assets and 20% of profits. You can’t do this in mutual funds because performance fees have to swing back and forth the same – and hedge fund managers don’t want to subtract 20% from losses.

The bad news for individual investors is that the best strategies are either closed to new investors or limited to large institutions. Usually things for investors with less than $ 100 million are the weakest, and when you pay fees like that you need some insanely good stuff just to get closer to what you would get in a 60/40 low. . -common cost sharing fund.

Variable annuities
I saved the worst for last. The most important thing to know about variable annuities is that they charge you a BIG commission. When advisors recommend a VA to you, they mention the tax benefits, but what they’re really thinking about is that big commission.

The VAs come in a variable annuity policy with a sub-account insurance fee inside. These are tax-efficient structures that hold a portfolio of mutual funds. Unlike annuities, the value varies depending on the underlying assets. Some advisers have criticized the use of VAs in 403 (b) accounts, although the value to investors varies widely depending on their needs and the quality of the VA.

Conclusion
Regardless of the vehicle, it pays to keep an eye on costs and the quality of management. Most of the time, ETFs and open-ended funds are the best options, but it’s good to understand your choices and be open to better opportunities when they arise.

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Regional governments across China are escaping borrowing limits by shifting assets into the books of local investment firms to lower their official debt ratios, executives and officials say.

This practice has enabled local government funding vehicles to raise more money for infrastructure and other construction projects. But analysts warn that many assets are of poor quality, paving the way for an increase in bad debt after a wave of bond defaults at government-backed companies in recent weeks.

“A lot of our assets don’t generate much economic value,” Liu Pengfei, chairman of Taiyuan Longcheng Development Investment, a LGFV in northern Taiyuan City, said at an investment conference last month. “Taiyuan government gave them to us so that we could meet. [the debt-to-asset] requirements set by our creditor banks and bond investors.

TLDI focused on infrastructure projects. Today, it is a large, diverse operator of everything from parking lots to tourist attractions, many of which barely stay afloat.

According to public records, the total assets of 960 major LGFVs that regularly disclose their financial results have increased by 40% over the past four years. However, their income and net income only increased by 6% and 4% respectively.

The bigger we are, the more we can borrow

“A Rmb100bn [$15.3bn] a company will be no less likely to default on its debt than a Rmb 10 billion company simply because of a size difference, ”said Bo Zhuang, chief economist for China at TS Lombard, a group of research.

The surge in acquisitions is expected to continue as local governments turn to LGFVs to boost the economy in the wake of the coronavirus pandemic. The Shaanxi provincial government said in a statement in October that it would transfer “as many assets as possible” to LGFVs so that they can double their borrowing over the next two years. The measure “would effectively eliminate the risks associated with public debt,” the government added.

“The bigger we are, the more we can borrow,” said an executive from Yan’an City Construction Investment Corp, another Shaanxi-based LGFV.

The executive said YCCIC has been entrusted with dozens of state-owned enterprises by the Yan’an municipal government since 2018, ranging from hotels to water treatment plants. Most of them struggle to make a profit.

Nonetheless, the executive added, YCCIC was able to borrow more as its larger size translated into a better credit rating, which was upped a notch to double A plus in October. Over the past two years, YCCIC’s outstanding bank loans have more than doubled.

Many local governments had previously ceded valuable land to their LGFVs free of charge in order to increase their borrowing capacity. But the practice was banned by the central government, forcing local governments to resort to lower-quality asset transfers.

Chinese banks, the largest LGFV lenders, are comfortable lending to the largest public investment firms, even as the quality of their underlying assets deteriorates.

“We have an obligation to support government-controlled enterprises as long as they meet core funding requirements,” said an executive from the Bank of Xi’an.

The rating agencies, on which LGFVs rely to access the bond market, are also generally favorable. An executive from the China Chengxin Credit Rating Group, one of the largest in the country, said the company paid more attention to total assets than earnings or cash flow. “The injection of government-controlled entities, whether profitable or not, into LGFVs is a sign of state support,” the official said. “It’s a plus for their credit rating. “

Some investors, however, are not convinced that the frenzy of LGFV acquisitions will make them less likely to default.

“Expanding LGFV balance sheets will not remove credit risk,” said Dave Wang, a Shanghai-based fund manager specializing in buying LGFV debt. “They may erupt at a later date, on a larger scale.”

Some LGFV executives have said they are aware of the potential risks as they seek to create more market-responsive businesses.

An executive from Jiangdong Holding, an LGFV in central Ma’anshan city, said his group had acquired two smaller peers and wanted to emulate Temasek, the Singaporean public investment group, even though it could not match its return on capital for the foreseeable future.

“Temasek has enjoyed a 16% annual return on investment for many years,” he said. “We would be satisfied with 1.5%. “