Fair Financial investors claim SoftBank drove startup into the ground so they could take full control of bankruptcy

SoftBank CEO Masayoshi Son.
  • SoftBank and its Vision fund have invested more than $ 300 million in Fair Financial, a car rental startup.
  • Fair is considering filing for bankruptcy, Bloomberg reported this week.
  • Some Fair investors blame SoftBank and say the Japanese giant is trying to take control.
  • See more stories on the Insider business page.

Investors in Fair Financial Corp., a struggling car rental startup once valued at over $ 1 billion, are exploring legal options to tackle SoftBank, which they say has deliberately pushed the company in the ground so that it can take full control and eliminate other shareholders.

“There was a calculated effort to drive the company into insolvency so that it could take over the business completely,” an investor told Insider. “SoftBank is guilty of putting the company in a difficult position.” Investors have asked not to be identified to discuss sensitive private matters. The current CEO of Fair and someone familiar with the matter disputed this description of Fair’s problems.

The startup was founded in 2016 by entrepreneur Scott Painter with the ambition to disrupt the $ 120 billion used car industry. SoftBank and its giant Vision fund have invested at least $ 300 million in the company, while other investors have invested around $ 170 million.

The company is now considering a bankruptcy filing that would eliminate shareholders, Bloomberg reported Thursday.

SoftBank has built up a significant position in Fair’s debt in recent years, in part by purchasing assets from lender Greensill, investors said. Greensill, also backed by SoftBank, filed for bankruptcy earlier this year.

SoftBank now hopes to use its senior credit position to come out of a bankruptcy reorganization of Fair as the startup’s new equity owner, investors said. They spoke to Insider in an attempt to thwart this plan by arguing that SoftBank is not looking after Fair’s best interests and is acting more like a lender seeking control rather than a typical shareholder.

Fair had around $ 800 million in assets on the books in 2019, mostly from the more than 50,000 vehicles he owned. In late 2019, investors said SoftBank had started selling those assets and using the cash to run the business and pay off some of the debt it held.

Investors also said that in 2019, SoftBank kicked Painter out and replaced him with its own executive, Adam Hieber. SoftBank also kicked out Painter’s brother, Tyler Painter, and cut 40% of Fair’s staff.

Under SoftBank’s new leadership, Fair appeared to abandon growing the business, investors said. The startup has increased the upfront fees it charged, which is similar to down payments. Those start-up costs went from several hundred dollars to several thousand, and new customers evaporated. Fair also ended its insurance coverage, which infuriated existing customers and led to a wave of vehicle returns, according to investors.

Now, with most of Fair’s vehicles sold, its assets have fallen far below its debt, most of which is owned by SoftBank, investors said.

“SoftBank had a clear objective: to liquidate the fleet to generate revenue,” said one of the investors.

SoftBank declined to comment, but someone familiar with the matter said Painter was responsible for Fair’s mismanagement. Employees told Insider in 2019 that Fair’s unconstrained growth was its downfall, and some criticized Painter’s leadership.

“The Vision Fund does not control its businesses; this is not their model, ”said the person familiar with the matter. “In fact, Scott had total control. He spent recklessly thinking that the Vision Fund would always be there to bail him out. Eventually it became clear that he needed to be replaced, just as he was in his old business. Painter, who is still the chairman of Fair, declined to comment.

Brad Stewart, the current CEO of Fair who joined the company last year after a career in private equity, said any suggestion that SoftBank sabotaged the company is false.

“I saw them working really hard to save and keep the business going even though it cost them substantial capital that they didn’t have to invest,” said Stewart. “The point is, the company had an extremely negative unity economy and poorly developed risk controls that were hidden from the board and investors. These missteps led to a series of credit defaults starting in mid-2019 that forced someone to step in and save the business. “

The aggrieved investors said Stewart was a puppet of SoftBank and, exceptionally, had no capital in the startup he was hired for.

Stewart told Insider he was initially given shares when he took over as CEO, but the board blocked him from getting shares. In any case, he said the shares would have been worthless.

“It doesn’t really matter because the company’s debt was greater than its enterprise value when I started, so any grant was worth zero,” said Stewart.


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Financial investors are pressuring companies to reduce their carbon emissions. Could art collectors do the same at galleries?

The art collector and billionaire at the head of investment firm Blackrock Larry Fink had a clear message in his annual written address to CEOs last January: “No issue is higher than climate change on our clients’ priority lists. They ask us about it almost every day.

Although the letter was stamped with environmental concerns, Fink’s main point was that greener approaches are good for business.

“This is the start of a long but rapidly accelerating transition, one that will unfold over many years and reshape the prices of assets of all types,” Fink wrote. “The climate transition presents a historic investment opportunity,” he said, adding that “climate risk is an investment risk”.

In the art industry, where Fink is living his second life, galleries have taken notice. Many are by making net zero carbon commitments. Dealers participate in symposia to discuss new sustainability strategies. Christie’s has announced that it will go down to zero by 2030, and multinational gallery Hauser & Wirth has announced the same. Both hired dedicated staff to meet the challenge.

“Any organization that wants to continue to exist and perform its function 10 years from now must take this seriously,” said Danny Chivers, climate change researcher and environmental advisor at the Gallery Climate Coalition, which was founded in October to encourage individuals and businesses in the art world to halve their emissions by 2030.

BBut there are major differences between the investment industry and the art industry. In the financial world, investors are under significant pressure: they injected $ 288 billion into sustainable assets in 2020, an increase of 96% compared to 2019. In addition, increasingly standardized rules and rankings make it easier for customers to buy in or out of business — a business based on its sustainability merits. Nothing like this exists in the art industry.

In addition, the pressure in the art world comes mainly from artists and dealers, not collectors, who have been less vocal. Are they finally going to show up and start pushing?

Hauser & Wirth, Durslade farm, Bruton, Somerset. Photo: Jason Ingram.

Where are the collectors?

In October 2020, the founders of the Gallery Climate Coalition started with only 14 members. Six months later, they numbered 500, including merchants, advisers, fair managers and auction houses. Yet no collector is listed on the organization’s website. (Circle of CCG supporters requires a one-time donation of at least £ 1,000). [Update, June 24: There are a few collectors, GCC tells Artnet News, who have donated but who did not want to be listed.]

Resellers told Artnet News that the imperative to act largely comes from within. Ewan Sales, CEO of Hauser & Wirth, said it is the artists who have been a major catalyst towards greener business practices. But little is said about collectors demanding low-carbon shipments, and no dealer has mentioned that their business would be compromised if they failed to clean up their gallery’s carbon footprint. (One dealer said his gallery would first organize itself internally before offering customers the option to “green” the way they buy and ship artwork.)

On the other hand, Tineke Lambooy, professor of corporate law and member of the advisory board of Art / Switch, a non-profit organization that promotes sustainability practices in the art sector, told Artnet News that in the financial world, investors are asking companies to “comply with OECD guidelines which are in line with the principles of the United Nations Global Compact.

“Business leaders and CFOs need to be guided by the attitude of investors towards a greener environment. How this fact translates into the art world is not yet completely clear ”, Venters said. (This year, the gallery hired a full-time environmental sustainability manager.)

“We are in a climate emergency, and if we don’t do things differently, the planet will be in trouble,” he added. “Every sector seems to understand this. “

The founding members of the Gallery Climate Coalition.  Courtesy of GCC.

The founding members of the Gallery Climate Coalition. Courtesy of GCC.

Where are our green labels?

When it comes to those who engage, transparency is key: promises are only worth the numbers. As Fink wrote: “Data and disclosure issues”.

Tom Woolston, global operations manager for Christie’s, told Artnet News the company is seeking validation from the Science Based Targets (SBTi) initiative, an independent body that helps private companies achieve sustainability goals. based on science to align with the Paris Accord, and gives certifications to companies that meet the qualifications.

“You see a lot of organizations making promises without necessarily always following them,” Woolston said. “We are very sincere in our ambition. Christie’s now plans to publish an annual environmental impact report.

“It can be a very complicated and technical field and we are all on a learning curve,” added Woolston, suggesting that the complex issues made it essential to partner with an organization specializing in the subject such as SBTi.

Another point of progress would be a gallery ranking system.

“It’s relatively easy for investors in other industries to find companies through rankings and make decisions based on them,” Lambooy said. The ESG rankings (environment, social and governance) for most actions is a click on Google. “It’s time to formulate them” for the art market, she said.

Image courtesy of Christie's.

Christie’s has committed to be net-zero by 2030. Image courtesy of Christie’s.

A green art market

Things are improving rapidly. Just a few years ago, you would have struggled to find climate talks at an art fair, let alone see sustainability as a top concern for art dealers. But the pandemic has made the world smaller and more fragile. This also led to the the largest drop in CO2 emissions since World War II, up to 7.5 percent. What will the behaviors look like when the world returns to some sort of normalcy?

In a recent article by the editorial board of the Financial Time, the editors warned that as the world emerges from this pandemic, we may see the second largest to augment in carbon emissions.

As the art world recovers, many in the business are saying it’s time for collectors to start voting with their dollars.

“The art sector, private and public, is where the imagination of society resides,” Chivers said. “If we want to imagine and build a better future, we need everyone in art to be on board. “

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Co-investment vehicles under the Final Deferred Interest Rules | Foley & Lardner srl

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.]


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American food majors and their investment vehicles Archives

Tyson Foods Fund to Invest in “Revolutionary” Companies

Tyson Foods has become the latest American food company to create an investment fund with the establishment of a venture capital unit that will focus on start-ups developing sustainable “disruptive” technologies, business models. ..

Campbell Soup Co. to invest in start-ups - CAGNY

Campbell Soup Co. to invest in start-ups – CAGNY

Campbell Soup Co. has detailed plans to launch an investment vehicle that will support the development of young, high growth food businesses. Speaking to the Consumer Analyst Group of the New York investor …

Feb 18 2016


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UK Watchdog: Protecting Retail Financial Investors

Britain’s Financial Conduct Authority (FCA) has instituted a new consumer obligation designed to provide consumers with greater protection when dealing with companies in the retail financial markets.

While the FCA already has consumer protection rules for these companies and notes that many of them “deliver the right results for consumers,” the watchdog group said on Friday it saw evidence of harmful practices.

This includes companies providing misleading or hard-to-grasp information, which makes it more difficult for consumers to properly rate the product or service.

“This may give an idea of ​​why one in four respondents to the FCA’s 2020 Financial Life Survey said they lacked confidence in the financial services industry, and only 35% of respondents agreed. that companies are honest and transparent in their dealings with them, ”the authority said in a press release.

The FCA says it is proposing an extension of its rules to ensure a higher and more consistent level of consumer protection.

The new consumer obligation, which businesses will follow or risk taking regulatory action or even enforcement investigations, requires businesses to take “all reasonable steps to avoid foreseeable harm to customers” and to “allow customers to pursue their financial goals and act in good faith. . “

The FCA published a study earlier this year which found that young traders are increasingly engaging in risky investments without realizing the consequences.

The group’s research looked at how and why people invest in cryptocurrency and foreign exchanges and found that many of these investors are younger, more diverse, and comfortable with riskier offers. They were also motivated to invest in part because of the accessible investment applications.

But there is significant evidence that these investments are not the best solution for less experienced investors, with more than half of those polled saying a loss would negatively affect their lifestyle.

Last year, the FCA tightened its rules governing payment companies following the collapse of Wirecard AG, which excluded millions of customers from their accounts.

——————————

NEW PYMNTS DATA: SELF-SERVICE SHOPPING ROUTE TODAY – SEPTEMBER 2021

On: Eighty percent of consumers want to use non-traditional payment options like self-service, but only 35 percent were able to use them for their most recent purchases. Today’s Self-Service Shopping Journey, a PYMNTS and Toshiba Collaboration, analyzes more than 2,500 responses to find out how merchants can address availability and perception issues to meet demand for self-service kiosks.


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AIFs seek co-investment vehicles to enable tailor-made transactions for major investors

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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Dear reader,

Business Standard has always strived to provide up-to-date information and commentary on developments that matter to you and have broader political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering has only strengthened our resolve and commitment to these ideals. Even in these difficult times resulting from Covid-19, we remain committed to keeping you informed and updated with credible news, authoritative views and cutting-edge commentary on relevant current issues.
However, we have a demand.

As we fight the economic impact of the pandemic, we need your support even more so that we can continue to provide you with more quality content. Our subscription model has received an encouraging response from many of you who have subscribed to our online content. More subscriptions to our online content can only help us achieve the goals of providing you with even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practice the journalism to which we are committed.

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First published: Wed, April 14, 2021. 07:26 IST


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building infrastructure for green growth

The dawn of a new era: Careful planning and investment will be needed to make activities such as energy production and transportation more sustainable. Credit: Filip Bunkens / Unsplash

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.

Anna Pasková is Director of Environmental Policy and Sustainable Development at the Ministry of the Environment of the Czech Republic

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.

Dirk Röttgers is Policy Analyst in Green Finance and Investment at the OECD

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.

Dr Kim Yates is UK and Europe Sustainability and Climate Change Manager at Mott MacDonald

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.

Ivo Jaanisoo is Head of the Construction and Housing Department at the Ministry of Economic Affairs and Communications in Estonia.

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.

The “A Platform for New Growth: Building Green Infrastructure” webinar took place on March 9, 2021 and was supported by Mott Macdonald. You can watch the whole session via our events page, or below.


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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.

Dear reader,

Business Standard has always strived to provide up-to-date information and commentary on developments that matter to you and have broader political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering has only strengthened our resolve and commitment to these ideals. Even in these difficult times resulting from Covid-19, we remain committed to keeping you informed and updated with credible news, authoritative views and cutting edge commentary on relevant current issues.
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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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A quick survey of investment vehicles

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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