Alternative investments are something which I have dabbled in quite a bit over the years. Some have been good and some - not so good.  Like many, I have received those calls from a rather dubious person who claims that they can offer me huge profits from palm oil to carbon offsets. Of course, these are usually boiler rooms, just wanting to pay for their Range Rover and bolt to the next serviced office!

I try to treat alternative investments as more of a fun type of playground but when executed correctly, they can return a rather good yield. However, caution should be exercised and expect these in the main to be long term, plus one should be prepared to ride the wave. I am going to cover a rather strange range of investments in this article, in the main because I don’t buck the trend of the wines and whiskeys, but instead, enjoy more evangelistic approaches.

Starting with the obvious and working through to the less obvious…

Real Estate

Offices may be a thing of the past; London is emptying, and prices are going to crash - so why real estate? Yes, we are certainly in a new era in this sector. I have friends who are large players in commercial real estate in the big cities and are now terrified of what is going to happen. Banks are allowing more people to work from home and are even clearing out those broom cupboards in the local branches for hot desking.  However, there is a good chance of picking up prime properties moving forward and even working with the trend.  For instance, those people who bought up properties in the outskirts of big cities and the country are certainly able to reap the rewards if the working-from-home movement continues.

With real estate, there are two plays - the short term ‘buy at auction, refurbish and sell’, or the building of a diverse portfolio to let out and sell at the prime time. Renting out a property comes with a big burden though and can go horribly wrong if you do not have the cash set aside for repairs, evictions and non-payments of rent. In addition to this, this sector needs a good hedge with a balanced portfolio, rather than putting all your eggs in one basket. There are a number of crowd-based portfolios of properties now too, but be careful, many are very dubious!

Angel Investing /Venture Capital

Firstly, for this, you need to be good at business and able to spot the niche products. Get it right and you could be a winner. Imagine those people who invested in Google, Amazon, Microsoft and Facebook. Then imagine those people who invested in the trend of dot com’s and lost everything!

I love mentoring business owners and angel investing gets you right in the mix without the daily burden of running the business. Stay orbiting and be ready to help out, but don’t make it personal or you will have many sleepless nights when the directors are having a bad few weeks or months.

With many people being made redundant or choosing to take the opportunity to do it alone, there are some really nice gems appearing. However, with COVID-19 and lockdowns all over us, it is time to exercise more caution than ever before. Not only are there many issues regarding supply chain and client bases, but people themselves are suffering mentally with being locked down at home when all they want to do is get out there. You may find yourself being not only a business mentor but also a personal mentor!

Soil 

Now for the less obvious…

Farmland and soil itself is trending as the new gold. I have been following the discussions on this for a while now and initially, couldn’t quite understand the reasoning. However, after spending a large amount of time on one of my portfolio companies (Organic Trace Technologies), the penny dropped.

Farmland itself is almost a dead cert, albeit a very slow and rather boring investment in the main. Populations are growing and we need food - whether it be the traditional farm produce or the new vegan crops which strangely taste and look like meat. A slow burner, but beyond stable against the stocks and volatility of markets.

But soil? Well, more of what quality soil can do for crop yield. Initially, I thought that I needed to order 50 tons of soil and explain to my wife why the back garden had taken on a new design! Companies are investing at a high rate into microbials (those things in the small bottles which are supposed to make our stomachs happy), which enrich the soil and produce vastly better quality and yields of crops. If it works, then this is a no brainer!

Digital Real Estate and Collectables 

No, I’m not Lawnmower man, but this is trending! Think of it like buying that piece of land centuries ago and reaping the reward now. This is what is happening right now within the digital worlds. Okay, it’s volatile, but it is trending for sure. I have seen that in recent months, digital collectables have begun to gain pace within these worlds too and people are trading at an increasing rate, whether it be a boost up for a game or a digitally signed football T-shirt. This market is very new and risky, but if you are one of the early ones, you could be analogous to an early Bitcoin buyer – you never know!

Written by Christophe Diricks & Axel Butaije, KPMG Luxembourg 

Running a cross-border business isn’t exactly like sailing down a peaceful river… perhaps it’s more like crossing an ocean full of dangers. However, on the other side may be a land of opportunity. New regulations, political trends, and business restrictions populate this ocean of challenges, but the wind of new technologies is picking up too, offering new paths across. And every good sailor knows that wind can be a fearless enemy but also a powerful ally, if you know how to harness it.

Disruptions to the business environment have been many, recently, like new reporting obligations (FATCA, CRS, and country-by-country reporting) or the new level of transparency that the Base Erosion and Profit Shifting (BEPS) action plans require. These changes may lead to a paradigm shift on how businesses deal with tax authorities.

In such a context, new technologies have (and will keep having) major impacts on how business is done—on one hand, negatively, by for example turning sensitive information into publicly available data, but, on the other hand, positively, by helping you meet the new requirements which ultimately keeps you competitive.

In this article, we will examine recent tax developments in private equity, real estate, and debt/hedge funds (so-called alternative investment funds) and discuss how new technology can be your best ally in navigating these changes.

Following several crises in the financial sector over the last decade, governments have put more pressure on companies (and to some extent individuals) by verifying their compliance with new international requirements, as well as by ensuring that they pay their fair share of taxes. Tax authorities have furthermore been performing tax audits based on information available via search engines (like Google), public online trade registers, and social networks (like LinkedIn, Facebook, or Twitter). This atmosphere of high-tax pressure has engendered new tax audit methodologies which look not only at a company’s tax returns/accounts but which also verify all the publically accessible information that tax authorities might be able to access.

Companies are thus asking themselves how they can comply with the new substance, oversight, and documentation norms in a cost-efficient manner. It could be hard to determine whether your fund platform in Luxembourg or Ireland has enough substance to benefit from tax treaties and directives under the new standards, but the BEPS Action 6 recommendations and information on non-CIVs offer guidance on this. Basically, they mention two pillars: infrastructure and human capital.

Infrastructure in terms of substance might sound obvious, but it could be worth revisiting. Broadly speaking, infrastructure comprises all the tangible fixed assets necessary to running your business like having a dedicated furnished office space, but also less tangible elements like your IT system or personalised email address or domain.

The substance definition of human capital is maybe a little less straightforward. Generally, by “human capital requirements,” it should be understood that you must have a task force appropriately qualified to run the business and to ensure that there is proper oversight over activities both performed and delegated. In addition, simply having the human capital is not enough anymore: the qualified workforce must be involved throughout the whole process of the (alternative) investment.

As industry members know, it is currently common for deal teams to be located in the country (or countries) of investment, and for investment funds and holding platforms to be in financial centres such as Luxembourg or Dublin for Europe, Singapore for Asia, or New York for the US.

However, deal teams are only a link in the long chain of the investment transaction, and fund management platforms (including special purposes vehicles) in Luxembourg or Dublin must have a more and more important role to play in those transactions:

• Prior to the investment, the deal team(s) must inform the fund management platform of the intention to invest.
• During the transaction, the fund management platform must have sufficient information to assess the profitability/viability of the investment, so it can raise a red flag when needed.
• Finally, at the investment’s “end-of-life” phase, i.e. when the investment is to be disposed of, the fund management platform should be in a position to determine which of the proposed exit options is the most appropriate so it can ensure that all the efforts made throughout the process have not been made in vain.

Having an experienced management team to review, approve, and monitor investments is also one of the key functions of the alternative investment fund manager (AIFM). Having an AIFM means that strategic decision-making abilities and management have to be performed in-house, with sufficient substance, people, and systems to effectively manage the overall operations.

We can therefore see a convergence between the AIFM Directive and the OECD’s BEPS Action 6 in the level of substance, responsibility, and activity required. This is probably why, following Brexit, the biggest alternative investment funds managers have decided to transform their Luxembourg or Dublin investment fund and holding platforms into AIFM-compliant platforms.

So management teams in Luxembourg or Dublin must play their roles seriously during the whole lifecycle of the investment—however, in instances of tax audit, this is not enough. The teams should also be able to demonstrate (through documentation) that all the appropriate functions are being effectively performed.

Management teams, in order to adequately and promptly document the oversight of the business, need efficient IT dashboard tools that allow them, in one click, to access the compliance status of their entities. They must furthermore be able to perform risk management and compliance duties (according to FATCA/CRS, MIFID, AIFMD, and any other local requirements) smoothly and efficiently. Tailor-made software solutions already exist in this area.

Looking ahead, artificial intelligence (AI), robotic process automation (RPA), blockchain and digital ledger technology (DLT) will shape how alternative investment managers operate and even how investments are structured. RPA, for example, will enhance productivity, reduce costs, streamline processes, and limit operational errors. It will affect many routine tasks with limited added-value such as invoice processing or investor reporting, taking them over from human workers, who in turn will focus on more interesting and dynamic functions such as review, approve, and monitor investments

The oversight is becoming an increasingly important activity within the alternative investment fund industry notably because of the regulatory requirements for the AIFM conducting officers and the tax international developments (BEPS) obliging directors to understand the business into which they invest.

AIFMs understand the importance of creating strategies around tax technology. They are pursuing investments in these areas in order to transform the tax function into a strategic business aspect of the organisation. Now is the time to assess where you are in terms of substance and technology, where you want to go, and how to get there.