With almost 25 years of tax advisory experience, Teo specialises in fund formation and has structured numerous funds that invest in a diverse range of asset classes, such as hedge, real estate, infrastructure, private equity, venture capital, private debt/credit and digital assets. Besides structuring third-party funds, he is also involved in advising ultra-high net worth (UHNW) individuals in setting up their investment vehicles and management offices in Singapore. Tapping on his expertise in mergers and acquisitions, as well as international tax, Teo has also advised multiple clients in acquiring their investments across the Asia Pacific, Europe and US.
In the last 25 years of your career, what would you say are the key tax considerations relating to fund formation? Any differences depending on the asset classes?
As it is widely believed that a fund is a mere pooling vehicle, any tax should therefore only be levied at the investors’ and at the investments’ level. As a result, in the past, the main tax consideration has always been focused on ensuring that the fund achieves tax neutrality, a concept that is used to describe the non-imposition of taxes on income and gains and withholding taxes on profit repatriation and return of capital. This objective is quite simply achieved through setting up the fund in a jurisdiction with a favourable tax regime or through a tax transparent structure.
However, the key considerations relating to fund formation have evolved tremendously over time. Increasingly, we see added complexities arising from ensuring that the fund structure considers tax implications at the investment level. For instance, if you are setting up an open-ended Pan-Asian real estate fund, the structure must allow the fund to leverage on both treaty benefits and tax-advantaged domestic structures in the target location. These objectives must be balanced with the fund’s marketability, which is also important in determining the fund’s legal form and location.
The level of complexity varies across asset classes. Hedge funds possess relatively flat structures and are generally the least complex while setting up a fund that invests in hard assets such as real estate and infrastructure (including renewables) involves greater rigour. This complexity arises from multiple tax considerations on various levels, as such funds tend to have many layers of structures. Funds focusing on private equity, venture capital and debt possess moderate complexity. Lastly, complications in funds focusing on digital assets largely result from the fact that tax treatment of such assets are relatively untested, and many tax incentive schemes globally typically include only conventional capital market products but not digital assets.
Traditionally, funds are set up in tax-neutral locations such as the Cayman Islands but the fund management functions are often located in a different country such as the US, Singapore, Hong Kong, UK, etc. Are you seeing the onshoring of funds in Singapore and Hong Kong as an increasing trend and if yes, what are the possible reasons?
Such a trend has been observed in recent years and can be attributed particularly to changing policies, perceived risks and innovation in fund structures.
Setting up and maintaining funds in traditional tax haven countries such as Cayman Islands have become significantly costlier due to increased regulations. On the contrary, it is becoming more cost-competitive to set up funds in countries such as Singapore, especially because of government-issued grants to enhance attractiveness.
Furthermore, many institutional investors such as sovereign wealth funds and pension funds are moving away from such a structure because of the potential reputational risks. Certain family offices and UHNW investors are also moving away from such structures, fearing that association with such structures would result in them being targets of tax audits.
From a tax perspective, particularly for the purposes of accessing treaty benefits, if the fund and the holding company are set up in the same country, this could arguably reduce the risks of being accused of treaty shopping. For instance, many Asian-focused funds are set up as Singapore limited partnerships (LP) with wholly-owned subsidiaries in Singapore.
Another contributor is arguably the development of new fund structures offering fund managers and investors more flexibility than before and catering to the various needs of each segment. For example, Singapore fund managers may set up their fund vehicle in the form of a Variable Capital Company (VCC), LP or unit trust.
Could you briefly discuss the key benefits of domiciling funds in Singapore?
Singapore is a leading financial services hub and is regarded as being transparent, stable and a gateway to the Asia-Pacific region. It is renowned for having an open and well-regulated economy that is well-served by a vibrant ecosystem of service providers such as banks, tax and legal advisers.
Singapore is a leading financial services hub and is regarded as being transparent, stable and a gateway to the Asia-Pacific region. It is renowned for having an open and well-regulated economy that is well-served by a vibrant ecosystem of service providers such as banks, tax and legal advisers.
Using Singapore entities within a fund structure is ideal for several reasons. Singapore has a wide network of over 90 double taxation agreements and a flat corporate income tax rate of 17%. It has a measured approach to regulation with agencies such as the Monetary Authority of Singapore (MAS) and the Economic Development Board adopting pro-business policies.
Singapore is also a common law jurisdiction and offers a variety of legal entities and arrangements, such as companies (private limited and VCC), trusts or partnerships. To offer a conducive operating environment to the asset management industry, tax incentive schemes are also available for qualifying funds and asset managers.
What about those who want to set up a fund management company in Singapore? What do they need to consider?
First, the fund manager should consider whether the fund management company (FMC) is required to obtain a licence from the MAS to conduct regulated fund management activities in Singapore. There are two self-invoking licence exemptions whereby the FMC either manages a fund that invests solely in immovable assets, such as real estate and infrastructure funds; or provides fund management services to related corporations, such as members of the same group of companies. The second exemption is typically utilised by single-family offices (SFOs). If the requirements for exemption are not met, the FMC would have to apply for a licence with the MAS. They may apply for a Capital Market Services licence, where one key feature is the unlimited assets under management (AUM) (typically for mutual fund/hedge fund managers) or register with the MAS as a Registered Fund Management Company (typically for those who manage smaller funds).
Next, Singapore offers tax incentives such as the Section 13U (Enhanced-Tier Fund Tax Incentive Scheme) and Section 13O (Singapore Resident Fund Scheme) schemes, which provide for tax exemptions on certain income or gains derived by the funds. One key condition of note is that the fund must be managed by a licensed (or exempted) fund manager in Singapore.
Furthermore, FMCs may be eligible for a concessionary tax rate of 10% under the Financial Sector Incentive–Fund Management (FSI-FM) scheme. This is for fund management companies which manage only incentivised funds and commit to, amongst other things, growing their businesses (such as through AUM or headcount) in Singapore over a specified period.
Are there any specific rules governing the taxation of carried interest in Singapore?
No. In the absence of any deeming provisions in Singapore, the tax treatment of carried interest would prima facie follow its legal form. For funds managed in Singapore, it is common for carried interest to be structured as investment returns and paid out as dividends or partnership distributions if the carried interest recipients have invested a meaningful amount of capital to show alignment of interest with investors. Whilst less common, carried interest is sometimes structured as a performance fee payable to the FMC.
In what way is Singapore a favourable location for setting up a family office and what are the types of structures available?
Apart from the key benefits mentioned above, Singapore operates in a time zone which allows for greater convenience and ease of communication when servicing clients in Asia. The multi-racial make-up also brings multilingual capabilities. Singapore has a good reputation and infrastructure with an unbiased, fair court and legal system, a strong regulatory framework and a stable political environment.
The structures typically used by Singapore SFOs include private limited companies, VCCs and/or trusts. These allow flexibility and enable effortless assimilation into various categories of wealth planning structures.
What about someone who desires to set up a multi-family office (MFO) in Singapore? How is it different from setting up an SFO in Singapore?
One key difference lies in the licensing requirements. MFOs require an MAS licence to conduct fund management activities, while SFOs typically qualify for licensing exemption. A huge limiting factor for time-sensitive investments by MFOs lies with the approval process of the licence, which may take up to 9 months.
Furthermore, FMCs may qualify for the FSI-FM scheme, subject to conditions met. The intention of this is to incentivise fund managers to grow their AUM/fund management activities in Singapore. This scheme is more targeted towards MFOs since SFOs’ main objective is generally to grow and preserve family wealth. However, the MAS is prepared to approve FSI-FM applications made by SFOs on a case-by-case basis and if conditions are met.
INSPHERE was founded in 2013 by CEO Ben Adeline and CTO Oliver Martin, originally providing metrology consultancy, sub-contract management and training to manufacturing businesses including Rolls-Royce, Airbus and Jaguar Land Rover.
Industries such as aerospace, automotive and defence all employ highly automated manufacturing processes which rely on production lines of robots performing precise and repeatable actions.
Measurement technologies have traditionally been used to verify parts at the end of the production line. Faults or defective parts found at this stage are either scrapped or require expensive re-work. These faults can be caused when a robot is not set up correctly or drifts even slightly out of position. It can be problematic and laborious to determine the root causes in the production line resulting in costly downtime or poor-quality parts if problems are unresolved.
The Fund’s investment will be used to develop and accelerate the commercialisation of INSPHERE’s new products, build sales and scale the business.
RW Blears, with Partner Adam Lawrence and Associate Chris Spencer, acted as legal adviser to the Foresight Williams Technology EIS Fund.
Barclays has announced that it has teamed up with the UK Government to provide £1bn of development finance to help build thousands of new homes across England to help increase the pace and volume of housing provision.
Loans ranging from £5 million to £100 million, which will be competitively priced, are available for developers and house builders who are able to demonstrate the necessary experience and track record to undertake and complete their proposed project. Funding is open to new clients as well as existing Barclays clients, and will put greater emphasis on diversifying the housing market, as at present, almost two-thirds of homes are built by just ten companies.
A key priority of The Housing Delivery Fund is to support small and medium sized businesses to develop homes for rent or sale including social housing, retirement living and the private rented sector, whilst also supporting innovation in the model of delivery such as brownfield land and urban regeneration projects.
Launching the fund, John McFarlane, Barclays’ Chairman, said: “There is a vital need to build more good quality homes across the country. This £1bn fund is about helping to do exactly that by showing firms in the business of house building that the right finance is available for projects that help meet this urgent need.
“We are very pleased to be working with government to get the country building more homes, more quickly.”
Housing Secretary Rt Hon James Brokenshire MP, said: “My priority as Housing Secretary is to get Britain building the homes our country needs. This new fund - partnering Homes England with Barclays - is a further important step by giving smaller builders access to the finance they need to get housing developments off the ground.
“This is a fantastic opportunity to not only get more homes built but also promote new and innovative approaches to construction and design that exist across the housing market.”
Chairman of Homes England, Sir Ed Lister, said: “Homes England has been established to play a more active role in the housing market and do things differently to increase the pace, scale and quality of delivering new homes.
“The Housing Delivery Fund demonstrates Barclays’ commitment to the residential sector and will provide a new funding stream for SME developers to help progress sites and deliver more affordable homes across England.”
Today’s agreement with Barclays forms part of the Government’s wider commitment to increase the pace of housing delivery in England. Ministers have been clear on their ambition to achieve 300,000 new homes a year by the mid-2020s, which follows 217,000 homes built last year, the biggest increase in housing supply in England for almost a decade.
(Source: Barclays)
Camden Associates was founded 11 years ago with the objective to capitalise on overlooked opportunities in the financing markets. At that point, a lot of the traditional banks were pursuing large deals, paying no attention to the needs of smaller companies. As a chartered financial analyst, Jean-Claude Gonneau has been active in the field of emerging growth companies for years. Former banker at Donaldson Lufkin and Jenrette and General Manager of SG Cowen Europe - this is a space Jean-Claude knows well. Here he shares his insights with Finance Monthly.
What has been happening with Camden Associates since we last spoke in 2016? Are there any recent project or major milestones that you’d like to share with us?
2017 has been a very busy year for us with some major pieces of business done. As an international firm, we have scored closing one major deal, seeing a private equity fund taking 52% of the capital of one of our historic client, a real estate developer. We have been faced with some complicated transactions, which have however been highly satisfying as well.
At the moment, we are also in the final stages of the sale of a Ghana-based mining company to eastern investors. As expected, the mining sector is gathering steam and we have been active with two TSX-V listed mining companies. Finally, we are acting for a listed Canadian medical cannabis company. This definitely keeps us busy.
How has the mid-market sector fared in the past year ?
Things started quickly in January 2017 and have stayed very stable since then. As far as we can judge at this point, it is likely that 2018 will follow that trend, barring any unforeseen event.
What have been the issues that your clients face in relation to fund raising and project finance ?
The volume of new regulations just does not abate and is seriously harming international financing flows. As of 3 January 2018, MIFID II will add to the maze of new regulations that are meant to protect investors. Unfortunately, people creating these regulations have little to no idea about the final consequences of these new regulations. It seems likely that very large international banks will manage to adapt, but, in my opinion, it is medium-sized players that will be affected.
What are the issues that your clients face in relation to fund raising and project finance?
The evolution of the last few years shows that regional regulations are going in opposite directions with the effect of gradually closing markets.
European investors have rarely showed as little appetite as they currently have for American companies. This is largely due to new European regulations, but also due to a gradual lack of interest and understanding. Aside from the UK, European investors are shying away from the mining sector. A limited number of investors in Europe understand the gradual legalisation of cannabis in the US and Canada and its massive financial implications. What this means is that fund raising and project financing tend to operate on a regional basis. From our point of view, having a fairly strong international reach tends to help us to some extent, but it’s not a situtation one can really rejoice about.
What lies on the horizon for you and Camden Associates in 2018?
Camden is a specialised investment firm. We have positioned ourselves for trends which are starting to materialize. We do not think much further than that. We have to do our best for clients who have put their trust in us. We are very busy at present and our book is still pretty full.
I can’t predict anything going forward, as you need to work as hard for a deal that fails as for a deal that works. Simply put, it seems that the only certainty is that working hard is the order of the day and that of next year. As for success – only time will tell.
What differentiates Camden Associates from other investment firms?
We work with our clients as partners. Without proper and effective communication, there cannot be a successful financing. We constantly interface with potential investors and provide feedback to our clients. The feedback from the markets when it comes to valuation is not necessarily well received, but we believe that honesty rhymes with integrity. Our constant interaction with the buy-side allows us to provide our clients with company-specific or situation-specific IR execution, which integrates with capital markets strategies and planning.
Website : http://www.camdenassociates.co.uk/
Retail investors withdrew £3.5 billion from UK investment funds in June, according to Investment Association data released today.
By comparison, in the worst month of withdrawals during the financial crisis, January 2008, retail investors withdrew £561 million from UK investment funds. In October 2008, just after the collapse of Lehman Brothers, retail investors withdrew £493 million from UK investment funds. Total assets under management are now around twice as high as they were back then, but June 2016 was still an exceptional month for outflows.
The exodus was led by investors in the property sector, who withdrew £1.4 billion from these funds, leading to some funds suspending trading, and others imposing hefty dilution levies on those who did want to sell.
£2.8 billion was withdrawn from equity funds across the board, with £1 billion of net withdrawals from the UK equity sectors.
£464 million was also withdrawn from ISAs over the course of the month.
Laith Khalaf, Senior Analyst at Hargreaves Lansdown comments:
‘The scale of the exodus from investment funds in June is quite extraordinary, with the Brexit vote eclipsing the financial crisis in terms of putting the frighteners on retail investors in the short term.
The property sector saw the biggest outflows, as investors flocked to the emergency exits, concerned that the economic effects of leaving the EU would damage commercial property prices. Since the vote some property funds have been forced to suspend trading because of the high level of outflows, with others imposing high transactional charges on those wishing to sell. UK and European equity funds also saw heavy outflows over the course of the month, with fixed interest and absolute return funds being the main beneficiaries.
Clearly investors were rattled by the referendum, and switched out of assets they perceived to be at risk from a vote to leave the EU. UK investors who withdrew from equity funds are probably regretting this decision in light of the performance of the stock market since the referendum, and that goes in spades for those who cashed in their ISA allowance, losing that tax shelter forever.
This demonstrates the danger of events-based investing, because even if you do happen to guess the correct outcome, you still might not be able to predict the effect on markets and asset prices.
When it comes to elections and referenda, investors are better off voting with their polling cards rather than their finances. In these situations it pays to keep a cool head, to ignore the inevitable clamour, and to take a long term view on your portfolio.’
(Source: Hargreaves Lansdown)
Deutsche Bank’s Global Social Finance Group has announced the closing of the Essential Capital Consortium (ECC), a five-year $50 million (€47 million) social enterprise fund, which is part of its family of social impact funds first launched in 2005.
With a list of investors including Church Pension Fund, MetLife, Inc., Agence Française de Développement (the French Development Agency), Deutsche Bank, Calvert Foundation, Prudential Financial, Inc., the Multilateral Investment Fund, member of the Inter-American Development Bank Group, Left Hand Foundation, IBM International Foundation, Tikehau Capital, Salvepar, Cisco Foundation and the Posner-Wallace Foundation, the ECC will provide debt financing to social enterprises in the energy, health and Base of the Pyramid financial services sectors. The Swedish International Development Cooperation Agency (Sida) is also providing ECC with crucial credit enhancement support.
The ECC, which will finance 25 social enterprises including microfinance institutions (MFIs) expanding their offerings of financial products, has made its first round of loans to three organisations: Sproxil, a developer of a patented text message-based drug authentication system; Tiaxa, a provider of “nanocredits” to poor consumers in developing countries via mobile phones using big data analytics; and Arvand, a Tajikistan-based MFI providing innovative “green loans” to finance solar panels, clean cookstoves and other energy efficient products.
“The Essential Capital Consortium is a pioneering fund that aims to finance the growth of social enterprises as vehicles to achieve measureable benefits in improving the lives of the poor, bringing together well-respected and similarly motivated investors to fill an existing capital gap,” said Gary Hattem, Head of the Global Social Finance Group at Deutsche Bank. “As part of Deutsche Bank’s ongoing commitment to microfinance and the impact industry, the ECC provides responsive debt capital to support the next generation of social entrepreneurs globally who are redefining a market approach to addressing fundamental humanitarian challenges.”
