PwC IMRE News June 2009


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PwC IMRE News June 2009

  1. 1. Asset Management Asset Management News Insights & views from PricewaterhouseCoopers’ global Asset Management practice* June 2009 Featured inside: Interview with Dan Waters, UK Financial Services Authority Our view on Europe’s Alternative Investment Fund Managers Directive *connectedthinking
  2. 2. Contents Section A: Section B: A new order starts to emerge General stories 04 Striking a balance between regulation 16 Transfer pricing risk in Asia and innovation (an interview with 17 Enhancements to tax incentives for Dan Waters, Sector Leader for Asset Singapore’s investment management Management at the UK’s Financial industry Services Authority) 18 Even Islamic funds have been 06 Europe’s Alternative Investment Fund impacted by the crisis Managers Directive poses more questions than it provides answers 20 Forestry investment – a new global asset class? 08 A global approach to regulating hedge funds? 21 UK real estate: have we reached the bottom yet? 10 U.S. legislation targets investments in tax havens – changes on the horizon 22 Reclaiming EU dividend withholding tax 12 The game changes for prime brokers 24 Product simplicity reigns in a 13 The rise of bank-owned bear market administrators 25 New EU VAT rules and reporting 14 Opportunities swing to the east obligations 15 The many challenges of Australia’s REIT CFO 2 PricewaterhouseCoopers Asset Management News June 2009
  3. 3. Introduction Less than a year after the crisis in financial markets was hit at its worst, the shape of the asset management industry that may emerge is beginning to become apparent. In this issue of Asset Management News, we provide insights into some of the key developments around the globe. Within Europe, we describe the potential impact of the European Union’s draft directive on Alternative Investment Fund Managers (“AIFM”) and interview Dan Waters, the UK Financial Services Authority’s Sector Leader for Asset Management, about the effects of this and other regulatory developments. In the United States, we report on the Obama administration’s drive to target tax havens. We also analyse the significant changes affecting administrators and prime brokers. And in Asia, we showcase our research into China’s promising fund market. Through this publication, our goal is to share our understanding of today’s issues, challenges and opportunities that PricewaterhouseCoopers1 gains by working with businesses in the asset management sector around the world. We hope that this publication gives you some useful insights and we welcome any feedback you may have. Please do not hesitate to contact me, or any one of our global Asset Management contacts listed on the back page. Kees Hage Managing Editor PricewaterhouseCoopers (Luxembourg) +352 49 48 48 2059 1 “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International PricewaterhouseCoopers 3 Limited, each of which is a separate and independent legal entity. Asset Management News June 2009
  4. 4. Section A: A new order starts to emerge Striking a balance between regulation and innovation Dan Waters, Sector Leader for Asset Management at the UK’s Financial Services Authority (FSA), provides insight into the regulatory reaction to the financial crisis including the proposed EU Alternative Investment Fund Managers Directive. Q. What areas are you focusing on as you tighten up regulation of Dan Waters Financial Services asset management? Authority (UK) A. “These are tough times for asset managers and the collapse of equity markets has hit revenues very hard. People are looking to cut costs and in a people-intensive business there are not that many places to do so. We are very sensitive to where resources are being cut and to the depth of resources that are being retained. To the extent that firms view risk management and compliance as cost centres they can be disproportionately targeted for savings, which we think is the wrong thing to do. “We have had some significant issues globally, within Europe and in the UK on the liquidity of funds. Some asset classes are quite complex, and valuations are becoming quite demanding even in areas where this has not traditionally been the case. There have been issues with open-end real estate investment funds, and we have emerging concerns about corporate bond funds and their liquidity, especially given extreme volatility and anxieties around corporate credit. We are concerned that these funds are popular at a time when conditions are very testing. “We expect firms to be stress testing funds exposed to this – to have a good view of the impact of redemption requests and liquidity and to be treating customers fairly. This means treating customers who are redeeming, investing and holding funds equally fairly. “Post Madoff and Lehman, we are also looking closely at the way client assets are held in custodial bodies and the transparency of those arrangements.” Q. What is your view about proposed legislative changes in Europe? A. “On the legislative front, there are big changes coming down the pipe. We think that the UCITS IV Directive has progressed well, with thorough stakeholder consultation, consumer testing of initiatives and a robust impact assessment. This process has been conducted in a way that we think is exemplary and there will be good outcomes. The management company passport is to be welcomed. “The other major piece of legislation is the proposed EU Alternative Investment Fund Managers Directive. This has been understandably driven by enormous political pressure when we are living through what has been dubbed the Great Recession. We consider that changes in regulation are warranted. But we are concerned about the rapid pace of this and the lack of consultation with stakeholders. And we are worried about the unintended consequences of legislation that treats such a wide range of asset management businesses in the same way. “Fortunately, the European Parliament elections have intervened and will give us more time to collect feedback about the proposals in the directive. This is a huge priority for us. We need to create the window for meaningful consultation that the EU process has not allowed. We are running town hall meetings and will devote our annual conference in September to this important issue. “To the extent that the proposed directive diverges from the work that was done by the G20 in this area, it needs to be questioned. Furthermore, the underlying analysis needs to be produced to justify some of the proposals.” 4 PricewaterhouseCoopers Asset Management News June 2009
  5. 5. Q. Is the UK changing from a Q. To what extent do you think principles-based approach to the regulations likely to be a rule-based approach? introduced will affect the critical A. “If you look at what principles-based balance between strong regulation was about it was delivering regulation and innovation? outcomes. Instead of focusing on detailed procedures we wanted to focus A. “This is a difficult balance to strike and more on what was happening at the end whenever we get into a situation like of the day – in terms of the prudential today’s there are clarion calls for position of firms and how they were something to be done. The danger is that treating their clients. This has not something is done but because it was not changed, but we are becoming more given sufficient time it makes things intrusive and putting ourselves in a worse. The regulator is bound to make a stronger position to challenge firms. robust and deep analysis of what the This is both on the prudential side around problem is, what its drivers are in the business models and on the conduct of marketplace and how to effect change. business side.” “We would certainly not welcome the EU alternatives directive in its current form. Q. How does this affect the Now is the time for the industry and ARROW approach? interested stakeholders to give evidence about what the impact of this proposal A. “We are integrating some of these will be across hedge funds, private equity, ideas into the ARROW approach. real estate and other types of funds.” We did a lot of work on treating customers fairly. That has been embedded in the ARROW training and ARROW visits are looking at things like culture, remuneration and product design. We are modifying and strengthening ARROW to make it more intrusive and to deliver the results we want.” PricewaterhouseCoopers 5 Asset Management News June 2009
  6. 6. Section A: A new order starts to emerge Europe’s Alternative Investment Fund Managers Directive poses more questions than it provides answers If the EU enacts the Directive in its current form, it may impose a disproportionate regulatory regime on managers of alternatives funds that are not authorised UCITS. On 1 May, 2009, the European Union published its draft directive on Alternative Investment Fund Managers (“AIFM”), (the “Directive”). The Directive, as drafted, will radically reshape the alternative asset management industry in the EU, potentially James Greig requiring changes to AIFMs’ business models and significantly increasing the PricewaterhouseCoopers Legal (UK) regulatory demands on AIFMs, including increased capital, disclosure, risk +44 20 7213 5766 management and liquidity measures, reporting and other costs. The Directive also poses a number of questions about the accessibility of the EU’s markets to non-EU alternative fund managers and funds and how EU-based managers with funds or connections outside the EU are going to be able to continue to operate. In addition, the Directive has important implications for administrators, valuators, depositories, prime brokers and custodians and other service providers to AIF. Graham Phillips PricewaterhouseCoopers (UK) The AIFM is the EU’s response to comments in the G20 Communiqué, which referred +44 20 7213 1719 to the need for certain systemically important hedge funds to be regulated, and for financial regulators to have access to information necessary for the assessment of systemic risks and the tools necessary for effective macro-economic oversight. Macro- prudential risks associated with the use of leverage primarily relate to the activities of hedge funds, however, the Directive goes further, proposing the creation of a comprehensive regulatory environment for all alternative investment fund managers, Olwyn Alexander including those managing private equity, commodity, real estate and infrastructure PricewaterhouseCoopers (Ireland) funds. The Directive not only addresses systemic risk but also, with a key focus on +353 1 792 871 micro-prudential issues and risks associated with inadequate governance arrangements, has a key objective of ensuring a high level of consumer and investor protection. This will be achieved by specifying a detailed common framework for the authorisation and supervision of AIFM. It could well be argued that this level of consumer protection goes beyond what is actually required by the Professional/Qualified investors, who will be the only Régis Malcourant categories of investor to whom participations in AIFs will be able to be sold. It may also PricewaterhouseCoopers (Luxembourg) prove expensive not only for the AIFM, who may well have to adopt costly policies and +352 49 48 48 2230 procedures to satisfy the Directive’s requirements, but also indirectly for those investors to whom it is likely AIFMs will seek to transfer those costs by recharging the AIF. Applying to a wide range of alternatives managers The Directive affects the managers of hedge funds, private equity funds, real estate funds and infrastructure funds, as well as REITs, listed investment trusts and many other forms of collective investment vehicle which have previously been outside the scope of financial services regulation. AIFM that are divisions of EU banks or insurers, or are authorised pension fund managers and various categories of sovereign wealth funds, however, are excluded from the scope of the Directive, putting those institutions at a relative competitive advantage. 6 PricewaterhouseCoopers Asset Management News June 2009
  7. 7. Section A: A new order starts to emerge Fund managers established outside the EU will be able to seek authorisation from a member state in order to market shares or units in any AIF in the EU, subject both to themselves and the jurisdictions in which they are based meeting certain stringent conditions. The Directive, as drafted, will apply to all A disproportionate regulatory AIFM with assets under management in excess of €100m, irrespective of the regime? number of AIF managed or the nature of The Directive has the potential to be those assets. It is unclear if this is net or beneficial. There will be merits to a gross assets but the definition does uniform platform of regulation and, include assets “acquired through the use certainly, a passport for funds and their of leverage”. AIF with assets up to €500m managers in the AIF industry will be an under management that do not use advantage. However, if enacted in its leverage and prohibit investor current form, the Directive risks imposing redemptions for five years from a disproportionate regulatory regime on subscription are excluded (which may the managers of all collective investment provide a significant competitive vehicles which are non-qualifying UCITs advantage to Shariah compliant AIF and and which are intended only to be other unleveraged AIF). The Directive is available to sophisticated investors, deliberately not sector specific. For as well as seeking to achieve tax-related example, as the thresholds are arrived at objectives which are inappropriate for a by the aggregation of all funds under Directive intended to provide a framework management (rather than on a per fund for regulating managers. It also leaves the basis), real estate funds which are position of established funds that are managed professionally are likely to come already fully invested unclear. within its scope, although the systemic risk of such funds is questionable. The time for consultation on the Directive is likely to be very short. The draft will Fund managers established outside the now be sent to the European Parliament EU will be able to seek authorisation from and European Council, where the a member state in order to market shares Commission expects it to be the object of or units in any AIF in the EU, subject both intense political discussion and to themselves and the jurisdictions in negotiation. If political approval on the which they are based meeting certain Commission’s proposals is reached by stringent conditions. These include the end of 2009, the Directive could come determinations by the EU Commission as into force in 2011. to equivalence of the law and regulatory supervision in non-EU member countries It is crucial that industry participants with laws and supervision in the EU, and assess the potential impact of the the existence of effective information proposed Directive immediately and act sharing agreements on tax matters in now, so that they can seek to influence accordance with the standards laid down the shape of the final Directive and its in Article 26 of the OECD Model Tax implementing regulations, and, to the Convention. extent necessary, start planning for the changes the Directive will require. PricewaterhouseCoopers 7 Asset Management News June 2009
  8. 8. Section A: A new order starts to emerge A global approach to regulating hedge funds? The International Organisation of Securities Commissions (“IOSCO”) advocates a sensible way of regulating hedge funds, which strikes a good balance between ‘micro-prudential’ and ‘macro-prudential’ considerations, so minimising the risk they pose to the financial system. In response to the financial crisis in its November 2008 statement, the G20 advocated appropriate regulation and oversight for systemically important institutions, mentioning hedge funds specifically. At the same time, it stressed the need to ensure that “all Wendy Reed financial markets, products and participants are regulated or subject to oversight, PricewaterhouseCoopers (Belgium) as appropriate to their circumstances”. +32 2 710 7245 This rather broad-reaching statement was not repeated following the April 2009 summit but the focus on systemically important institutions, including hedge funds, remained. In effect, the Declaration on Strengthening the Financial System, which was annexed to April summit’s statement, stated: “Hedge funds or their managers will be registered and will be required to disclose appropriate information on an ongoing basis to supervisors David Sapin or regulators, including on their leverage, necessary for assessment of systemic risks PricewaterhouseCoopers (US) that they pose individually or collectively. Where appropriate, registration should be +1 703 918 1391 subject to a minimum size. They will be subject to oversight to ensure that they have adequate risk management. We ask the Financial Stability Board (FSB) to develop mechanisms for cooperation and information sharing between relevant authorities in order to ensure that effective oversight is maintained where a fund is located in a different jurisdiction from the manager.” This was further supported by the G20’s position on tax havens and non-cooperative offshore jurisdictions. Adams Chan Some question whether hedge funds or their managers are systemically important. PricewaterhouseCoopers (Hong Kong) +852 2289 2784 Industry claims that it was not a major cause of this crisis are well-founded. Nevertheless, there is growing recognition that actions the hedge fund industry was forced to take as the crisis unravelled did exacerbate the markets’ problems, thus having a systemic impact. Although the industry itself is not systemically important in size (the hedge fund industry is estimated at just $1.4 trillion of assets under management), leading industry players do recognise that the crisis has showed them to be ‘systemically important institutions’2 and that, as a result, they should be subject to appropriate oversight in the future. G20 requirements The G20 demands essentially three things: i) hedge fund or hedge fund manager registration, ii) adequate risk management systems and iii) appropriate levels of transparency vis-à-vis markets and regulators. These should be underpinned by consistent, enforceable industry standards. A consultation report issued by IOSCO in March 20093 goes a long way to addressing all these issues. Importantly, it stresses that “it is very important to emphasise that any regulatory measures or standards need strong collective global action and application – as the hedge fund industry is highly global and mobile”.4 Looking at these various points, industry bodies have made progress at the global level towards identifying best practice standards. A group of key hedge fund associations, representing firms on both sides of the Atlantic, have set up the hedge fund matrix comparing existing industry codes.5 According to Reuters, on 12 March, three associations (PWG, MFA and AIMA) wrote to the Financial Stability Forum confirming their commitment to converge on a unique set of best practices as required by the G20. There is still some way to go in this regard, however, as the comparative tables in the hedge fund matrix clearly show and, as IOSCO points out, although the existing codes may be quite comprehensive, “two main issues should be highlighted, the lack of regulatory status and of consistent implementation”. 8 PricewaterhouseCoopers Asset Management News June 2009
  9. 9. Section A: A new order starts to emerge In terms of registration, the requirement regulators in IOSCO and the fact that business models, investment strategies for fund manager registration or many hedge funds (both public or private) and risk management processes of authorisation exists in many countries in the region are domiciled in other the funds. now.6 The notable exception at this stage jurisdictions (e.g. EU), it is envisaged that The one area IOSCO does not address in is the US; however, a recently proposed the aforementioned move taken by the any great detail is perhaps the most bill would require hedge fund managers regulators in Europe and US may impact important in terms of transparency: the to register with the Securities and the existing approach adopted by their type of information to be shared with the Exchange Commission (SEC). Asian counterparts in different ways. regulators from ‘systemically important’ It seems unlikely that, in the current Consequently, the compliance standards hedge funds/managers to permit ‘macro- circumstances, this will struggle in the on hedge funds (and hedge fund prudential’ supervision. It does, however, same way as earlier SEC moves in this managers) will probably be increased. stress that the regulators themselves direction. Nevertheless, it is worth noting Traditionally, the risk posed by hedge have to be in a position to use this that in spite of IOSCO’s talking about fund managers as counterparties to information effectively. IOSCO is not these two in the same breath, registration financial transactions was controlled convinced that, at present, regulators and authorisation are necessarily not the largely through their relationship with one have the resources to do so adequately, same. If they provoke similar levels of prime broker. More recent moves by thus creating a potential ‘moral hazard’. oversight, however, this difference should hedge fund managers towards multiple be inconsequential. That said, the IOSCO paper provides a prime broker relationships, perhaps with a sound analysis and reasonable proposals view to managing their own counterparty Removing conflicts of interest risk, has reduced the validity of the with regard to the future regulation of hedge funds. In many ways, it strikes a Conflicts of interest exist currently in the former as an effective risk buffer against good balance between ‘micro-prudential’ way the industry is structured in some the financial markets generally. The crisis approaches and ‘macro-prudential’ jurisdictions. IOSCO noted that “many has also underlined that hedge fund considerations. This saves it from falling managers both manage hedge funds and managers need to manage a wider range into the ‘fallacy of composition’ trap in to raise capital for them and in certain of risks more effectively, including market, which banking supervisors fell: believing cases, administer, value and safeguard credit, operational and, importantly, that oversight of individual financial the assets”. Naturally, as part of the liquidity risks. As a consequence, institutions can protect the system as thinking around an adequate risk IOSCO has recommended the a whole. management framework, there is growing establishment of comprehensive and focus on effective segregation of different independent risk management and facets of the hedge fund value chain in compliance functions, concepts which 2 See, for example, comments of Segun Aganga are closely aligned to common practice in (Goldman Sachs) at the European Commission order to remove the risk of conflicts of March 2009 hearing on Private Equity and Hedge interest. EU requirements have long other financial sectors (banking, securities Funds: supported independent depositaries and and insurance) in the EU but which, investment/alternative_investments_en.htm custodians (and segregation of client nevertheless, could still prove challenging 3 Hedge Funds Oversight: Consultation Report by assets), and existing national for some fund managers. From the (small) Technical Committee of the International Organisation of Securities Commissions, March 2009 requirements for hedge funds – and fund manager perspective, the principle (responses due 30 April 2009) indeed Asian and European practice and of proportionality (the requirements 4 Ibid: Paragraph 109 the geographic split of the industry – should be consistent with the nature, 5 See support independent administration and scale and complexity of the organisation) 6 “In most members’ jurisdictions hedge fund advisers independent valuation verification to must be applied. and managers are subject to licensing, registration or some extent, although these eligibility requirements.” IOSCO Consultation Report, requirements could and, most likely, will Improving transparency Para 96 be strengthened. U.S. based funds have The third G20 requirement relates to not been subject to the same types of enhanced transparency, both towards the requirements regarding independent markets and regulators. IOSCO notes custodians and administration, but are that the informational asymmetries which seeing increasing demand from their exist between hedge fund managers and investors regarding the use of their clients may belie the industry’s independent, third-party administrators. contention that sophisticated and The SEC is also considering rules professional investors are capable of requiring annual “surprise” audits of making informed decisions. The advisers which maintain custody of client consultation report also notes that while assets. There is definitely a move in the there are good commercial reasons for US towards the EU approach to funds and their managers to provide independent custody and administration. information to investors, direct creditors In Asia, while the “segregation and counterparties, “some aspects of requirements” are mandatory for hedge investor information may not be as funds which are offered to retail investors transparent as it could be”. IOSCO, (and which are subject to regulators’ therefore, advocates enhanced supervisory/authorisation requirements), disclosures to investors in terms of the given the participation of the Asian actual investment products as well as PricewaterhouseCoopers 9 Asset Management News June 2009
  10. 10. Section A: A new order starts to emerge U.S. legislation targets investments in tax havens – changes on the horizon The economic crisis has paved the way for potential reactionary U.S. legislation that could significantly impact hedge funds and alternative investment funds. The alternative investment fund industry has been the target of increased focus by the U.S. government, evidenced by proposed legislation and public statements made by President Obama and Treasury Secretary Geithner. On May 4, 2009, Obama released Allison Rosier information detailing the international tax proposals that are part of the Administration’s PricewaterhouseCoopers (US) Fiscal Year 2010 budget. The U.S. Treasury Department released additional budget +1 646 471 5511 details in a publication known as the “Green Book” on May 11, 2009. The international proposals are focused primarily on limiting the deferral of U.S. taxation on the foreign earnings of American corporations but also target a range of activities in tax haven jurisdictions. Several of the “tax haven” proposals seek to curb tax avoidance and enhance transparency for U.S. funds that may be held offshore. The following proposals are the most relevant for the investment management industry: Foreign bank account reporting The current U.S. Administration believes that wealthy U.S. citizens are evading taxes by hiding money in offshore bank accounts in tax haven jurisdictions. To deal with this perceived abuse, the Internal Revenue Service has increased the scope of informational returns in the U.S. The administration is proposing to further expand who may be required to file such information as well as to increase the penalties associated with such filings. U.S. fund managers and their funds are subject to these filing requirements which can trigger monetary and criminal penalties if information is omitted or incorrectly filed. As a result, investment managers should be aware of the current filing requirements for U.S. owned and controlled foreign bank accounts as well as the application of such rules to their funds. Taxation of foreign feeders as U.S. corporations U.S. Senator Carl Levin recently introduced a bill entitled, “Stop Tax Haven Abuse Act.” One provision of this bill would tax foreign corporations organised in tax haven jurisdictions as U.S. corporations if managed and controlled in the U.S. If enacted, this provision would directly impact most U.S. managed foreign feeder funds that are typically organised as corporations in order to facilitate investments from U.S. tax exempt organisations as well as non-U.S. investors. Under this proposal, these foreign funds would be subject to an entity-level tax in the U.S. It is interesting to note that this provision has not been incorporated into Obama’s international tax proposals but it is possible that portions of Levin’s bill could still become law during the course of Senate action on tax legislation this year. Taxation of carried interest as ordinary income In many hedge funds and private equity funds, general partners structure their compensation as an incentive allocation that is commonly referred to as “carry,” reflecting a percentage of profits generated by the fund’s investments in exchange for providing services. Since the carry is structured as an allocation of income from a partnership, the income retains the same character as generated at the fund level (i.e., investment income). In private equity funds for example, managers typically seek to 10 PricewaterhouseCoopers Asset Management News June 2009
  11. 11. generate long term capital gain income Entity classification rules for Use of swaps to avoid U.S. which is subject to a lower rate of tax in the U.S. Part of President Obama’s foreign entities withholding tax on dividend proposed FY2010 federal budget includes Under current law, many foreign entities income a proposal to change the tax treatment of of U.S. businesses can elect to be U.S. source dividend income is generally carried interests from flow-through to disregarded for U.S. tax purposes by subject to a 30% withholding tax if ordinary income. The U.S. Treasury Green making a “check the box” election which received by a non-U.S. investor in a non- Book states that a partner’s “services is filed on Form 8832. As indicated in treaty jurisdiction. In contrast, if the same partnership interest” income would be President Obama’s budget proposals, investor received an in-lieu of dividend taxed as ordinary income, effective for there is a perception that foreign payment as part of an equity swap, such taxable years beginning after December disregarded entities are being used for amounts would not be subject to U.S. 31, 2010. The administration proposal tax avoidance purposes. The U.S. withholding tax. The U.S. government also includes anti-abuse provisions for Administration has proposed that a looked closely at this issue in a hearing “disqualified interests,” such as foreign corporation can only elect to be held by the Senate Permanent convertible or contingent debt, an option disregarded if the single owner is Subcommittee on Investigations (“PSI”) in or derivative instrument. House Ways and organised in the same non-U.S. country September 2008. The findings of this Means Committee members Charles as the wholly owned subsidiary or if the committee can be found in the Senate Rangel and Sander Levin have each owner is a U.S. person. While many PSI report dated 11 September, 2008. introduced bills that would change the tax hedge funds and private equity funds use Proposed legislation to change the way treatment with respect to partnership foreign disregarded entities for a variety this income is taxed if received through a allocations that are received not pursuant of business reasons, it appears that this swap contract was submitted by Senator to invested capital. If enacted, this proposal would have a more significant Carl Levin as part of the Tax Haven legislation would not only impact the impact on private equity investments in Abuse Act and most recently included in investment fund industry but also real non-U.S. jurisdictions. While the intent of the Administrations FY2010 budget and estate and oil and gas partnerships. the proposal is to limit investors from detailed in the Treasury Department’s Successful lobbying prevented the netting income subject to high tax rates Green Book. It is not clear how this enactment of this provision a few years with amounts subject to a lower tax in change in rule would operate in order to ago when it was first introduced, but a different jurisdiction, as currently avoid double taxation on U.S.-source given the current composition of contemplated this proposal would exceed dividend income, but the change in Congress and its inclusion in the Obama the scope of the perceived abuse. treatment of swaps would have an impact administration’s budget, it is likely that on the structure and use of equity swaps the tax treatment may change in by non-U.S. investment funds. this area. PricewaterhouseCoopers 11 Asset Management News June 2009
  12. 12. Section A: A new order starts to emerge The game changes for prime brokers Learning from the past year’s market crisis, and especially the Lehman Brothers insolvency, prime brokers are evolving their operating models to win market share and protect profitability. The past year’s severe market dislocations and stresses – including the credit crunch, liquidity crisis, discovery of Ponzi schemes and the impact of the Lehman Brothers insolvency – have changed the investment management industry’s priorities. Investors Darren Ketteringham are becoming more discerning about their investment criteria. They are focusing on PricewaterhouseCoopers (UK) ensuring that assets and their associated risks are well managed, with more +44 20 7213 5255 transparency and reporting over transactional and operational activities. At the same time, hedge funds have lost confidence in their prime brokers. The Lehman insolvency has heightened concerns over asset security and protection. Hedge funds are increasingly renegotiating their prime broker agreements, revising and often reducing their rehypothecation levels. They are insisting that their unencumbered assets (those assets not subject to rehypothecation) are placed into segregated accounts, which afford better protection and speedier access in stress scenarios such as broker insolvency. Both investors and hedge funds are seeking increased assurance about the manner in which assets are controlled, secured and managed when in the hands of their brokers and custodians. Profitability pressure There are multiple pressures on prime brokers’ cost bases. Hedge fund clients are becoming more demanding at a time when there are fewer assets to lend. Reduced levels of rehypothecation are combining with asset managers’ and banks’ diminished appetite for lending securities, and jurisdictional bans on short selling, with the effect that there are fewer assets available for prime brokers to finance, borrow and loan. This in turn is increasing their funding costs. In addition to increasing funding costs, further costs are being incurred as a result of client demand for more assurance, risk management and reporting. There is also an expectation that the cost of regulation will be higher going forward. Regulators will, no doubt, be looking to revise and enhance existing client asset (including client monies) rules in response to recent market events, to ensure appropriate lessons have been learned, and to help ensure client assets are better protected going forward. Revising operating models Faced with these issues, prime brokers are revising their operating models. They are responding to client needs by tailoring their products and services, improving the control environment, and increasing the transparency and quality of reporting. Operational structures are being revisited, with some players considering bankruptcy- remote vehicles. These would segregate client assets, so allowing continued and immediate access in insolvency. In addition, questions have arisen over role, choice and independence of custodian and sub-custodian relationships. The change in operating models, will undoubtedly impact pricing. Fees will need to be unbundled to reflect required service levels and client demand across transactional, custodial and administrative activities. Agility will be rewarded The rules of engagement between investors, hedge funds and their prime brokers have significantly changed. We have already witnessed a big shift in prime broker market share since the end of 2008. Those prime brokers which are most agile and who respond most appropriately to changing market conditions, and client demand, have a 12 PricewaterhouseCoopers unique opportunity to sustainably increase market share and protect profitability. Asset Management News June 2009
  13. 13. Section A: A new order starts to emerge The rise of bank-owned administrators As independent administrators become essential to hedge fund operating models, this is accelerating the consolidation of the hedge fund services industry and leading to convergence between banks and administrators. When a Swiss private bank, one of the shopping’, including lines of credit, cash world’s largest investors in hedge funds, management, custody and global trustee demanded in late 2008 that all of the services. In addition, direct securities hedge funds it invested in should be lending by large hedge funds is increasing Keith Caplan independently administrated, this was the the pressure on administrators to support PricewaterhouseCoopers (US) latest and one of the paramount events their transaction bookkeeping, settlement, +1 646 471 1463 set to change the face of the fund collateral management and margin administration industry. requirements. Recent events, including problems with Hedge fund managers in particular want valuation transparency and trading activity administrators to protect them from validation, that have come to light are counterparty risk. By using the Ian Drachman increasing investor anxiety. Since then, administrator as a neutral, third party PricewaterhouseCoopers (US) many large US hedge funds have retained transaction facilitator and central +1 646 471 2095 administrators (Asian and European counterparty, they considerably reduce hedge fund operating models typically the danger of counterparties losing assets already included them) in order to quell through the bankruptcy or fraud of other investor fears. In this way, they have split third party counterparties. Once again, the roles of investment management and this favours the administrators owned by valuations and accounting. This also banks with strong balance sheets which pre-empts likely Securities & Exchange are willing to take on credit risk with Commission regulations to make hedge funds. independent administration mandatory. The credit crisis, and its impact on the Technology enables hedge fund industry, is having a profound As ever, technology is the key enabler. impact on administrators. The large hedge The leading fund administrators recognise funds are favouring those administrators that their IT architectures need to be with the capital strength to make them flexible enough to accommodate new credit worthy counterparties. They are products and more complex portfolios, also looking for administrators that can while providing consistent and accurate offer the widest range of services, often computations of valuations and risk including those typically delivered by exposures. Hedge funds are also looking banks. All of this is favouring bank-owned to fund administrators for straight- administrators. through-processing platforms that This turn of events is placing the have multi-market, multi-asset class and remaining independent administrators, multi-entity capability. This minimises which lack capital strength and scale, at a reliance on manual processes and, competitive disadvantage. Consequently, consequently, reduces operational risk consolidation is accelerating and banks and operating costs. are likely to take the opportunity to What all of this means is that for the acquire niche operators to build out their banks with strong credit ratings there is fund administration offerings – with a an opportunity to develop fund focus on higher margin services. administration businesses with high quality earnings. At the same time, Converging with banks current events are accelerating consolidation in the industry. There is still Indeed, as hedge fund managers look to room for independent operators, but they administrators for a broader range of will be fewer and differentiate themselves services, this is acting as a catalyst for through superior technology offerings and convergence with banks. Hedge funds a focus on alternative investment niches. favour bank-owned models for ease of access to facilities and ‘one-stop PricewaterhouseCoopers 13 Asset Management News June 2009
  14. 14. Section A: A new order starts to emerge Opportunities swing to the east In spite of substantial fund redemptions, foreign fund managers operating in China remain optimistic about the growth of their businesses. The greatest opportunities for growth in asset management are swinging to the east. This is confirmed by PricewaterhouseCoopers’ Foreign fund management companies in China 2009 survey, published in April 2009, which revealed a distinct sense of Robert Grome optimism among these companies’ senior executives, in spite of substantial recent PricewaterhouseCoopers (Hong Kong) fund redemptions. +852 2289 1133 While expecting zero growth in assets under management in 2009, they predict a significant improvement over the next three years. Indeed, the majority of companies surveyed expected expansion in assets exceeding 20% per annum on average over the next three years, with profits expected to increase correspondingly. So, in spite of the current market malaise, foreign fund managers remain resolutely committed to China. There is no suggestion that the financial crisis would lead to scaling back or the sale of joint venture stakes in Chinese fund management companies. Of the 29 CEOs and senior executives of foreign fund management companies interviewed in Beijing, Shanghai, Shenzhen and Hong Kong in January and February 2009 almost half expressed ‘maximum’ commitment to the Chinese market. Yet, the managers also point out that the overall pace of growth will depend on a number of factors that are far from certain. Growth factors The first factor influencing the rate of growth is the timing of the end of the equity bear market and the recovery in the Chinese and other international economies. The bear market is believed to have undermined local investor confidence, inflicting some medium-term damage. A second factor is that foreign fund managers would like the China Securities Regulatory Commission, the local regulator, to relax controls over both the timing and number of new products that can be launched. This is important because the controls inhibit foreign fund managers’ opportunity to gain competitive advantage through innovation. The third key issue is distribution. China’s banks are the most important distribution channel for funds, yet as the banks themselves market more proprietary funds so this poses a threat to foreign fund management companies’ distribution. The foreign fund managers plan to overcome this through superior investment performance, better client service and stronger brands. The better resourced ones also plan to expand into second tier cities – indeed some have already done so successfully. In a related fourth point, the fund managers surveyed highlighted competition from domestic competitors as a particular challenge for their businesses. Future opportunities Overall, however, China’s foreign fund management community remains optimistic. They see a range of future opportunities arising from Qualified Domestic Institutional Investor funds, segregated accounts, capital guaranteed funds, balanced funds, equity funds, private equity funds, real estate funds and new lines of business in investment advisory and pensions. As for the pace of change, the severity of the financial crisis means that China’s authorities are likely to remain cautious about market liberalisation for now. 14 PricewaterhouseCoopers Asset Management News June 2009
  15. 15. Section A: A new order starts to emerge The many challenges of Australia’s REIT CFO As one of the most securitised real estate markets, Australia is also one of the most transparent. This makes the REIT CFO’s challenges and opportunities especially visible. In the early part of this decade, Australian and lenders are increasingly demanding REIT CFOs spent their time building regular and more accurate financial integrated real estate businesses. forecasts, and equity is increasingly Developers acquired fund managers, and difficult to source. Indeed, some REITs are Mark Haberlin REITs took development risk to increase considering issuing bonds that rank pari PricewaterhouseCoopers (Australia) yield. The REIT sector became complex passu with secured lenders, which may +61 2 8266 3052 and risky – yet investors accepted help encourage investors to move out decreasing yields and benefited from of cash. increasing asset values. Leverage was For many years, REITs have distributed ramped up, and good profits and 100% of cash earnings, sometimes more, bonuses were enjoyed. but this is no longer the case. For many How the world has changed! In 2009 we retired investors, a distribution cut is the face many challenges; macroeconomic last straw. For other investors, it is the conditions are poor, and investor responsible thing to do. For the CFO, how confidence and wealth are shattered. much cash is left to pay distributions is To make matters worse, banks are the last piece of the puzzle. increasingly risk-averse and demanding – and staff are increasingly disengaged, A sustainable strategy with remuneration schemes no longer calibrated to retention and incentive The best CFOs are focused not just on objectives. The CFO is caught in a perfect surviving, but thriving. They see storm – not only faced with solving competitors who are relatively more immediate problems but also focused on distressed, and see opportunities that developing sustainable strategies. others cannot pursue. They see the return of syndicates and extensive Immediate challenges consolidation, capital raisings, de- staplings7 and ‘take private’ transactions. The most immediate challenges relate to But most of all they continue to see real asset valuations, which have fallen by as estate as an attractive asset class, albeit much as 20% in mid 2009. This threatens in a simpler world with lower margin loan-to-value ratio covenants, allowing product for risk-averse investors. lenders to demand asset sales, facility Articulating a strategy which responds to repayments and increased margins – tomorrow’s opportunities is the first step. resulting in lower profits and ‘de-risked’ The strategy needs to address the businesses with slower growth. changes above, as well as to allow for De-leveraging requires re-assessing potential regulatory change and derivatives needs and unwinding complex prolonged or further economic investment structures. Many of these deterioration. The best CFOs are no structures were well suited for a growth longer focused on budgets, but on environment but are difficult to scenario planning, and are more regularly deconstruct, particularly as there is every speaking to investors and financiers. chance that currency and interest rate While still navigating through the storm, movements are adverse, and tax liabilities the best prepared are already looking can be easily triggered. Management towards the horizon and planning for what requires surgical precision. might come next. Indeed, the optimists Ordinarily tenant credit quality is not an see clearing skies and opportunities area of concern, but the economic inherent in any crisis. The best and the environment is causing rents to be strongest will have first mover advantage. renegotiated and leases are not being renewed. This is leading to lower forecast 7 The uniquely Australian practice in which two or rental income, declines in asset values more units or shares that have been traded and difficulty in funding assets. Investors together are separated. PricewaterhouseCoopers 15 Asset Management News June 2009
  16. 16. Section B: General stories Transfer pricing risk in Asia Asia’s diverse transfer pricing rules and audit practices mean this is a complex issue for fund managers. With many managers downsizing their businesses, now is a good time to revisit their transfer pricing policies. Globally, transfer pricing is regularly cited as the number one international tax issue for financial services tax payers. In the fund management industry, the breadth of international audit activity and tax authority commentary means that there is no question that transfer David McDonald pricing is a real tax risk. PricewaterhouseCoopers (Hong Kong) Transfer pricing rules are typically designed to ensure that tax payers price their +852 2289 3707 transactions with related parties on an arm’s length basis. In many countries, the transfer pricing legislation also includes a requirement to retain transfer pricing specific documentation, and there are often significant penalties for non-compliance in this area. What of Asia? The reality is that almost all countries in Asia now have some form of transfer pricing regulation, including documentation compliance requirements in some countries. In China for example, the introduction of the new corporate income tax law in 2008 Ryann Thomas coincided with the introduction of detailed new transfer pricing legislation, and more than PricewaterhouseCoopers (Japan) 100 pages of transfer pricing guidance. In 2008 China also introduced contemporaneous +81 3 5251 2356 documentation requirements and a transfer pricing specific penalty regime, and began investing significant time and effort in training its tax inspectors to deal with transfer pricing issues, including those relating to the financial services industry. Even in Hong Kong, which has traditionally been considered a relatively benign jurisdiction from the transfer pricing perspective, the tax authorities have indicated their intention to issue two tax circulars in 2009, focused specifically on the interpretation of Hong Kong’s transfer pricing legislation Shin-Jong Kang and case law. It is, therefore, likely that transfer pricing will come under more scrutiny even PricewaterhouseCoopers (Korea) in Hong Kong going forwards. +82 2 709 0578 Specific issues for fund managers For fund managers, transfer pricing means ensuring that the management fees (and performance fees, if relevant) paid by the fund are reasonably allocated between the different companies and partnerships making up the management group. In many cases, the fund manager has a clear geographical nexus, and the focus of the transfer pricing exercise is on remunerating its satellite offices around the world – often using a mark-up on full costs. Audit activity in Asia to date has often been associated with tax authorities questioning the application of this type of mark-up on costs methodology, and attempting to implement, under audit, their own form of profit or revenue split. In addition, tax authorities often investigate the taxable status of the profits/gains of the fund, or overseas management companies, and question whether part or all of those profits/taxable gains should be taxable in the local jurisdiction. Of course, Asia is a large region, and not all tax authorities are playing on the same field. To date, for example, a large amount of audit activity has been focused in Japan and Korea. In Japan, audits have targeted the entire fund management industry: from large, traditional fund managers through to private equity, real estate and hedge fund specialists. In addition, the transfer pricing at issue in those audits has related to both fund management/advisory activities and capital raising/distribution. In contrast, other countries have turned their attention to transfer pricing documentation and developing their experience. This may change over time as those other tax authorities gain more transfer pricing experience generally, and become more familiar with the fund management industry in particular. Effect of the downturn In 2009 many fund managers may have to revisit their transfer pricing policies, regardless of the approach they have adopted historically. Management and performance fees are down, offices are being rationalised, and market data from past “good” years is becoming less relevant in the current economic climate. At the very least, all of these changes should lead tax payers to ask themselves first, whether their business has changed, and secondly, whether their transfer pricing method continues to be appropriate in the current environment. In conclusion, transfer pricing is and will continue to be a real issue for fund managers with operations in Asia. In fact, the array of transfer pricing rules and regulations in Asia, and the differences in audit practice amongst Asian tax authorities, mean that transfer pricing may 16 PricewaterhouseCoopers currently be more of an issue here than elsewhere in the world. Asset Management News June 2009
  17. 17. Section B: General stories Enhancements to tax incentives for Singapore’s investment management industry The 2009 Budget was presented by the Singapore government on 22 January 2009. The following measures announced in relation to the investment management industry generated considerable excitement despite the current market downturn. The 2009 Budget proposed certain The 2009 Budget announcements expand enhancements to the tax incentive regime these definitions. The notable additions applicable to the investment management are qualifying Islamic investments, Anuj Kagalwala industry. These are: emission derivatives and adjudicated and PricewaterhouseCoopers (Singapore) non-adjudicated liquidation claims. +65 6236 3822 Introduction of an enhanced tier Goods and Services Tax (GST) An enhanced tier (ET), effective from 1 April 2009 to 31 March 2014, has been remission for Singapore funds introduced.9 ET status entitles FMs and The exempt nature and character of fund the funds they manage to certain income is such that Singapore funds Lim Maan Huey additional benefits, including: generally have a problem registering for PricewaterhouseCoopers (Singapore) GST and, therefore, recovering the input • No restrictions imposed on the +65 6236 3702 residency status of the fund vehicle GST on expenses that they incur in or its investors; Singapore. Consequently, this may result in a 7% tax cost for Singapore funds. • Fund vehicles constituted as limited Background partnerships can be entitled to tax The 2009 Budget announced GST relief exemption (as opposed to the current for certain Singapore funds. The Currently, foreign funds managed by fund authorities have since issued a circular on regime, which covers only individuals, managers (FM) in Singapore are exempt 3 April 2009 on this remission scheme. companies and trusts). from tax on specified income from designated investments if certain In our view, the ET is a good concept as Broadly, and based on the circular, funds conditions can be met. Broadly, the main the existing tax incentive schemes are which meet qualifying conditions will be conditions require the funds to be undisturbed. Thus, this avoids the allowed to claim GST incurred on ‘qualifying funds’ (i.e. not wholly owned potential complications of tweaking prescribed expenses based on a fixed by Singapore investors) and the investors current rules. recovery rate, without GST registration. of these funds to be ‘qualifying investors’. The remission applies with effect from 22 The ET regime benefits Singapore-based January 2009 to 31 March 2014. Certain Non-qualifying investors8 will be subject FMs as it allows further access to administrative procedures, however, will to ‘tax’, referred to as a ‘financial Singapore investors’ funds and seems to apply. The fixed recovery rate will be amount’. remove restrictions on the fund and announced annually and has been set at In addition, fund companies incorporated location of the fund vehicle. 93% for the first year of remission. and resident in Singapore, subject to An application for ET status must be conditions being met, may also be Conclusion made to the MAS. The fund must have a approved by the Monetary Authority minimum fund size of SGD 50m at the The Singapore government’s bold of Singapore (MAS) as approved point of application. There are additional initiatives in Budget 2009 indicate that Singapore-resident fund companies. conditions to be met as well. the IM industry is still one of the pillars of These companies also enjoy tax exemptions for specified income from growth for the Singapore economy. designated investments. Expansion of specified income It also demonstrates the government’s and designated investment lists preparedness to listen to, and act on, industry feedback. 8 Generally, non-qualifying investors are non- Not all income derived by qualifying funds individual Singapore investors who own substantial and approved Singapore-resident funds stakes in the funds (generally more than 30% or 50%). is tax exempt. Only ‘specified income’ 9 On 30th April, the MAS issued a circular providing derived from ‘designated investments’ details of the enhanced tier. Please see enjoys this tax exemption. Both terms are defined. management/assets/harv200905.pdf PricewaterhouseCoopers 17 Asset Management News June 2009
  18. 18. Section B: General stories Even Islamic funds have been impacted by the crisis In spite of their conservative investment principles, Islamic funds could not avoid the general hysteria that has infected financial markets. The Islamic financial industry has experienced a tremendous boom in the last five years, boasting growth rates of 20–30% per annum. The number of Islamic funds has increased from approximately 200 funds in 2003 to over 650 funds in 2008. Factors Serene Shtayyeh including the rising oil prices that created excess liquidity in the oil-rich Islamic PricewaterhouseCoopers (Luxembourg) countries, and a rise in Islamic fundamentalism and political views, have driven the +352 49 48 48 2115 upsurge. The crash of the international markets in 2007, which started in the finance sector – a sector prohibited to Islamic investors and funds – also boosted the popularity of Islamic funds. Islamic funds are governed by Shariah law. These are the fundamental principles that govern all aspects of a Muslim’s life, including finances. The core principles, which are not considerably different from other major religions, are based on integrity, sincerity, honesty and fair treatment. Shariah law prohibits Islamic funds from investing in companies whose predominant operations are considered ‘haram’ or unlawful. These include companies that produce, sell or distribute alcoholic products, pork and pork-related products or tobacco; companies engaging in gambling or entertainment; companies producing weapons; and any conventional financial institutions, including banks and insurance companies. Investments are limited to companies considered to have healthy capital structures. Consequently, companies with debt to market capitalisation ratios exceeding 33%, whose cash and other deposits exceed 33%, or whose receivables as a percentage of market capitalisation exceeds 45%, are prohibited (note these ratios are judgmental and may vary depending on the Shariah board of the fund). The most significant prohibitions in Islamic finance are: (i) the earning of ‘riba’, known conventionally as interest; and (ii) ‘gharar’, which is speculation. These exclusions have prevented Islamic funds from investing in fixed income, hedge funds and derivatives. Each of these areas was hit hard by the credit crunch and ensuing market crisis, which has led people to conclude that Islamic funds have been insulated from the crisis. This belief has been flaunted by many Islamic financiers, and in reality is a slight exaggeration. Slight performance advantages Comparing the 2008 MSCI World index with that of the MSCI Islamic World Index one can see that both markets were severely hit in the past year with returns of negative 42% and 36% respectively. While Islamic equity market indices, in general, did not include the badly hit banking and financial sectors, they have not been completely immune to the overall equity market volatility. The fourth quarter of 2008 was exceptionally hard on all markets, including the Islamic markets, and eliminated some of the advantage Islamic indices had over conventional indices. 18 PricewaterhouseCoopers Asset Management News June 2009
  19. 19. Contributing factors past year, have triggered significant negative returns. Some of the factors that have contributed to the success of Islamic While it is true that the Islamic markets funds are in response to the conservative have fared better than others through nature of Islamic investing – avoiding the turmoil, the crisis has left nothing leverage, speculation and companies unscathed. Islamic funds have benefited carrying excessive debt. Nevertheless, from their conservative principles and the Islamic markets have not been have avoided the losses created by completely protected from the general over-leveraging. Unfortunately, they market deterioration. Their heavy have not been immune to the general weightings in real estate and commodities, hysteria and lack of confidence that has which have also suffered severely in the impacted the equity markets, and have still suffered significantly. MSCI World Index vs. MSCI World Islamic Index 120 110 100 90 80 70 60 50 40 30/08 30/09 30/10 30/11 30/12 30/01 29/02 30/03 30/04 30/05 30/06 30/07 30/08 30/09 30/10 30/11 30/12 30/01 28/02 30/03 2007 2007 2007 2007 2007 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2009 2009 2009 MSCI World Index MSCI World Islamic Index PricewaterhouseCoopers 19 Asset Management News June 2009
  20. 20. Section B: General stories Forestry investment – a new global asset class? Forestry has the potential to become a major new asset class, with attractive ‘bond-like’ returns. Yet use of an inappropriate tax structure can erode returns. Traditionally, forestry as an asset class rarely featured in institutional investment portfolios, although it has always been popular with wealthy individuals. As institutions seek genuine diversification and ‘green’ investments move up their agenda, however, Rachel Mackenzie new markets are developing in the financial sector for investment products which PricewaterhouseCoopers (UK) promote sustainability and social responsibility and reduce climate change. +44 20 7804 3240 Over the past decade, the US has led the way in structuring timberland investment vehicles. The sell off of forestry assets by many industrial players led to the emergence of Timber Investment Management Organisations (TIMOs), through which Timberland investment has become an established element in a balanced North American investment portfolio. Amanda Berridge But what’s next? TIMOs can no longer rely on the industrial players as a source of PricewaterhouseCoopers (UK) assets. They are now seeking to increase their returns by diversifying their business +44 20 7213 2994 strategies and exploiting the asset class to ensure the most valuable and best use of forestlands by, for example, maximising their potential for renewable energy sourcing. In addition, as competition increases, the US TIMOs are beginning to shift their investment focus outside of the US to tap into the more attractive returns available in other regions. International expansion At the same time European investors are rapidly becoming interested in forestland and we are seeing the beginning of forestry-specific investment funds in Europe. These funds seek to take advantage of the stable returns available from this asset class, while benefiting from favourable local forestry taxation regimes. To date, the southern cone of South America and Australasia have been the main target locations but Asia and Africa are gaining attention. Europe is also attracting increasing interest, despite the barriers created by its traditionally fragmented and state dominated forestland ownership structures. As well as the emergence of European forestry funds, we expect to see increased activity in forestland preservation as a result of the United Nations’ proposed scheme aimed at saving the remaining tropical forestlands. This scheme aims to pay national and local governments to keep their forests intact and preserve the habitat of many species of animal and plant life indigenous to them. The development of the nascent voluntary carbon credit market could be a further key to the future of timberland investment, because if carbon credit markets become established and even mandatory, they could provide an additional source of income from forestland in addition to, or even instead of, the harvesting of the timber. Tax perspectives These exciting developments pose many challenges from a tax perspective. Finding a suitable fund structure for multiple classes of investors with contrasting. and sometimes conflicting requirements, is invariably complicated and complex. In addition, the locations of forestland assets means that funds must deal with many countries around the world with far less developed tax and legal regimes than found in Europe and the US. In many countries there are issues with land ownership by overseas investors, and while timber investment typically attracts some form of local tax relief it can be hard to get the benefits of this at fund level. Investing successfully into global timberland requires knowledge of the interaction of investor requirements for transparency, tax efficiency and good governance, with a good understanding of the underlying forestry investments and the local challenges in each jurisdiction. Timber is a long-term investment and returns can easily be eroded if the wrong structure is used. If structured correctly, however, it can be an excellent diversifier 20 PricewaterhouseCoopers and provider of long term ‘bond-like’ returns, in addition to supporting the future of the Asset Management News June 2009 planet by locking in carbon emissions and supporting local communities.