In layman’s terms, the term ‘investment structure’ simply refers to the way an asset or group of assets is legally owned. There are a number of different types of investment structure and the most suitable one to use will vary depending on the requirements of the investor.
The assets being purchased, delegation of control, the profile of the investor(s), required cash flows, tax implications and liquidity requirements, are all factors which will help determine the most appropriate investment structure to use.
Taking time at the outset to consider the principal features, benefits and limitations of each type of investment structure is therefore vital, as this decision can have significant longer term implications for investors.
A sub-set of investment structures are ‘collective investment vehicles’ or ‘funds’. These structures are used to pool investors’ money together, this money is then used to purchase a portfolio of assets that have been identified by an investment manager.
Here we look at three commonly used investment fund structures; unit trusts, limited partnerships and companies.
A unit trust is not a separate legal entity but a trust arrangement whereby legal ownership of the fund’s assets is vested in a trustee, who holds the assets of the fund on trust for the benefit of the unit holders.
A unit trust, which has the inherent qualities of a fund, may pool investments from many investors, spread risk and provide diversification. Importantly, the unit trust and the underlying assets into which it invests are not controlled by the investors.
Unit trusts can be bought (subscribed) and sold (repurchased) at a prevailing price (the net asset value per unit) and, depending on the liquidity requirements, the fund price can be issued daily, weekly or monthly. This liquidity, and the ability to receive regular monthly income, are attractive features for retail investors who often require ready accessibility to their funds. Further, investors may recognise the investment and returns in the unit trust without having to concern themselves with the disclosures and pricing associated with the underlying portfolio.
While the trustee holds legal title to the assets, a manager is often appointed to oversee the operations of the unit trust. The manager has the fiduciary responsibility to make decisions in the best interests of the unit holders (the investors) and has a board of directors who ensure the fund complies with the investment objectives stated in the trust deed and appropriate regulations.
A key benefit of collective investment structures such as unit trusts is that they can be used to provide investors with access to alternative investment products that they may otherwise not be able to invest in. One example of this in the Japanese market is access to derivative structured products; regulation does not allow for retail investors to invest directly into derivative structured products created by investment banks or active managers. By investing into a feeder vehicle, such as an offshore unit trust, investors can access the investment product.
Key benefits of a unit trust:
A limited partnership is a closed-ended fund structure which allows for a number of investors to be pooled together, with each investing into the fund as a limited partner. Importantly, the limited partners do not have management responsibility in the structure – this role is performed by the General Partner.
The General Partner, a corporate vehicle with a board of directors, makes decisions on behalf of the Limited Partnership and has a fiduciary responsibility to act in the best interests of the limited partners at all times.
The limited partners are admitted to the fund following execution of a fund subscription booklet in which each partner signs up to the Limited Partnership Agreement (the LPA), the rulebook governing the operations of the limited partnership, and states the amount of capital (the commitment amount) they have agreed to invest in the fund. Importantly, each partner’s liability is limited to this commitment amount.
Minimum commitment sizes are often high (around USD 100,000) and this, along with the illiquid, closed-ended nature of most limited partnerships, the fund term is typically 10-12 years, makes investment most suitable to institutional investors and experienced high-net worth individuals. The timelines and costs of establishing a General Partner / Limited Partnership structure and the initial and on-going regulatory requirements are largely determined by both the number and profile of investors investing into the structure.
Further, a limited partnership can be an attractive structure for tax planning purposes with partnerships generally treated as being fiscally neutral and transparent. Applicable taxes are settled in the country where the assets are located and tax is paid by the investor upon receipt of income or capital.
A general partner-limited partnership is a commonly used structure to facilitate investment into alternative assets such as Private Equity, Real Estate, Infrastructure, Debt / Mezzanine investments and Venture Capital. In addition, this type of structure is frequently used when following a funds of funds strategy.
Key benefits of a General Partner / Limited Partnership Structure
Open-Ended Investment Companies
With an Open-Ended Investment Company (OEIC), investment is made via the purchase of shares. Like the units in a unit trust, the shares in the fund vary in price in direct proportion to the variation in value of the fund's assets. Each time money is invested, new shares are created at the prevailing share price; as shares are redeemed underlying assets are sold to match the prevailing share price and remain as a direct reflection of the underlying assets.
The ability to redeem shares in an OEIC, and thus high level of liquidity, is attractive to many investors. Further, the legal structure being that of a company, the governance structure is familiar and easily understood by many investors, with control and decision making powers vested in a board of directors.
A particular subset of company fund-structures are cell companies. These are corporate entities overseen by a board of directors and investors are issued shares. The cell companies can be in the form of Incorporated Cell Companies (ICC) and Protected Cell Companies (PCC). Cell companies can benefit from the economies and efficiencies of an umbrella structure with a number of series or classes. With an ICC, the assets and liabilities of each cell company can be distinct; with each cell being a separate legal entity. These give the economy of setting up subsequent cells without investors being concerned about cross contamination of liabilities.
Special Purpose Vehicles
While not a collective investment structure, special purpose companies (commonly known as SPCs) are commonly used as asset holding companies in combination with investment fund structures.
Multiple SPCs can be established within a structure, enabling a single asset or group of assets to be ring-fenced from the rest of an investment portfolio, thereby avoiding the possible cross contamination risk of multiple assets being held by a single legal entity. The ring-fencing of assets can also help gain access to leverage from banks issuing asset-backed loans.
It is important to carefully consider where each SPC is established taking into consideration key factors such as tax treaty networks in place between countries and the expertise of the jurisdiction in terms of the asset class being held.
The use of multiple SPCs is commonly seen in investment fund structures purchasing physical assets such as Real Estate or Aircraft;
Key benefits of a Corporate Investment-Fund Structure
There are a range of investment fund structures that can be used to facilitate investment and many provide similar benefits. Such structures can provide investors with the opportunity to invest into a diversified portfolio of assets, including assets that would otherwise be inaccessible to investors.
Key considerations when choosing an investment structure therefore include investor preference and familiarity, liquidity requirements (open ended versus closed ended), tax efficiencies and regulatory factors.
Here at Moore Management we have a long track record of providing services to a wide range of investment fund structures. We work in close partnership with our clients from an early stage to help determine the investment vehicle most suited to their needs in order to provide tailored solutions.
If you’d like any further information or would like to discuss further investment structures please don’t hesitate to get in touch.
T: +81 3 6441 309