Ten things Asset Managers need to know about Institutional Investors

1. An Institutional Investor may need to balance government level initiatives with investment and tax considerations. Political dynamics and inter-government initiatives may be factors when considering investments, including related tax structures. For example, some tax exemptions may be subject to ownership/governance limitations by the granting jurisdiction. Australia limits the sovereign tax exemption to investments of less than 10 percent in an asset and where the investor does not retain a board seat or governance rights in the asset^.[1] Other jurisdictions, such as the US, have similar limitations on specific types of assets such as real estate for certain Institutional Investors to claim a tax privilege. These restrictions will require that the commercial opportunity be balanced against the tax efficiency. 

2. Special regulatory requirements may drive tax structures. Political climate, discretion and/or competitive advantage can create the desire to limit regulatory and tax disclosures of investments, portfolios and activities. While many Institutional Investors have committed to the Santiago Principles (e.g., GAPP 15), they may select structures that limit certain tax or regulatory disclosures, if presented structuring alternatives. Tax structures may be influenced by regulatory disclosures, leading to structural inefficiencies. Institutional Investors seek to work with managers that understand and balance these tax and regulatory considerations.

3. Institutional Investors may have concerns about issues that would typically be favorably received by other investors. Due to the variety of sovereign tax exemptions that exist globally, the tax-driven sensitivities that Institutional Investors need to manage can be substantial and nuanced. Some seemingly innocuous “investor-friendly” conditions or arrangements (e.g. advisory board seats or management fee rebates) can be problematic to the investor’s qualification for sovereign exemptions. Institutional Investors will expect that the manager be aware of, and accommodating of, these sensitivities.

4. A manager’s activities will need to be carefully defined. As a threshold matter, Institutional Investors will want to manage the risk of a manager being treated as an agent of the investor under local tax law. Where an agency relationship exists, the manager’s activities can be attributed to the Investor and put the Investor’s tax status at risk. As such, the governing management agreement will typically need to contain some very strict limitations on what manager activities are permitted or prohibited. 

5. Anticipate that transfer rights must be broad. As a governmental entity, Institutional Investors often balance policy mandates with commercial drivers when evaluating investment opportunities. Such mandates can change over time with new governments and stakeholders. In addition, changes in tax and regulatory laws in investment jurisdictions may affect existing investments or structures, putting the sovereign tax exemption at risk or creating adverse disclosure obligations. The investor will typically ask for flexible and broad transfer rights so that it can effectively manage these changing dynamics.

6. Data requests will likely exceed those of a typical investor. As Institutional Investors build their in-house capabilities to help source and manage larger, more complicated deals, they require ever greater access to data in connection with investments. As capabilities increase and portfolios grow, so too does the need for regular and timely data.

7. Reputational considerations, including a manager’s approach and sophistication towards tax matters, will be important. Many Institutional Investors are focused on managing the risk of adverse publicity from aggressive tax structuring, whether actual or perceived. Institutional Investors will require that managers proactively monitor BEPS, EU and local country tax developments and review structures for positions that might be considered aggressive. However, the investor will continue to expect the manager to maintain tax efficiency.

8. Responsible tax policy may be mandated at the investee company level. Many European and Australian Institutional Investors are part of the current responsible tax dialogue with legislatures, tax authorities and their stakeholders. This is a trend that is expected to continue. Several Institutional Investors are now actively assessing their current portfolios to determine whether any investee companies have engaged in aggressive tax practices. New investment mandates will likely increase the obligations on managers to perform reviews on a prospective basis.

9. Many Institutional Investors will be sensitive to local tax filing requirements. Tax filing obligations will need to be managed and appropriately reduced, either through the use of corporate blockers or from a confirmation of the absence of filing obligations. Institutional Investors can be expected to work with the manager to allocate these responsibilities and will likely expect managers to understand and address local tax filing considerations. 

10. Not all Institutional Investors, or investments, are the same. Managers need to understand the differences. Availability of tax privilege will vary by jurisdiction and by Investor. Certain types of Institutional Investors may enjoy broader benefits than others, even within the same jurisdiction. For instance, the US generally offers expanded benefits to Qualified Foreign Pension Funds (“QFPF”) ^[2], as opposed to other types of Institutional Investors. This can provide opportunities for simplified structuring and relative tax preferences as between classes of Institutional Investors. Co-mingling different classes of Institutional Investors in structures can result in the loss of certain preferences. Managers must demonstrate an appreciation of these important differences.

Understanding the reasons for special structuring and other efforts will help ensure Asset Managers are well-placed to work with Institutional Investors on new and existing opportunities. KPMG has a dedicated Institutional Investor Group practice that works with the top Institutional Investors globally. KPMG professionals can help provide insights and advice on market leading structures to accommodate all parties to a transaction.