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2 PwC Asset Management News November 2010

Conference edition

03 Introduction

Asset management04 Alternative investments’ journey to

a brave new world06 Opportunities in the Third Sphere

of impact investing 08 Preparing strategies for the pension

revolution09 Business-critical implications of tax,

and why this should be on everyone’sradar

10 FATCA – the future

Real estate12 Global themes return to real estate13 Regulation moves centre stage14 The best options for restructuring

real estate 16 Rising to public sector real estate’s

many challenges17 The harsher tax environment’s

impact on real estate

C

General issues18 AIFMD brings relief to offshore

centres20 AIFMD may restrict EU investors’

access to private equity22 High-frequency trading poses new

challenges in Japan23 IT’s role in intelligent decision

making24 Inching towards producing a UCITS

IV KIID26 EU withholding tax refunds start

to flow28 EU real estate rulings continue

00 PricewaterhouseCoopers Asset Management News November 20102 PwC Asset Management News November 2010

Contents

Visit us online atwww.pwc.com/amnews

PwC Asset Management News November 2010 3

Introduction

In our two conferences and thispublication, we consider the major impactof western countries’ public sector reform.Public sectors will, for example, needprivate sector asset managementtechniques as they rationalise their realestate portfolios. We also look at theimplications for asset managers ofgovernments tackling pension fundaffordability.

The wave of regulation almost upon uswill undoubtedly burden many assetmanagers. At our October 2010Alternative Investment Fund Managersdirective seminar in London, a survey of186 predominantly alternative investmentmanagers concluded that the directivewould both raise fees for investors andreduce the profitability of hedge fund,private equity and real estate managers.Forty one percent thought fees would riseas a result of the directive and more thanhalf thought the directive would reducetheir profitability, in spite of the likely risein fees. Several articles in this publicationexamine the various impacts of thedirective.

Similarly, governments’ drive to maximisetax revenues – partly through moretransparency, tax information exchangeand enforcement action – means that thetax function is now at the forefront ofcompany and investment decisions.

Asset managers and real estate companiesneed intelligent strategies for navigatingthese treacherous waters. Over the nextfive years, seizing today’s emergingopportunities will be essential to success.

As the consequences of the credit crisis become clearer, this is a time ofexceptional change for asset managers and real estate companies alike.Shifting economics, onerous new regulation and a drive for greatertransparency in reporting are creating challenges – yet also someopportunities.

Kees HageManaging EditorAsset Management NewsPwC (Luxembourg)+352 49 48 48 [email protected]

41%thought fees would rise as a result ofthe directive and more than halfthought the directive would reducetheir profitability, in spite of thelikely rise in fees.

At our October 2010 Alternative Investment Fund Managers directive seminarin London, a survey of 186 predominantly alternative investment managersconcluded that the directive would both raise fees for investors and reduce theprofitability of hedge fund, private equity and real estate managers.

186

Alternative investment managershave great opportunity in thepost-crisis world, yet to capitaliseon this they must navigate a rangeof regulatory challenges, investordemands and changes in markets.

Within the alternative investmentindustry, the credit crisis’s reverberationsare creating challenges that are rapidlyredefining the sector.

Hedge, private equity and real estatemanagers all need to adapt to varyingdegrees to an environment whereregulation, tax, the product range, theinvestor base and even the underlyingmarkets are undergoing rapid anddramatic change.

Yet the credit crisis has also brought greatopportunity for alternatives managers.More than ever, institutional investors areconvinced of the need to diversify theirportfolios of assets. They recognise thatthe best alternatives managers offer themthe potential to both diversify and protecta portion of their assets. Notably, there isa flow of institutional assets into thehedge fund sector, especially to the largestmanagers with the best governance andinfrastructures.

For some of the smaller hedge and privateequity managers, however, the growingregulatory, tax and transparencydemands will lead to a substantialincrease in costs.

Surfing the wave ofregulationEuropean alternative managers face atsunami of regulation and will soon be themost heavily regulated worldwide.Already subject to national regulations,they will soon need to comply with theEuropean Union’s Alternative InvestmentFund Managers (AIFMD) directive, andmany will have to register with the US

Securities & Exchange Commission (SEC)following the Dodd-Frank Wall Street andConsumer Protection Act.

These regulations will be implementedsoon – SEC registration is required byJuly 2011 and the AIFMD will probablybecome effective in early 2013.Complying with regulations will requirestronger controls, reporting and record-keeping. Above all, the compliancefunction must have the resources andauthority to fulfil its task.

Preparing for growing taxchallengesIn addition, the tax environment isincreasingly challenging. Tax authoritiesare stepping up audit activity, enhancinginformation reporting rules, introducinglegislation to counter perceived loopholesand, of course, raising taxes. Managerstherefore need efficient tax functions thatare fully integrated into all areas of theirorganisations.

For private equity, tightening permanentestablishment requirements in manycountries are a particular challenge,bringing entities previously not liable tolocal tax into the tax net.

Investors demand trust andtransparencyInstitutional investors are also influencingchange. They are demanding higherstandards of corporate governance,operational and reporting standards,along with more transparency intocompliance, risk management, theinvestment portfolio and the controlenvironment. Operational due diligencehas now become the first step whenevaluating managers – if the managerdoes not have robust operations manyinvestors will not invest.

In the hedge fund sector, investors arefocusing on a range of governance issues,notably the independence of fund boardsand remuneration. From an operationsperspective, there is increasing scrutiny ofadministrators and prime brokers and an


Asset management

Alternativeinvestments’ journeyto a brave new world

Olwyn AlexanderPwC (Ireland)+353 1 792 [email protected]

Régis MalcourantPwC (Luxembourg)+352 49 48 48 [email protected]

assessment of their true “independence”from the investment manager.

Seeking reassurance, many institutionalinvestors want to invest with managersthat have assurance reports such as SAS70s in place.

Tailoring product rangesManagers must also be prepared to tailortheir product ranges to the needs ofdifferent investors. In Europe, thepopularity of UCITS demonstrates ademand for onshore tightly regulatedproduct. At the same time, moreexperienced institutional investorscontinue to favour products with lessinvestment restrictions.

Additionally, just as some investorshave questioned the value added byfunds of funds, lower cost exchangetraded fund products and index funds aregaining traction.

ConclusionFive years from now, the alternativeinvestment sector will be transformed.There will be fundamental changes infund governance, the way that managersoperate and the range of products onthe market.

Yet institutional investor assets will flowto the managers that adapt successfully tothe changing market. As a direct result ofthe lessons of the recent credit crisis,there is great opportunity for the bestalternative investment managers.


For private equity, tightening permanent establishment requirementsin many countries are a particular challenge, bringing entitiespreviously not liable to local tax into the tax net.

Growing investor interest inphilanthropic investing is beingmatched by increasingopportunities for profit.

Until recently the idea of both investing ina grassroots project in the world’s poorestcorners and hoping to turn a reasonableprofit were seen as mutually exclusive. Ifyou wanted to assist you donated tocharity. If you wanted to invest youlooked for a more traditional opportunity.

Times have changed. There are nowmutually beneficial opportunities for bothsides of a market whose size may reachUS$500bn within a decade.1 On one sideof the market are institutions andinvestors that want to improve living andworking conditions in the long-term whileat the same time generating investmentreturns. On the other side of the marketare cash-starved, developing worldentrepreneurs and communities seekinginvestment for enterprises, enhancedinfrastructure, utilities or services thatpromote sustainable growth.

Bridging the divide between both sides ofthe market through appropriate vehiclesis the key to creating long-termopportunities for all.

Investor groupsTwo distinct groups of investors are activein this market, although it is important tonote that significant crossover can occur,particularly with regard to philanthropy.

Investors in the first category compriseprivate investors and commercialinstitutions. While they aim to makesocial and environmental improvements,they must also achieve investment returnsin order to justify ongoing involvement –a crucial factor to satisfy if greatervolumes of finance are to be unlocked.

The second category of investors, beinggovernments, intergovernmentalorganisations, development financeinstitutions and civil society players, maygive capital on very favourable terms, orforgo commercial returns via donation orsubsidy. They may also be more likely tohave a ground-level understanding ofprojects through hands-on involvement.

Both categories of investors are crucial tothe Third Sphere of impact investing.Each party can complement the other interms of expertise and focus as theytypically represent different disciplines.For example, one group will bring vitalsocial and cultural knowledge, while theother group will bring financial acumen.The guiding principle for both is that theprojects invested in be enriching in asocietal context – not just profitable infinancial terms.

Types of opportunityExamples of impact investing areincredibly diverse, but can be brokendown into a number of broad areas,including reducing poverty and hunger,improving health, greater education andenvironmental sustainability. Projectsmay, in fact, touch on more than one ofthese areas at the same time.

Within poverty alleviation, microfinance(including micro-credit and micro-insurance) is one of the most widelyrecognized and successful investmenttypes. Access to loans, savings andinsurance products can enable animpoverished population to smoothconsumption, build assets, developenterprises and manage financial risks.The success of microfinance is due, inpart, to the nature of the business model,which provides clear investmentopportunities with quantifiable returns.

In health and education, the barriers toimpact investing are higher. In health, thevolatility of funding flows betweendonors and recipients affects bargainingpower and cash management (forexample inefficient order sizes), howeverthis has not prevented financial


Asset management

Opportunities in theThird Sphere ofimpact investing

John ParkhousePwC (Luxembourg)+352 49 48 48 [email protected]

Dariush YazdaniPwC (Luxembourg)+352 49 48 48 [email protected]

1 Investing for social and environmental impact, theMonitor Institute, 2009.

institutions from developing innovativesolutions for financing healthcareprograms on the ground. Similarly,education lacks a strong multilateralframework. Yet progress is being made viamicro-businesses offering low-costeducation materials such as textbooks,computers and teaching aids.

Environmental sustainability covers awide spectrum projects ranging fromareas as diverse as agriculture, carbontrading, energy efficiency and manyothers. In one example of the latter, apublic private partnership agreed tocreate a fund that would finance energyefficiency projects in the western Balkansand Turkey, mostly by expanding andstrengthening the provision of loansthrough local financial institutions.Investors into the fund can purchase notesat varying levels of risk and return.

The opportunities involved in ThirdSphere investing are substantial. Viableeconomic returns are possible forinvestors, while the overall impact of theinvestment contributes to a value chainthat allows for new and profitableinvestments later on. As communitiesdevelop and become prosperous, so toodo the possibilities for further investment.


US$500bnTimes have changed. There are now mutuallybeneficial opportunities for both sides of a marketwhose size may reach US$500bn within a decade.

As governments everywhere grapplewith pension affordability, theUK’s initiatives potentially highlightthe need for asset managers servingthis market to reconsider theirstrategies.

Pensions have never been higher in thepublic consciousness. The raft ofannouncements from the new UKcoalition government have sparkedconsiderable comment, while proposalsto raise the retirement age in France havebrought people onto the streets. Whenaligned to pension fund changes thatcorporates are already introducing, thepensions market is evolving at its fastestpace in decades. This will requiresignificant changes in products fromfinancial services providers andasset/fund management organisations.

In the UK, where the state pension age isbeing raised to 66 and beyond, we believethe actual retirement age will need to riseto 70 if retirees want to maintain the levelof comfort that we have all come toexpect – unless they are in a very wellfunded private scheme. Importantly,retirement will start to look very differentfrom what we are used to. Working part-time after the age of 60/65 will becomemore common, with people taking ondifferent roles, perhaps moving tobecoming mentors or trainers. We cannotafford to build a new ‘glass ceiling’ intothe workplace.

Turning to financing, retirement annuityproducts will have to change substantiallyto reflect this new retirement andworkplace model. People will want toaccumulate pension savings and spend atthe same time. They will need flexibilityto draw down savings for key life events –which may include the ability to pass‘wealth’ across generations.

Implications for assetmanagersFirstly, given the UK government changeson auto-enrolment, National EmploymentSavings Trust (NEST) and public sectorpensions, there will be substantial ‘newmonies’ that require to be invested.Projected funds under management, evenfor the default investment of NEST, rangefrom £100bn to £300bn. This is asubstantial sum for the industry tomanage. Will it just be UK basedinstitutions that will invest theseadditional sums? Another challenge to beaddressed is whether there is sufficientmarket capacity for investable assetsresulting from these new monies?Additionally, the introduction of NESTmay lead to much greater transparencyon the cost of provision and investmentreturn. How will the industry respondto this? Linked to this, many existingpension product providers arequestioning and reviewing theprofitability of their range of productsand existing contracts for Group PersonalPensions etc. How will these changesaffect existing pricing?

Secondly, government, employers,commentators, industry bodies and thefinancial services industry will want toincrease consumers’ understanding oftheir options in this new world. Howwill the asset management industrysupport this?

Lastly, these are just the firstconsequences of the changes plannedby government. The retirement worldwill continue to change and evolvesubstantially over the next few years.

Given all these reforms, it is clear that anumber of players in the retirementmarket need to reconsider their strategies.However, this should not be viewed asdoom and gloom; in this new world therewill be real opportunities to define themarket and products – particularly forasset management – from a UK andinternational perspective.


Asset management

Preparing strategiesfor the pensionrevolution

David BrownPwC (UK)+44 7725 704 549 [email protected]

Richard KeersPwC (UK)+44 20 780 [email protected]

In the UK, where the state pension age is being raised to66 and beyond, we believe the actual retirement age will need to rise to 70 ifretirees want to maintain the level of comfort that we have all come to expect.

70

Mounting pressure for increasedtax revenues and greatertransparency in tax matters,coupled with an onslaught ofregulatory changes and changinginvestor demands, has put thetax function at the forefront ofcompany and investment decisions.

The global economic crisis is reshapingtax policy across the world. Governmentsare in desperate need of more revenuesbut do need to realise that taxes coulddistort economic growth or obstructcross-border activities. In order tomaximise revenue collection,governments have intensified their fightsagainst tax fraud and evasion by pushingfor more transparency, tax informationexchange and increased tax enforcement.The crisis has also triggered a wholespectrum of new regulatory legislation,the tax implications of which are onlynow being considered. Beyond this,investors are also requiring moretransparency and information.

The governments’ demand for greatertransparency in tax reporting is one of thebiggest challenges asset managers face.The US Government passed the ForeignAccount Tax Compliance Act into US lawin March 2010, greatly increasinginformation reporting for foreigninvestment partnerships and funds. TheG20 finance ministers and central bankgovernors have engaged the OECD toincrease the information exchange, andwithin the EU the political debates aboutbanking secrecy legislation are among themost delicate topics. In this respect, theEuropean Commission has also made aproposal to amend the existing EUSavings Directive. Funds must not onlycomply with these new rules, but alsoneed to consider their impact on currentproduct offerings and investors.

Tax raising measuresAs they strive to reduce budget deficits,several countries have announced highertaxes and increased audit activity. Also,taxing authorities around the world arescrutinising treaty-based platforms,causing some managers to review theirstructures and making rigorous planningimportant. The increased focus onbeneficial ownership and securitieslending positions will also causecustodians to review their currentpositions.

In some European countries, taxlegislation is being used to maintain orincrease their competitiveness as assetmanagement centres. Whether the UCITSIV directive achieves its full potential as adriver of increased industry efficiencydepends to a large degree on overcomingtax barriers. And tax will also influencedecisions about how to deal with theupcoming AIFM Directive. In addressingquestions like where to base the assetmanager and the fund, business, legal andtax people must work side-by-side.

Improving the tax functionIn today’s climate, it is no surprise to see anumber of asset managers turn theirattention to reviewing the controls,processes and governance surroundingboth their tax positions and theirinvestors’. Non-compliance may not onlylead to unexpected tax costs, but alsoreputational risks. Asset managers shouldconsider where responsibility foroperational taxes sits and how risks arecontrolled and monitored.

Current developments will impact frontand back-office activities. To stay abreastof increasing tax rates and shiftingregulatory and tax legislation, assetmanagers need to integrate tax functionswithin their businesses. An overarchingand coherent tax policy, implemented bya competent tax function, has become aclear source of competitive advantage.The tax agenda needs to be at theforefront of company and investmentdecisions: ranging from what trades tomake, to what structure to embrace, towhich investor to take on.

Asset management

Business-criticalimplications of tax,and why this shouldbe on everyone’sradar

William TaggartPwC (US)+ 1 646 471 [email protected]

Martin Vink PwC (Netherlands)+31 88 792 [email protected]


The US Foreign Account TaxCompliance Act potentially impactsall non-US financial institutionsand may be a dress rehearsal forwider OECD and EU-sponsoredsystems.

In March this year the US introducedFATCA – the Foreign Account TaxCompliance Act; a simple concept withfar-reaching consequences. From January2013, all non-US investment banks,insurance companies, hedge funds,private equity funds and other foreignfinancial intermediaries will be subjectto certain information gathering,withholding and reporting requirementswith the US tax authorities, or suffera 30% withholding tax on certain USsource income. Such income includesthe gross proceeds from the sale ordisposition of property that producesUS source dividends and interest, as wellas swap payments and manufactureddividends that are determined byreference to US source dividends. Anyamounts withheld generally are notrefundable or creditable unless therecipient of the income is entitled to thebenefits of a tax treaty with the US.

It would be a mistake to underestimatethe impact of FATCA or to assume that itis an aberration of the current US politicalclimate. Stricter tax controls will be afeature of the post financial crisis worldand many governments are using theheightened focus on transparency andreporting to strengthen their defencesagainst tax evasion. FATCA is the USresponse to evasion by its own citizensand to perceived collusion by

international financial intermediaries.Other governments are watching theprogress of FATCA with great interest.

OECD and EU initiativesThe OECD has set up a work stream calledTRACE (Tax reporting and ComplianceEnhancement) which would create aglobal investor reporting system. TheEU Commission has published its ownrecommendations for a Europeanwithholding and reporting regime whichclosely mirrors the OECD proposals.The OECD and EU proposals differ fromFATCA in one respect only. They envisagethat the reporting of investor informationwould be to source countries who wouldthen share the information under TEIAs(Tax Information Exchange Agreements)or Tax Treaties rather than directly backto the residence country (the US in thecase of FATCA).

FATCA has profound implications forall non-US financial institutions withUS customers or which invest in USsecurities, regardless of whether theyactually have US account holders. It willrequire many institutions to extensivelymodify their internal customerinformation and reporting systems.Any non-US institution holding USsecurities will be required to establishwhether or not it has direct or indirectUS account holders, and then report onany such US account holders or suffera 30% withholding.


Asset management

FATCA – the future

Pat WallPwC (Ireland)+353 1 [email protected]

Daniel LobattoPwC (US)+1 646 471 [email protected]

Kerstin ThinnesPwC (Luxembourg)+352 49 48 48 [email protected]

It would be a mistake to underestimate theimpact of FATCA or to assume that it is anaberration of the current US political climate.

European lobbyingIn the highly intermediated world of crossborder portfolio investment, it is oftenextremely difficult to identify the ultimatebeneficial ownership. This is especiallytrue of collective investment vehicles suchas UCITS, exchange-traded funds, fund-of-funds and mutual funds generally.The funds industry is engaged in intensivelobbying and the European Asset FundsManagement Association has engagedPwC to assist in this process. It is hopedthat the final FATCA proposals willprovide a carve-out for low-risk, widely-held (as well as publicly-traded) vehicles.EFAMA is currently engaged in detaileddiscussions with the US Treasury on howsuch a carve-out would work.

All non-US financial institutions arepotentially impacted by FATCA which, initself, may turn out to be a dress rehearsalfor much wider OECD and EU sponsoredsystems. Every financial institution needsto understand the legal, tax, regulatoryand systems implications of FATCA. Theimplementation date of January 2013provides an opportunity to influence theoutcome and to get businesses ready to becompliant.


Financial intermediaries will be subject to certain information gathering, withholding and reportingrequirements with the US tax authorities, or suffer a 30% withholding tax on certain US source income.

30%

After retreating to domesticmarkets for several years, the realestate industry is seeing the returnof global opportunities, but alsoglobal challenges.

Having peaked in the period immediatelyprior to the liquidity crisis of the summerof 2007, real estate fund launches areexpected to touch fresh lows in 2010. Thepeak for fund launches was also the peakfor cross-border real estate investmentmore generally and, since the crisis, realestate capital has largely restricted itselfto a domestic horizon.

There are, however, reasons for optimism.Real estate remains an appealing assetclass and evidence suggests that manyinvestors are delaying rather thanabandoning investment plans. There arealso new entrants to the market such assovereign wealth funds and otherinstitutions that have not previouslyinvested in real estate as an asset class.

Three years ago, at our November 2007real estate client conference in Vienna, welooked at the impact of economicglobalisation and demographic change, inparticular the shift of economic powerfrom the G7 countries to the majoremerging economies, which we dubbedthe “E7”. Events since then haveaccelerated the process. Most of the largedeveloped countries are showingpersistent economic weakness, withsluggish growth and high unemployment.In contrast, growth in the major emergingeconomies of Brazil, Russia, India andChina (the BRICs) is accelerating.

However, as the BRICs face the challengeof much weaker economic growth indeveloped economies, they will need toreplace exports with domestic demand(household consumption; investment;government spending) as the primaryengine of growth. The emergence of newmiddle classes will not only create anappetite for assets in which to invest, forexample through the burgeoning demandfor shopping malls, but also a supply ofcapital as the same people look to providefor their old age.

The winners among fund managers willbe the ones who develop product to caterfor the risk, liquidity and portfolio-building requirements of these investors.Within the insurance sector, which is amajor player in retirement provision, theEuropean Union’s Solvency II directiveand similar legislation elsewhere in theworld, will impact how firms approachthis. The appetite for new vehicles thatblur the boundaries between traditionalsegregated accounts and funds also addscomplexity.

Converging regulation, taxand investor demandsNew regulation in the European Unionand in the United States is also a globalissue and will introduce a new level ofdirect regulatory burden on fundmanagers. Changes to tax legislation andpractice are also becoming a majorconsideration when structuring funds,deals and the new managed accounts.Moreover, the tax authorities’ increasinglyrobust challenges to tax planning willrequire much greater attention to detail instructuring and a more rigorous ongoingrisk management process.

Yet an even greater push in terms ofreporting is coming from investors. Fundmanagers are working harder to satisfyinvestors’ hunger for information duringdue diligence and on an ongoing basis.We are also seeing the first signs ofdemand for third-party verification,through the use of independently-verifiedcontrols reporting or independentattestation of fund performance trackrecords used in fund-raising. While manytraditional asset managers have beenrequired to demonstrate the effectivenessof their internal controls by providingindependently-audited controls reports toinstitutional investors for many years, realestate fund managers have not previouslyfaced the same pressure.

Going forward, then, the sources of assetsand capital will be global, but so will thechallenges of regulation, tax, governanceand transparency. For those firms thatmaster the complexities of theseinternational trends, there will beopportunities.


Real estate

Global themes returnto real estate

John ForbesPwC (UK)+44 20 7804 [email protected]

Regulation has hit the headlines for thereal estate community in 2010. The long-running AIFMD drama has reached finalagreement and its impact on the realestate community is becoming clearer.But beyond AIFMD, there is a raft of otherregulatory change which will impact thereal estate industry either directly orindirectly. Consequently, managers needto consider carefully how they structureproducts and funds to meet investorneeds in an ever-changing regulatoryenvironment.

AIFMDClearly the AIFMD will have a wide-reaching effect. The need forauthorisations, reporting and compliancewith certain custody / depositaryprovisions is likely to increase costs and,therefore, to reduce returns. The ability tomarket non-EU funds to EU investors iscritical for current structures. The agreedposition that allows national placementregimes to operate for two years, withmovement on a transitional basis to apassport for non-EU funds, is a betteroutcome than had seemed possible earlierin the summer. What remains to be seen,however, is the conditions that the newEuropean Securities and MarketsAuthority (ESMA) will apply. Details ofthese will emerge as the underlying

regulation is drafted in the comingmonths, so there is still time to get pointsof view across and to influence theregulatory regime’s final form.

Less obviously, but also critically, the realestate industry will need to understandinvestors’ key concerns. For example,pension funds may require managers todemonstrate high standards ofcompliance to reduce any perceived riskto client funds, and to ensure they cannotbe criticised for their choice ofinvestment.

If the AIFMD makes it more costly toaccess EU investors, as appears to be thecase, managers may decide to set upseparate structures for investors in the EUand those outside the EU. There is no onecorrect answer – it will depend on thelocation of potential investors and thebenefit, if any, to the fund of being ableto access the EU marketing passport bysetting up in the EU with an EU manager.

Recent drafts have included potentiallyhelpful exemptions for holding companiesand joint ventures (though detaileddrafting is yet to begin) and transitionalprovisions. These mean the directivewill not apply to certain closed-endedfunds which have reached the end oftheir investment periods or are short-lifefunds only.

Insurance, derivativesand banking regulationsBeyond AIFMD, the new regulatoryregime for the insurance industrycontained in Solvency II is likely to affectreal estate fund structures and theirattraction to investors. Solvency II willmake investors consider the balancebetween the level of capital required byinsurance companies and the availabilityof higher returns from equity andproperty, as compared to corporate bondswhich carry a lower capital requirement.

The European Markets InfrastructureRegulations which will regulate thederivative market currently applies to all

firms falling within the AIFMD’s scope.Broadly, this means that margins onhedging transactions taken out to coverfloating rate loans for property purchaseswill have to be funded. Lobbying effortsto prevent this applying to real estatevehicles and structures have so far fallenon deaf ears. It is not yet clear whatpractical effect these provisions will haveon structures, but probably they will infuture avoid debt requiring additionaldeposits to cover derivative exposure.Potentially, this could encourage a moveto fixed- rather than floating-rate debt.

Lastly, Basel III should not be forgotten.The new capital rules will make banksconsider the relative costs of capital forloans relating to liquid and illiquid assets.Banks with capital constraints wouldpossibly be more likely to lend againstliquid assets than real estate.

US investment adviser rulesOutside the EU net, some of the non-USbased real estate managers may now besubject to registration in the US for thefirst time under the Dodd-Frank WallStreet Reform & Consumer ProtectionAct, which introduces an amendment tothe investment adviser regime. Thisdepends on the number of US investors,assets under management and the typesof investment made. Real estate managerswith US interests should review thelegislation carefully. If the regime appliesto them, they will need to review theirregulatory and compliance structuresbefore the July 2011 registrationdeadline, after which they will be subjectto Securities & Exchange Commissionscrutiny.

The interaction of all the variousregulatory provisions coming into playover the next few years makes itinevitable that regulation will have hugesignificance in structuring real estatetransactions in future – particularly withregards to accessible markets and costimplications. Finding the right solutions,for both regulation and tax, will be aprimary consideration. Real estatebusinesses will also need to ensure thatthey are operationally fit for purpose tomeet regulatory reporting andcompliance requirements – a newchallenge for many players.

The interaction of all theregulations being introduced overthe next few years will affecttransaction structuring and placedemands on operationalcompliance.

Real estate

Regulation movescentre stage

Amanda RowlandPwC (UK)+44 20 7212 [email protected]


While the standstill and stabilisingcashflows remains the best optionfor distressed real estate, there willbe more options as the marketrecovers.

European real estate is still facingchallenging times. Although theEuropean economy is slowly recovering,major uncertainties remain. Concernscentre on whether the withdrawal ofgovernment stimulus packages will chokeoff recovery, and how the financial systemwill digest the large amount of real estatedebt on banks' balance sheets and thecommercial mortgage-backed securitiesthat are maturing.

In the past boom cycle, real estatefinancing was easy to obtain. With realestate collateral expected to appreciate,banks and other financing partnersoffered loan amounts of up to 100% of thepurchase price. The financial crisis endedthis practice and loans with LTVs above70% are now not so readily available.

Since most real estate financings havebeen closed for five years, we nowobserve the maturing of those loansissued in the boom years 2006 – 2007.The European commercial mortgage-backed security (CMBS) markethighlights the current need forrefinancing: until 2017 approximately600 CMBS structures with around €65bn,thereof €55bn until 2014, are maturing.In addition, the European banks haveapproximately €200bn of non-performingloans on their balance sheets.

Bank optionsSo what options does a financing bankhave when dealing with maturing andunder-collateralised real estate loans?Basically, the bank can either seek a short-term exit by selling the loan or theproperty to other real estate or debtinvestors, or aim for a medium- to long-term solution through securitisation,standstill, deed-in-lieu or forcedadministration. While the short-term exitvia a discounted pay-off or a short-term"fire" sale will probably result in loanlosses, the latter does require some extraefforts in order to stabilise the borrowerand the property's cashflows.


Real estate

The best options forrestructuring realestate

Thomas VeithPwC (Germany)+49 69 9585 [email protected]

Marcus Losch PwC (Germany)+49 69 9585 [email protected]

Dr. KonstantinKortmann PwC (Germany)+49 69 9585 [email protected]

Option Definition Time Horizon

Discounted Pay-Off Sell the maturing loan to another bank or investor at a lower price Short

Sale Disposal of property either in agreement with the borrower Shortor not (short term-pressured disposals often result inlower prices – "fire sale")

Securitisation Prolong the loan "as-it-is" and seek securitisation Medium-long

Standstill Prolong the loan (possibly under new contract) and seek to Medium-longimprove the long term position of the bank

Deed in Lieu Debt-to-equity swap, taking the engagements on the Longbalance sheet

Forced Administration Implementation of forced administration, paying directly to Longthe creditor

€200bnEuropean banks have approximately €200bn ofnon-performing loans on their balance sheets.

So far, there have been very few fire salesvisible in the market. Also, transactions ofthe Sub- or Non-Performing-Loans (SPL /NPL) with a discounted pay-off for theselling bank have been scarce. While theUK and Spain have seen several deals,other markets like Germany or Italy havebeen quiet. As internal rate of returnexpectations from some investors in thedistressed debt sector have fallen from 20-25% to around 15%, we assume a furtherconvergence of bid- and ask-prices for thenext 12 months.

Securitisation via CMBS has beenvirtually dead during the two years sincethe Lehman bankruptcy. At the sametime, the number of loans under specialservicing has increased significantly.With these difficulties, it is unlikely thatthe CMBS channel will be open for thelarge number of loans restructuring in thenear future.

Just like securitisation, the other medium-to long-term solutions ― standstill, deed-in-lieu and forced administration ―require not only a bettering marketenvironment, but also restructuring of theborrower and his properties. So far, thesehave been the preferred option in themarket (especially the standstill).

What measures can realestate companies take?Securing debt financing is vital for realestate companies. However, on top ofdeclining property values, increasingvacancy rates and decreasing net rentalincome, real estate companies havesuffered from restrictions on real estatefinancing through reduced loan offerings,increased margins and strict covenants.So stabilisation of cashflow in order toprevent a company from defaulting on aloan is essential. This can be achievedthrough professional asset and portfoliomanagement, which helps to identify theadditional potential of the underlying realestate assets.

Another option is the sale of assets andsub-portfolios. This measure offers twoadvantages. The disposal of non-performing assets may help increase thecashflow of the portfolio if assets with anegative cashflow after financing aresold. Performing assets that achieve agood sales price, and hence enable a highpay-back of debt, can help to reduce thefinancing cashflow and so have the effectof increasing the portfolio’s positivecashflow.

A third asset-related option is thereduction or postponement of investmentinto the portfolio’s assets. Whileredevelopment or extension measures canoften be postponed without incurringnegative effects on the property cashflow,this may not be the case for replacement /refurbishment measures. Delaying theseinvestments can often lead to tenantsmoving out or investing themselves inexchange for rent-free periods. Bothpossibilities result in a lower operatingcash flow from the asset.

In the current unfriendly marketenvironment, restructuring and a long-term work-out seems to be the best way tosecure the highest recovery for bothequity and debt investors. This perceptionof the standstill as the best strategy forboth parties may change though, oncethe market environment improves.

Do we already see signs ofmarket improvement?The next 12-18 months will be driven bythe following topics:

• Impairment of loans on bank balancesheets: We expect that some Europeanbanks will use a conservative approachfor the 2010 balance sheet.

• Stabilisation of rents: In most Europeanmarkets rents have already stabilisedfor core properties in major markets.We still expect challenges for olderproperties in B- and C- locations werecapital expenditure has been postponedover the last few years.

• Investment markets improve: We arealready seeing tough competition forcore real estate investments in mostEuropean markets due to high liquidityfrom institutional investors. Fordistressed (debt) investments, IRRexpectations were partly reduced and afurther price convergence will help thetransactions market to recover.

As the market improves over this time,real estate restructuring will have moreoptions.


Just like securitisation, the other medium- tolong-term solutions – standstill, deed-in-lieuand forced administration � require not onlya bettering market environment, but alsorestructuring of the borrower and his properties.

Increasing utilisation of publicsector real estate and releasingvalue require new methods of assetmanagement that the public sectoroften does not possess.

Following the economic downturn, manyEuropean countries’ stretched fiscalpositions require governments to makemore efficient use of resources. Realestate represents both a major cost and,potentially, a source of substantial capitalvalue. But increasing utilisation andsecuring efficient capital managementbrings a number of challenges. Toovercome these challenges, the publicsector must increase the coordination ofits activities and apply modern assetmanagement skills which it seldompossesses.

Public sector real estate is the land andbuildings necessary for executing theservices of governments, authorities,defence, healthcare, etc. Essentially, it isa back office process which should bemanaged according to the principles ofcorporate real estate. However, it differsfrom private sector real estate in specificways. For example, operating in apolitical environment inevitably bringsdiffuse governance practices and a lack ofdistinct control systems. Furthermore,public sector real estate has often, at leasthistorically, been provided on an internalmarket basis, implying that market signalsare often missing as a basis for financialcontrol. Commonly, low cost for aminimum level of quality is now theprime goal.

Becoming more efficientThe first challenge in becoming moreefficient is to understand real estateportfolios’ content and nature. Forhistorical reasons, portfolios are notalways well documented. Getting a gripon the current situation usually requires ahigh-level overview – a difficult task for

decentralised organisations where realestate is not a core business. By organisingand structuring basic information,organisations can make thorough,fundamental asset analyses.

The next challenge is to understandfuture occupation requirements. Here,co-ordinating planning of frontlineactivities and real estate is crucial.This is key in the public sector as manyreal estate investments have limitedalternative uses and political decisionscan rapidly change the nature of frontlineactivities. From an asset managementperspective, a multi-dimensional riskanalysis reconciles the prerequisites ofpublic sector activities with the principlesof real estate management.

Divesting surplus assetsHaving identified the real estate resourcesin place, and organisations’ future needs,conclusions can be reached aboutdivesting. Many countries have a surplusof real estate that could, potentially,be sold to the private sector in order torelease capital. But historically the publicsector has limited experience oforganising and executing large-scaledivestment processes. Also, assetsoperated in an internal public sectormarket must be carved out and preparedto meet the expectations of the privatesector market. Support from partiesunderstanding the two worlds of publicand private sector real estate is required.

The public sector is at a point of massivechange. Looking forward, more serviceswill be produced with fewer resources,altering both frontline activities andsupport functions, such as real estate.Also, governments in many Europeancountries are planning huge disposals ofreal estate assets to cover budget deficits.A clear success factor in this changeprocess is to involve modern and moremarket-driven asset managementmethods to achieve a more rationalhandling of costs and capital. For assetmanagers, this provides an opportunityboth to bring in knowledge and aninjection of new assets in the market.


Real estate

Rising to public sectorreal estate’s manychallenges

Jörgen SigvardssonPwC (Sweden)+46 709 29 37 [email protected]

Anna DunnePwC (UK)+44 20 7212 [email protected]

Joop KluftPwC (Netherlands)+31 [email protected]

While corporate tax rates arefalling, indirect taxes are rising withsignificant effects on real estatecompanies and their tenants.

During the past decade, corporate taxrates in Europe and elsewhere have fallensteadily. In the EU, the central and easternEuropean states that acceded to theUnion in 2004 and 2007 embarked on acompetition in corporate tax rates, withBulgaria lowering the benchmark to aslittle as 10%. To avoid production fleeingtheir countries to the new tax havens,core EU states like France and Germanyfollowed the trend and lowered taxesthemselves.

Real estate investments gained from thistrend. Low capital gains taxes madetransactions easier. Lower taxation ofproperty developers stimulated real estatedevelopment. Lower taxes for investorsincreased after-tax return from propertyinvestments, making them moreattractive. All of this helped the realestate sector.

Moving to a harshertax environmentBut the financial crisis changeseverything, although this is notimmediately apparent. So far, there is noclear indication that corporate income taxrates have stopped falling. The UK hasannounced a 4% reduction in corporatetaxes, while Hungary recently proposeda flat 16% tax, down 3%. Does this meanthere is not a harsher tax environment?

Looking at indirect taxes, it is clearimmediately that governments are raisingtaxes. In the EU alone, six countries haveannounced VAT rate rises in 2011. Takethe UK, where the corporate tax rate willbe lowered but VAT has been increasedfrom 15% to 17.5%, and now to 20%.

In Germany, land tax and real estatetransfer tax rates are on the rise. Severalfederal states have announced increasesfrom 3.5% to up to 5%, and cities are alsoraising rates.

The effect of indirect taxesDirect taxes have a direct impact on realestate investments. Whatever the incomefor a property, the gain of a developer ora vendor of property, the corporate taxburden is a function of the investment’seconomic success.

With indirect taxes this is different.Usually, VAT is deductible if a property isused for VAT taxable purposes. But VATbecomes a cost where it is not deductible.Take a property developed for a bank orinsurance company tenant. VAT on theconstruction cost may not be deductiblein this case, and an increase in VATimpacts the owner of the building orthe tenant, depending on whether or notthe owner can pass the VAT cost on tothe tenant.

The same goes for land tax, which ischarged on to the tenant in mostcountries. The tax either increases therent for the tenant or, when there arevacancies, is a cost to the owner.

While direct tax rates may mask the truth,in reality the tax environment is gettingharsher, especially regarding indirecttaxes like VAT and land tax. This meansowners and developers of real estate needto be aware of indirect taxes’ effects onboth them and their tenants.

Real estate

The harsher taxenvironment’simpact on real estate

Helge DammanPwC (Germany)+49 30 2636 [email protected]


Six EU countries have announced VAT rises in 2011. 6

The EU directive’s final draftcompromise text prepares the wayfor EU investors to continue toaccess offshore funds.

The final draft compromise text of theAlternative Investment Fund Managersdirective (AIFMD), which has now beenapproved by all groups of Europeanlegislators, is generally thought to be asubstantially better result for theindustry than some of the earlier drafts,particularly in relation to the thirdcountry provisions. Within the offshorecentres of the Cayman Islands, BritishVirgin Islands and Bermuda, home to thevast majority of offshore hedge funds,there is some relief.

With earlier drafts of the AIFMDprohibiting third-country managers frommarketing their non-EU funds in Europe,the impact of the AIFMD on offshorefunds concerned many within theinvestment management industry.However, the latest text contains a dualsystem which would eventually allow foran EU passport for non-EU funds toco-exist for a period alongside nationalplacement regimes. Initially, privateplacement regimes will be the mainmechanism through which EU investorsaccess non-EU based funds, with thepassport potentially introduced two yearsafter the implementation of AIFMD,followed by a potential phasing out ofprivate placement regimes after 2018.

‘Third-country’ rulesThe ‘third-country’ aspects of the AIFMDthat apply to non-EU territories can besummarised as follows:

• Retention of the existing country-by-country private placement rulesgoverning distribution of a non-EUfund throughout the EU (i.e. the statusquo) until at least 2018, subject to fundscomplying with disclosure andreporting requirements and there being

in place cooperation agreementsbetween the non-EU domicile ofthe manager or fund and the EUjurisdiction into which the fund is tobe sold.

• From 2015, possible introduction of aparallel so-called passport regime,provided certain criteria are met,which will permit non-EU funds to bedistributed on a pan-EU basis.

• From 2015 – 2018, private placementrules will remain in force alongsidethe passport regime. In 2017, the newEuropean Securities Markets Authoritywill review the private placementregime and recommend whether itshould continue.

The conditions that third countries willhave to meet under a passport regime areyet to be agreed. However, they are likelyto include: (a) existence of appropriateregulator-to-regulator cooperationagreements, (b) appropriate anti-moneylaundering and anti-terrorist financinglaws and regulations, and (c) a network ofOECD model tax information exchangeagreements with EU member countries.

Although there has been much debate inrelation to the third country provisions,there are also a number of otherimportant provisions within the AIFMD,some of which are likely to increaseoperating costs. These include therequirement for EU managers to appoint adepositary and, particularly, theprovisions in relation to depositaryliability. Looking ahead to full compliancewith the AIFMD (i.e. under a passportregime), there are also provisionsregarding delegation, leverage,remuneration and asset stripping, theimplications of which will need to becarefully assessed by fund managers.

Implications for the assetmanagement industryThe retention of private placement rulesuntil at least 2018 (and possibly after)substantially continues the status quo fornon-EU managers running offshore


General issues

AIFMD brings relief tooffshore centres

Graeme SunleyPwC (Cayman Islands)+1 345 914 [email protected]

James GreigPwC Legal (UK)+44 20 7213 [email protected]

funds, subject to managers and fundsmeeting the disclosure obligationsapplying to EU funds and subject,importantly, to the offshore regulatoryauthorities entering into cooperationagreements with a number of EUregulators.

Looking beyond the private placementrules to a passport regime, offshorecentres will have to make sure that severalconditions are fulfilled.

In the Cayman Islands, the largestoffshore centre, these are expected to beachieved via:

• Existing regulatory cooperationagreements that the Cayman IslandsMonetary Authority (CIMA) (a fullIOSCO member) is party to, which weexpect will be added to or amended, asnecessary, to comply with the standardAIFMD cooperation agreement.

• The Cayman Islands’ extensive anti-money laundering and anti-terroristfinancing laws and regulations (whichhave been assessed positively byinternational bodies including theFinancial Action Task Force).

• A comprehensive and expandingnetwork of tax information exchangeagreements, which were recognised asbeing compliant with internationalstandards at the OECD Global Forummeeting in Singapore as recentlyas 30 September 2010, and arereflected in Caymans’ status on theOECD ‘white list’.

Inevitably, additional fine-tuning of theCayman legislative and regulatoryframework will be required to continue tomeet internationally-accepted regulatory,transparency and cooperation standards.CIMA and the government are workingwith the private sector to make balanced,timely and appropriate amendments.

Next stepsThe European Parliament is expected tovote on the latest text on 11 November2010, at the time of writing. If the vote ispassed, which looks likely, the EU financeministers will formally approve the text

on behalf of the Council and this isexpected to take place on either 17November or 7 December. The text willthen be published in the Official Journalof the EU marking its assent as a legallybinding act which is likely to take place inthe first or second quarter of 2011. Thedeadline for transposition of thelegislation in Member States will be twoyears from the publication in the OfficialJournal (Q1 or Q2 2013).

Over the next few months, the Level 2rule making and subsidiary regulationswill be produced by the EU, whichwill mark the beginning of theimplementation phase of the directive.During this phase it is important thatmanagers step up their lobbying efforts inorder to try and influence the final rulesto ensure the final AIFMD facilitateseffective marketing and reflectsoperational practicalities.


Looking beyond the private placement rules toa passport regime, offshore centres will have tomake sure that several conditions are fulfilled.

An industry that traditionallyoperated outside regulatoryconstraints will now have toconsider the consequences of raisinginstitutional capital in Europe.

The leading global private equitymanagers, in terms of funds raisedand diversification of assets, arepredominantly based outside the EU,either in North America or elsewhere.Indeed, the private equity managers thatare most attractive to investors today areoften located within emerging markets.But how will such third-country managersaccess European institutional capitalfollowing implementation of theAlternative Investment Fund Managersdirective (AIFMD)? Indeed, given thechallenges created by the AIFMD will theywant to?

Traditionally, private equity managershave raised funds through a combinationof private placement and passivemarketing. Passive marketing is a processwhereby the institutional investor makesa direct approach to the private equitymanager. Passive marketing is notregulated by the AIFMD.

But the AIFMD places additional burdenon third country private equity managersaccessing EU institutional investorsthrough private placement regimes –where the directive requires managers tomeet transparency obligations and tooperate within a set of rules in relation toEU portfolio companies.

Third-country private equity managers,having understood the consequences ofthe AIFMD, need to develop strategiesdetailing how they will continue to accessEuropean institutional capital.

The privateplacement regimeA non-EU alternative investment fundmanager (AIFM) managing an EUalternative investment fund (AIF), ormarketing a fund into the EU, mustcomply with all the directive’s provisions,unless the non-EU AIFM can demonstratethat doing so would be incompatible withits home country regulatory regime(which must offer an equivalent level ofprotection to investors). Additionally, thenon-EU AIFM must appoint a legalrepresentative in the EU to act as acontact point, and to perform thecompliance function for management andmarketing activities performed in the EU.

Non-EU private equity managers cancontinue to access institutional investorsin the EU through the private placementregime provided they comply withtransparency requirements as set out inChapter IV of the AIFMD. These include:

• Filing annual reports for all AIFs,including disclosure of fixed andvariable remuneration paid to AIFMstaff members.

• Disclosing aggregate remuneration paidto senior management and AIFMmembers of staff, whose actions have amaterial impact on the risk profile ofthe AIF.

• Onerous portfolio companytransparency obligations that exceedcriteria for small and mediumenterprises; in addition certain thereare reporting obligations for employeerepresentatives.

• Disclosing the strategic intentionsregarding portfolio companies that arecontrolled, including employmentplans.

Additionally, there are asset-strippingprovisions that prevent an AIFdistributing portfolio company reservesfor two years after an acquisition.


General issues

AIFMD may restrictEU investors’ accessto private equity

Brendan Mc MahonPwC (Channel Islands)+44 1534 [email protected]

James GreigPwC Legal (UK)+44 20 7213 [email protected]

Ashley CoupsPwC (UK)+44 20 7804 [email protected]

In order to obtain approval for marketingan AIF under the private placementregime, there must be a cooperationarrangement between the non-EU AIFM’sdomicile and the member state where thefund is being promoted. Furthermore, thenon EU AIFM’s domicile, and whereapplicable that of the fund, should not belisted as a non-cooperative country andterritory by the Financial Action TaskForce on anti-money laundering andterrorist financing.

The passportFrom 2018, the private placement regimeis likely to be replaced by a passportingregime, which will additionally requirethat a tax information sharingarrangement is in place between the thirdcountry and each EU member state.

The AIFMD is likely to enter into forcewith a transposition period of two years,during which detailed rules supportingthe primary legislation will be drawn up.In the case of a closed-end fund thatdoes not intend to make any additionalinvestments after January 2013, the AIFMwill not require authorisation.

Thinking aheadNon-EU private equity managerscontinuing to market to EU institutionalinvestors should understand theregulatory consequences and operationalconstraints placed upon them by thedirective. Mapping compliance with theAIFMD will be critical.

Given the onerous provisions above,certain non-EU managers may decideagainst promoting their funds directlyto EU institutional investors. Passivemarketing can, of course, continue.


Non-EU private equity managers continuingto market to EU institutional investors shouldunderstand the regulatory consequences andoperational constraints placed upon them bythe directive. Mapping compliance with theAIFMD will be critical.

The Tokyo Stock Exchange isseeking to attract high-frequencytrading by solving the permanentestablishment dilemma facingmany global investors.

In high-frequency trading, high-speedcomputers analyse market data andautomatically enter and exit short-termpositions, often holding the positions forjust moments at a time.

Speed is of the essence. Success ismeasured in milliseconds. Therefore, tosuccessfully implement this strategy, it iscritical for traders to access servers nearthose of target exchanges – a practiceknown as co-location.

Does co-location triggerPermanent Establishment?In Japan, this has raised the question ofwhether running a foreign trader’sprograms on a co-located server creates ataxable presence − a PermanentEstablishment (PE) − in Japan. Existinglaw does not make this clear, as it simplydefines a Japanese PE as a branch, factoryor other fixed place of business in Japan.

To reduce tax uncertainty, the TokyoStock Exchange (TSE) asked the Japanesetax authorities (NTA) for guidance. Itasked the NTA to confirm that a foreigntrader’s upload and use of trading andinformation gathering programs on aco-located server owned by a primebroker or other market participant(“Market Participant”) does not give riseto Japanese taxation.

The TSE position asaffirmed by the NTAIn its Inquiry dated 5 November 2009,the TSE presented the NTA with theargument that software does not have aphysical presence, so its use cannot giverise to a PE, even if loaded onto a serverlocated in Japan, an argument thatclosely tracks that of the OECD in itsModel Tax Treaty Commentary.

In its Inquiry, the TSE argued that if theforeign trader does not own or lease theserver, no PE should result, even if:

• the foreign trader’s upload andoperation of trading and informationprograms onto the server is exclusive,

• the foreign trader’s own software isloaded onto the server, and

• the server was bought based on theforeign trader’s specifications.

In its response, disclosed in June of thisyear (so-called TSE Letter), the NTAconcurred with the TSE’s analysis.

Some unanswered questionsThe TSE Letter does not resolve all issues;some questions remain. For example,what if the servers are located at theOsaka Stock Exchange and otherexchanges in Japan, or at an external site?Does the TSE Letter apply only to serversowned by Market Participants?

While questions remain, the TSE Letter isan important step forward and has givenforeign traders a framework for analysingtax issues related to high frequencytrading in Japan.


General issues

High-frequencytrading poses newchallenges in Japan

Raymond KahnPwC (Japan)+81 3 5251 [email protected]

Akemi Kito PwC (Japan)+81 3 5251 [email protected]

Robert KissnerPwC (Japan)+81 3 5251 [email protected]

The third article in our series oninformation technology’s criticalrole for asset managers focuses onbusiness intelligence’s practicalapplications.

The term Business Intelligence (BI) wascoined by Hans Peter Luhn in an article hewrote for the IBM Journal in 1958 titled"A Business Intelligence System”. Heexplained that a BI system is one thatunderstands the complexity of existingdata and can interpret that data to guidedecision makers to reach certainaspirations and goals. As discussed in ourprior articles, businesses possess anabundance of data and are constantlyseeking to exploit its value. The BIconcept was developed for that specificpurpose.

Companies routinely look for ways to usedata to make operational and financialdecisions, often leveraging BI softwareand methodologies to do so. BI solutionscan be very basic, such as home-madespreadsheets or databases that aid withdepartment-level data analysis andreporting. Or they can be more complexsoftware packages that are implementedenterprise-wide to capture andconsolidate data from all branches of anorganization, allowing for drill-downreporting and, in turn, real-time decisionmaking.

Within the asset management industry,common BI functions includebenchmarking, financial andorganizational performancemanagement, predictive analytics anddata mining. Performing these functionsempowers organisations to takeadvantage of data they already possess.The sections below will expand uponthese BI functions and technologysolutions.

Practical applicationsBenchmarking is a widely used BIfunction. By comparing one's ownbusiness performance against otherleading industry competitors, this methodexposes areas for potential improvementand helps management to set achievabletargets. Performance management,another BI function, is often used inconjunction with benchmarking to trackcurrent department or organizationalactivities against objectives that were set.

Finance departments use bothbenchmarking and performancemanagement to analyze profit and lossby portfolio manager, to monitor fundperformance across multiple years andto compare the budget to actualperformance.

Keeping investors confident and contentis not an easy task, especially in anunstable financial market. Whiletransparent and accurate communicationis essential to accomplishing this,knowing what an investor may bethinking is also helpful. While BI softwaredoes not exactly read minds, it canmonitor user activity data trends fromelectronic file rooms and portals toanticipate investors’ behaviour. Forexample, if a specific investor hashistorically logged into a company'sinvestor portal twice a year for the pastfour years but recently logged in six timeswithin three days, this irregularity couldbe reported to investor relations as anindication of a potential concern.Through the use of the website's trafficand activity logs, BI software can positioninvestor relations to take the necessaryaction to reach out to clients.

The most common use of BI within assetmanagement relates to data mining,the process of using statistical methodsto extract hidden patterns and trendsfrom data. Whether the data resides ina single database or disparate systems,BI technology can acquire and consolidatedata in order to streamline the analyticalprocess. Traders use information such ashistorical market trends and quarterlyfinancial statements to inform theirinvestment strategies. Additionally,data mining can be used to managecounterparty risks by highlighting issuesthat require deeper analysis orinvestigation. For example, data miningcan show whether the short interest in acounterparty exceeds acceptable levelsand how many news reports are negative.

The English philosopher Francis Baconfamously said, "Knowledge is power".In asset management, groups such as thefinance department, investor relationsand operations can be empowered to usethe data they receive in order to makebetter decisions. Whether these decisionsrelate to tax and finance, relationshipmanagement or general operations,leveraging technology to maximize theuse of data is an important success factor.

General issues

IT’s role in intelligentdecision making

David Steiner PwC (US)+1 [email protected]

Scott SteinPwC (US)+1 646-471-2990 [email protected]

Leah Armout LevyPwC (US)+1 646 471 6004 [email protected]


With the deadline for producingKey Investor InformationDocuments is looming, managersurgently need to focus on how theywill be able to meet the logisticalchallenges of production anddistribution.

While in principle a relativelystraightforward task, creating the two-page Key Investor Information Document(KIID) required under UCITS IV has thepotential to become a logistical nightmarefor asset managers. With a KIID requiredfor each share class, multiple translationsneeded and frequent updates, the assetmanager may have to produce tens ofthousands of such documents each year.

Typically, the infrastructure needed todeliver these documents exceeds thatcurrently in place to support the existingsimplified prospectus, fund factsheets andmarketing documentation alreadyprepared, requiring a review of systemsand related processes and controls.

While transitional arrangements exist,all new funds launched post 1 July 2011will require a KIID, and therefore time isof the essence.

In June 2010, PwC and the EuropeanFund and Asset Management Associationconducted a survey ‘UCITS IV: A time forchange’ which identified the stark factthat 58% of asset managers had notconsidered the cost implications ofchanges to their systems and controls toimplement the KIID. Furthermore, ofthose who were ahead of the curve andhad considered the costs, some suggestedthat “the production of the KIID would bea significant resource strain”.

Now four months on, with the deadlinelooming closer, how is the industrygearing itself up to deal with thisrequirement?

Recurring issuesSince conducting our survey, we havemonitored our clients’ progress. We havenoted that there are four recurring issues:

• ScopingIdentifying the numbers of UCITSfunds, their classes, translations,estimations of updates and the resultingKIIDs.

• GovernanceConsidering how the KIID project willrun in the initial set-up period and thenhow governance arrangements will beimplemented and monitored when it isbusiness as usual.

• ProductionEvaluating all data requirements andhow to capture and check inputs, withongoing monitoring and evaluationof changes and trigger points for there-issuance of KIIDS.

• DistributionDetermining the procedures needed toensure that updated and correct KIIDsare in the hands of potential investors.

Asset managers are applying varyinglevels of resource and taking variousapproaches to the KIID, placingresponsibility for it with changemanagement, product development,marketing or client reporting. The larger,more self-sufficient houses have createdsteering committees to drive forwards theinitiative and build solutions. But thesmaller houses often have limited supportand are seeking market created solutions.

Outsourcing


General issues

Inching towardsproducing a UCITS IVKIID

Sally CosgrovePwC (UK)+44 20 7804 [email protected]

Ken OwensPwC (Ireland)+353 1 792 [email protected]

Thierry BlondeauPwC (Luxembourg)+352 49 48 48 [email protected]

Damian ReganPwC (UK)+44 20 7804 [email protected]

58% of asset managers had not considered the costs of implementing the KIID.

58%

While outsourcing provides access toresources and IT systems that assetmanagers are lacking or would ratherallocate to other needs, this solution willonly be as good as the service levelagreement supporting it, the quality ofthe asset manager’s data being providedto populate the KIID and the effectivenessof the internal controls frameworks atboth parties monitoring the overallprocesses.

For those fund administrators and otherspecialist providers intending to offer asolution, particular challenges remain interms of timely production and collationof information. Indeed, a number of theconstituent parts of the KIID will need tobe sourced directly from the assetmanager, such as objectives and changesto fund charges; and appropriateauthorisation and release procedures willneed to be agreed. Assigningresponsibilities, clarifying deliverables

and ensuring effective timetables will becrucial to smooth operation.

Questions arise for all administrators andspecialists regarding what assurancesthey can provide to deliver KIIDs on atimely and accurate basis. Asset managersshould continue to be aware of the needto challenge their providers on theirsystems’ integrity, their resourceavailability and their experience. Theymust also demonstrate that they haveeffective controls to deliver the wave ofKIIDs that will need to be produced.

In summary, although some assetmanagers, proactive fund administratorsand specialists have made it across thestarting line and are actively developingand seeking solutions, others are still inthe starting blocks. What is certain is thatall will need to cross the finishing linesooner than later, and there is no easyoption to take to get there.


UCITS IV: Time for changeThe Asset Management Industry’s views on theKey Information Document

Asset Management

June 2010

Questions arise for all administrators andspecialists regarding what assurances they canprovide to deliver KIIDs on a timely andaccurate basis.

Following concerted pressure,pension and investment funds havebegun to receive withholding taxrefunds and laws are beingchanged.

Many pension and investment funds havefiled refund request and protectivereclaims in various EU Member States forthe recovery of EU withholding taxes ondividends and interest since 2004. Overthe last year, more and more countrieshave either started to make repayments orsuffered defeats in their domestic courts.Pension and investment funds havereceived, or are due to receive, millions ofEuros.

Some EU Member States still havelegislation which taxes foreign portfolioinvestors more highly than their domesticportfolio investors. According to theEuropean Commission (EC) Treaty, allrestrictions on the movement of capitalbetween Member States shall beprohibited, but as no harmonisation onthese tax matters exists, many MemberStates still discriminate foreign portfolioinvestors. Budgetary reasons are often thereason for this.

A pioneering study by PwC in 2005 foundthat 18 EU member states had regimeswhich made non-resident pension fundseffectively pay higher taxes on interest ordividends than comparable resident

pension funds. Based on this study, PwCand the European Federation forRetirement Provision lodged complaintswith the EC in December 2005. The ECagreed with these views and startedinfringement proceedings in 2007.Similarly, PwC has lodged complaintswith the EC against seven EU countriesfor their discriminatory fiscal treatment ofdividend payments to foreign EUinvestment funds. A number of EuropeanCourt of Justice (ECJ) cases support theEC’s view. In the Denkavit case, forinstance, the ECJ confirmed thatoutbound dividends must not be subjectto higher taxation in the source State thandomestic dividends.

Results of pressureToday, we are seeing the first results ofthe parallel pressure at EU and nationallevel. EU countries that have changedtheir law for pension funds due tocontinued EC pressure include: Austria,Czech Republic, Estonia, Italy, Latvia,Lithuania, Poland, Slovenia, Spain andThe Netherlands. The EC has alsoinitiated infringement procedures againstFinland, France, Germany and Portugalregarding their treatment of foreignpension funds. An EC referral of Denmarkand Sweden to the ECJ is expected.Recently, the Spanish and French courtsruled that no withholding taxes shouldhave been levied on dividenddistributions to foreign pension funds, butthe respective tax authorities requiremore information from foreign funds.


General issues

EU withholding taxrefunds start to flow

Martin Vink PwC (Netherlands)+31 88 792 [email protected]

Bob van der MadePwC (Netherlands/Belgium)+31 6 130 96 2 96 [email protected]

According to the European Commission (EC)Treaty, all restrictions on the movement ofcapital between Member States shall beprohibited, but as no harmonisation on thesetax matters exists, many Member States stilldiscriminate foreign portfolio investors.

In the Aberdeen case, PwC successfullyassisted a Luxembourg SICAV to claimback Finnish withholding tax. UK andLuxembourg funds have also obtainedwithholding tax refunds in Norway. Spainhas recently amended its domestic law infavour of foreign UCITS. In September2010, the French Tribunal Administratifsuggested an exceptional procedure,considering the large number of “FokusBank” claims filed by foreign investmentfunds. In two cases rendered since April2010, a French Tribunal ordered a refundof unduly withheld dividend taxes toforeign investment funds. The EC has alsostarting infringement procedures againstFrance and Belgium regarding thediscriminatory treatment of foreigninvestment funds.

Non-EU investors’ test casesNon-EU/EEA based investors e.g. based inSwitzerland, the US, etc., may also fileprotective claims as EU rules prohibitrestrictions on capital movementsbetween EU and non-EU countries. TheEC is of the opinion that non-EU investorshave strong arguments and has startedtwo test cases against EU member statesin 2009. The extension to third-countryresidents potentially applies to allportfolio investors, such as investmentfunds, pension funds, charities,endowments, insurance companies,banks and sovereign wealth funds.

To safeguard their rights, asset managerswill need to file protective claims withinlocal statutory time limitations rangingfrom three months to five years. In orderto avoid losing out on any payments dueto statutory time limitations, it is stronglyrecommended to take quick action as the2010 year-end is approaching fast.


2010In September 2010, the FrenchTribunal Administratif suggestedan exceptional procedure,considering the large number of“Fokus Bank” claims filed byforeign investment funds.

The impact of EU law on real estateinvestments cannot be overrated.Three recent developments provideproof of this position.

When international investors such aspension funds invest directly in cross-border real estate, they are not onlyconfronted with issues that are specific toreal estate, such as depreciation and roll-over relief, but also with discrimination inthe form of the source-state exemptionsavailable to domestic pension funds. Asurvey conducted by PwC in 2009 of thetax regimes in the EU-27, Norway andSwitzerland, revealed 45 areas ofpotential discrimination under EU law,chiefly relating to the special tax regimesfor domestic pension funds, real estatefunds and charities.

The developments below highlight areasof discriminatory treatment that haverecently been addressed.

Finnish REIT regime rulednot state aid In a case that sheds new light on thequestion of what constitutes state aid inreal estate, the European Commission(EC) has recently authorised theintroduction of Real Estate InvestmentTrusts (REITs) in Finland. The FinnishREIT regime is being introducedspecifically to encourage investment inaffordable rental housing. Although theseREITs will be exempted from Finnishcorporate income tax, the EC is satisfiedthat the scheme does not constitute stateaid as any profits the REITs make must bedistributed immediately and will be taxedat shareholders’ level. Key to the EC’s viewis the fact that Finland has designed itsREIT regime to make the tax treatment ofa REIT investment on a par with thetaxation of an individual’s direct realestate investment. In other words, theFinnish REIT regime is fiscally neutral.

Transfer tax on real estateshares possibly contravenesCapital Duty DirectiveIn a development that may affect theacquisition of shares in real estatecompanies across the EU, in May 2010,the EC issued a ‘reasoned opinion’ toSpain requesting it to change its taxprovisions related to the transfer ofsecurities. Taking the view that when realestate companies issue shares theseprovisions impose a real estate transfertax. According to the EC, when acompany issues new shares, this actshould not trigger a real estate transfertax for the parties acquiring the shares inaddition to Spanish capital duty. The ECconsiders that the Spanish legislation inquestion does not comply with CouncilDirective 2008/7/EC, as the directiveprovides for another tax to be levied inaddition to capital duty on certaincontributions of capital that fall withinits scope.

Dutch corporate taxationon real estate not compliantCiting the principle of free movement ofcapital, on 30 September 2010 the ECannounced it had requested theNetherlands to address several rules tobring the taxation of non-residents, whichhad been treated unfavourably, into linewith the taxation of residents. Firstly, theEC requested that foreign charities andchurch organisations should have thesame exemption from corporate tax astheir Dutch equivalents when investingdirectly in Dutch real estate. Foreigncharities and church organisations shouldno longer be deemed to carry on anenterprise in the Netherlands, the ECsaid, when investing in Dutch real estateand rights concerning Dutch real estate.

Additionally, the EC requested theNetherlands to change a tax ruleregarding indirect real estate income fornon-resident charities. This rule taxesincome from substantial interests notforming part of the business capital ofcompanies established elsewhere in the


General issues

EU real estaterulings continue

Hein VermeulenPwC (Netherlands)+31 88 792 75 [email protected]

EU, European Economic Area (EEA)and European Free Trade Area (EFTA),although income held by domesticcompanies is exempt, regardless ofwhether it forms part of their businesscapital. The Commission considers thisdifference in treatment a discriminationunder Article 63 TFEU (free movementof capital), and controlling participationsof article 49 TFEU (freedom ofestablishment). Moreover, the EC saysthe Dutch legislation is contrary tothe Parent Subsidiary directive(90/435/EEC) rules regarding dividends,since this directive does not provide for a"business capital" test.

The EC also considers these substantialinterest taxation rules contrary to EU lawfor investors other than charities in theEU, EEA and EFTA area, including foreignpension funds.

These are some of the areas wherediscriminatory tax treatments are beingaddressed. In some other areas, where nosolution has been reached, it is possiblefor international investors to negotiateequal treatment with domestic investors.


According to the EC, when a company issuesnew shares, this act should not trigger a realestate transfer tax for the parties acquiring theshares in addition to Spanish capital duty.

Asset Management News is produced by experts in their particular field to address important issues affecting theasset management industry. If you would like to discuss any aspect of this document, please speak to your usualcontact at PwC or a member of our global or territory leadership team.

Global Asset Management Leadership Team


Global Asset Managementcontacts

Barry BenjaminPwC (US)Global Asset Management Leader+1 410 659 [email protected]

Kees HagePwC (Luxembourg)Global Real Estate Leader+352 49 48 48 [email protected]

John ParkhousePwC (Luxembourg)European, Middle East & AfricaAsset Management Leader+352 49 48 48 [email protected]

Pars PurewalPwC (UK)UK Asset Management Leader+44 20 7212 [email protected]

Brendan McMahonPwC (Channel Islands)Global Asset ManagementPrivate Equity Leader+44 1534 [email protected]

Robert GromePwC (Hong Kong)Asia Pacific Asset Management Leader+852 2289 1133 [email protected]

Will TaggartPwC (US)Global Asset Management Tax Leader+1 646 471 [email protected]

Mike GreensteinPwC (US)Alternative Investments PracticeAssurance Leader +1 646 471 [email protected]


ArgentinaDiego Sisto+54 11 4850 4715

AustraliaAndrew Wilson+61 2 8266 3337

AustriaThomas Strobach+43 1 501 88 3640

BahamasDawn Jones+1 242 302 5300

BelgiumEmmanuèle Attout+32 2 710 40 21

BermudaAndrew Brook+1 441 299 7126

BrazilJoão Manoel dos Santos+55 11 3674 2224

CanadaRajendra Kothari+1 416 869 8678

Cayman IslandsGraeme Sunley+1 345 914 8642

Channel IslandsBrendan McMahon+44 1534 838234

ChileRoberto Villanueva+56 2 940 0070

ChinaAlex Wong+86 21 2323 3171

CyprusCostas Mavrocordatos+357 22 555 202

Czech RepublicRichard Jones+420 2 51 152 161

DenmarkMikael Sørensen +45 39 45 9269

FinlandTuukka Lahkela+358 9 2280 1333

FranceAlain Le Barbanchon+33 1 5657 1084

GermanyPeter Seethaler+49 69 9585 3436

GibraltarEdgar Lavarello+350 73520

GreeceMary Psylla+30 210 6874 543

Hong Kong SARRobert Grome+852 2289 1133

HungaryDavid Wake+36 1 461 9514

IndiaGautam Mehra+91 22 6689 1155

IndonesiaMargaret Margie+62 21 521 2901

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Isle of ManMichael Simpson+44 1624 689 689

ItalyElisabetta Caldirola+39 2 778 5380

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South Korea (Republic of)Jae-Hyeong Joo+82 2 709 0622

LatviaJuris Lapshe+371 709 4400

LithuaniaChristopher Butler+370 5 239 2300

LuxembourgDidier Prime+352 49 48 48 2127

MalaysiaMohammad Faiz Azmi+60 3 2173 0867

MaltaJoseph Camilleri+356 2564 7603

MexicoEduardo Gonzalez+52 55 5263 6072

NetherlandsFred Gertsen+31 10 407 6614

New ZealandPaul Mersi+64 4 462 7272

NorwayGeir Julsvoll+47 95 26 05 40

PakistanSohail Hasan+92 21 2419322

PolandAntoni Reczek+48 22 523 4340

PortugalAntónio Assis+351 213 599 000

RussiaRichard Gregson+7 495 967 6327

SingaporeYeow Chee Keong+65 6236 7298

SlovakiaChristiana Serugova+421 2 59 350 614

South Africa (Republic of)Pierre de Villiers+27 11 797 5368

SpainAntonio Greño+34 91 568 46 36

SwedenSussanne Sundvall+46 8 555 332 73

SwitzerlandThomas Huber+41 58 792 2436

TaiwanRichard Watanabe+886 2 2729 6704

ThailandMichael Haddon+66 2 344 1031

United KingdomPars Purewal+44 20 7212 4738

United States of AmericaBarry Benjamin+1 410 659 3400

Territory Leaders

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Editor: Rupert Bruce

www.pwc.com/assetmanagementThis publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the informationcontained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completenessof the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or dutyof care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2010 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms of PricewaterhouseCoopersInternational Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act asagent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its memberfirms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any othermember firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.