Вы находитесь на странице: 1из 62

WM 8

Tax Planning
Estate Planning
Real Estate & Reits


Trust Topic Flow

Section 1 : Introduction
Section 2 : Wealth Protection

Section 1 : Introduction

Wealth Cycles
Who are your clients?
HNW individuals, Entrepreneurs, Professionals

What stage of Wealth Cycle ?


Section 2 : Wealth Protection

Role of a Private Banker

Key words
Understanding Clients concerns & needs
Wealth Management
Personal Attention

Can you add value ?


Different Types
Investment Areas
Non Traditional assets (viz art, livestock)
Legal cf beneficial
For whom/What
Investment guidelines
Short/medium/Long term needs

Options for Succession Planning

Die Intestate intestate
-adjective 1.(of a person) not having made a
will: to die intestate. 2.(of things) not disposed
of by will: Her property remains intestate.
Bequeath wealth by way of a Will
Settle Trust during life time

Commonly Used Tools for Wealth Protection

Companies -The dividend distribution tax and takeover code has made
even the biggest groups simplify their structures
Partnerships - A business entity where partners (owners) share with
each other the profits or losses of the business undertaking in which all
have invested. Doesnt rule out fallout of human nature and
circumstances & has inherent risk of unlimited personal liability
Wills -A legal declaration of the intention of a testator with respect to
his property, which he desires to be carried into effect after his death.
Trusts - A Trust means vesting or placing property under the control of
a person in the confidence that he will hold it for the benefit of a third
person and/or himself. Depending on the end objective, a trust can be
public, private
or charitable

Trust - Concept
TRUST means vesting of property or placing property
under the control of a person in the confidence that he
will hold it for the benefit of a third person and/or himself.

Ingredients of Trust:
Settlor : Person who declares the confidence by vesting
Trustee : Person who accepts the confidence
Beneficiary : Person for whose benefit the confidence is
Trust Property : Subject matter of the Trust

Trust Superior structure

No regulatory compliance requirement

Flexibility in formation and usage
Ability to distinguish beneficiaries and their
shares in the corpus
Self Regulated
Confidentiality maintained at all times
Bankruptcy remoteness possible

Trusts: Diverse Objectives

Estate / Succession Planning Preserving family fortune for future generations
Maintaining confidentiality of financial transactions
Pursuing philanthropic intentions including anonymously
Watertight mechanisms to provide for foster child or child with special needs
Managed approach to wealth accumulation
Ringfencing family wealth yet leveraging the same
Different set of beneficiaries for separate pool of assets
Separating business assets from personal assets Bankruptcy Protection
Effectively addressing Generation Next issues
Reduction in Administrative Hassle. Transparency in managing wealth Immediate
& Extended Family.

Client (Settlor)

Trustee (Individual/corporate)-Illustration :
Line Trust Corporation: They have extensive expertise in setting up and
running all kinds of trusts in Gibraltar for private and corporate
clients around the world. They currently hold on trust assets under
management worth in excess of $10 billion. Wholly owned by the
partners of Hassans, the leading international law firm in Gibraltar, LTCL
is a professional trustee, licensed and assessed by the Financial
Services Commission of Gibraltar and a direct beneficiary of Hassans'
60 years of multi-jurisdictional expertise. LTCL not only executes all the
duties of a trustee, it is also able to structure the optimum trust
vehicle to suit clients' needs no matter how complex. LTCL's
licence from the Financial Services Commission of Gibraltar also covers
the provision of asset protection trusts which are governed by their own
specific legislation.

Beneficiaries (Individual/corporate)

Concept of Ownership (under Common Law)

eg UK, Sgp,Aus,Mal,India

Legal Ownesrhip


Beneficial Owner

Basic Trust Structure




Beneficiaries (may or
may not include

Trust Structure & Special Investment Companies





Company. A


Company. B


Types of Trust
Private Trust: A Trust where the beneficial interest is
limited to specified individuals or definitive ascertainable
individuals.Ex : CS Poonawalla Trust or RDA Trusts.
Public Trust: A Trust formed for the benefit of the public
as a whole or a section of the public, and in its
permanence. Ex: The Poona Music Society.
Charitable Trust: This is a sub-set of the Public Trust and
is often considered synonymous with Public Trust. Ex :
The Duragdevi Charitable Trust.

Sub-Categorization of Trust
Revocable Trust: A Trust where the right to revoke /
close the Trust at any point of time is available with
the Settlor
Irrevocable Trust: A Trust which can be wound up
only on fulfillment of trust objective or with consent
of all beneficiaries
Specific/ Determinate Trust: A Trust where the
beneficiaries are determined and their beneficial
interest is also determined
Discretionary/ In-determinate Trust: A Trust where
the beneficiaries are indeterminate and/or their
beneficial interest is indeterminate.

Article for Discussion


Taxation Aspects - Trust

Revocable Trust : Income taxed in the hands of
Irrevocable Indeterminate Trust : Income taxed at
Trust level
Irrevocable Determinate Trust : Income may be
taxed at Trust level or in hands of beneficiaries, as
per discretion of Assessment Officer

Wills Vs Trust

Creation of Law
Existing individuals
Mandatory in most cases
leads to delays in
Does not allow for control of
end use, monitoring etc

Creation of Equity
Possible to cover existing and
future generations
No need for probate
Provides for distribution and


Public Document during



Not Possible

Possible if assets are unencumbered

and there is no mens rea* (i.e. guilty


Invariably leads to

Structured Progression
Participative transition

Role of Trusts
Safeguarding the interests of minors
Providing financial security
Educational, health care oriented

Investment Purposes
Tax Planning
Mode of control : Generation Next

Illustration : ITCL

Structuring / Set-up fee :
One-time fee ranging between Rs 300,000/- to
1,000,000/- depending on complexity of transaction

Annual trusteeship fee for assets under

Upto Rs. 10 Cr Rs. 250,000/ Rs. 10 Cr. To Rs. 20 Cr. Rs. 500,000/ Above Rs. 20 Cr. Rs. 1,000,000/-

Escalation of annuity fees upto 25% once

every 3 years

When would a client need a Trust?
Assets which can be covered
Tools used for Wealth Protection &
Concept of Trust
Structures/Types/Sub Categorization
Wills vs Trust
Role of Trust

Real Estate & Reits

Real Esate Scenario in India

Understanding Real Estate through the
Real Estate Presentation.

Some additional Data Points

India Realty Milestones

India Supply Demand Data (see page5-7, 12

for Pune)

What is REIT
Entity which pools in money and invests in real
Provide a similar structure for investment in real
as mutual funds provide for investment in stocks
Can be publicly or privately held
Generally listed on exchange
Assets of the trust are managed by a Fund
Provide taxation benefit to investors
Pass through available in some countries like
USA if specified conditions are


What is REIT?

Why REITs?
The Indian REITs opportunity
Challenges in implementing REITs
Favorable steps so far
Some Suggestions

Why Reits
Provide alternate investment class to
High liquidity
Tax advantage of pass through status
Low transaction cost
Lower ticket size
Capital access and exit route to developers
Institutionalization of RE sector
Attracts foreign investors
Help develop a broader economy

Unit Holders
Investment in Reit


Distribution of income

Reit Vehicle

Acts on behalf of
Trustees fund

Ownership of properties






Discussion Document

Private Equity

PE Funds in India
The PWCGlobalPEReport2008 (Pg33-34)

Private Equity

Private Equity As an Asset Class:
Definition and Rationale
Private Equity vs Public Equity & Other Asset Classes
PE Investment Model

Private Equity Funds :

Types of Funds and Fund Structures
Cashflows and Valuation
Importance of Co-Investments

Direct Investing & Co-Investments:

Value Chain

The Private Equity Industry:

Prominent Funds and LPs

What is Private Equity?

Private Equity describes any type of funding for privatelyheld businesses, or funding for a public company, structured through
off market negotiations:
Private Equity investors are involved in financing
companies at different stage

Start-up firms
Mid- Stage firms
Mature companies
Troubled/Declining companies

The risks relevant to the companys stage of

development would largely determine the type of
Private Equity returns obtained.

Risk / Return Profile of Different

U.S.Asset Classes (Nominal,1990-2005)
Real Estate
Private Equity

Mean Returns

Std De

Source: Cambridge Associates, TIAA-CREF

Note: Unlike public markets, it is difficult to assign precise historical values
for private equity return and volatiliity due to the lack of reliable data

Private Equity is considered to have the highest risk /highest return

compared with traditional asset classes.

Private Equity vs. Public Equity


Public Markets

Private Markets

information adv

Few if any

Always Present

Price volatility


Always Present

Liquidity risk


Always Present

ST investment



Avg perf spreads

Much higher then

public market equity

Why invest through Private Equity?

Diversification. Private Equity returns are not highly correlated with

public market returns.
S&P 500
U.S. Bonds
Real Estate
Private Equity

S&P 500


Real Estate


Private Equit


Higher Returns. Achieved through investing in good projects and top-quartile funds.
E.g. G/C co-invested US$100,000 in Cisco and made about US$7 million.
G/C invested US$25 million in Equant and sold it for US$368 million.
(Source: GIC year book 2001 Pg 108)

Private Equity is an attractive asset class, albeit with

limited liquidity. Typical holding periods last from 3-10year, depending
on the type of investment

The Private Equity Investment Model


Methods of investing

Pension Funds


Insurance Co

Direct Investing

Stage (venture

Investing through Funds

A fund would source their capital from various investors
Managers of the partnership are known as General Partners (GPs) and the
investors are Limited Partners (LP)

Direct Investing
Wealthy individuals financing a business in the start up/early stage (also
called angel investing)
Co-investing: investing directly into the company often with other
sophisticated investors

Types of Private Equity funds

Investment Stage /Types Focus

Early Stage/Start-Ups/Venture Capital, e.g. Sequoia, Battery Ventures

Expansion Capital / Conventional PE, e.g. Actis Capital, CDH Investments
Buyouts MBOs and LBOs,e.g. KKR,Bain Capital,Blackstone
Distressed/Turnaround /Special Situations, e.g.Avenue Asia,Apollo,WL Ross
Mezzanine, e.g. ICG, Indigo
Geographical Focus

Global, e.g. Texas Pacific Group, The Carlyle Group, KKR

Regional, e.g. Affinity Equity partners
Country-Specific, e.g. Ironbridge (Australia), Advantage Partners (Japan)

Sector Focus:
Technology, e.g. General Atlantic Partners,Silver Lake
Telecoms, e.g. Providence,Telegom Venture Group

Energy/power, e.g. First Reserve, Carlyle Riverstone

Healthcare, e.g. Sanderling, Healthcare Ventures
Media, e.g. Elevation Partners,ABRY
Infrastructure, e.g. Goldman Sachs Infrastructure Fund, AIG Highstar

Early Stage ( Growth)

Shoppers' Stop is a leading player in lifestyle retailing in India. Since its

inception, Shoppers' Stop has progressed from being a single brand shop to
becoming a Fashion & Lifestyle store for the family. Today, Shoppers' Stop
is a household name, known for its superior quality products, services and
for providing a complete shopping experience.
ICICI Venture entered the company when it was still in the very early stages
of its growth. At that time, organized retail was still an untested concept in
India. The company operated through 4 stores and a revenue of Rs 800 mn
(USD 18 mn) and went on to become a 17 store chain with a turnover of Rs.
600 mn (USD 136 mn), by the time of ICICI venture's exit in 2005.
ICICI Venture played an active role in facilitating the supply chain and
systems efficiency of Shoppers' Stop. ICICI Venture provided active inputs
on the firm's growth strategy to become a leader in lifestyle store format
space and also helped it to firm up its IPO plan and actively assisted the
company to go public.


PVR, the pioneer in cinema multiplex in India, is the leading cinema
entertainment company in the country. Beginning its operations with
4 screens at a single cinema in 1997, PVR currently operates more
than 70 screens at multiple cinemas spread across the country and
is the largest cinema exhibition chain in the country. Besides cinema
exhibition, PVR has also ventured into film distribution through its
100% subsidiary 'PVR Pictures' and is also making a foray into film
Today, with its experienced team, systems and processes ensuring
the scalability of its business model, PVR is well positioned to
capture the opportunities created by the transformation in the
cinema industry in India. In Dec 2005, PVR had a successful IPO
and raised Rs. 1,282 mn (USD 29.2 mn).


Welspun India Ltd

Welspun is India's leading and among the top five manufacturers of terry towels in the
world exporting over 90% of its sales directly to leading retailers including Wal-mart,
Bed Bath and Beyond, Linen n Things etc. The recently launched bed linen products
have witnessed wide acceptance from well renowned customers globally.
Post the current expansion plans, its terry towel capacity will be 31,000 tpa and bed
linen capacity would be 45 million metres p.a. Welspun plans to foray into decorative
bedding including 'top of the bed' items with a capacity of 1.4 mn pieces of decorative
bed sets.
In 2006, Welspun acquired one of UK's largest terry towel brand 'Christy'. This
acquisition brings access to the premium-end of the UK and European market.
Christy has long-standing relationships with leading retailers across UK including
Marks & Spencer, John Lewis, House of Fraser, Selfridges and Debenhams. Having
established its credentials as a world class manufacturer of terry towel and bed linen,
the company intends to move to the next level in the value chain viz. 'Branding' using
Christy as its platform.


I-Ven Interactive Ltd.

One of the first buyouts of India, Infomedia was bought from the Tatas. It is India's largest
provider of commercial information in the form of business directories branded as Infomedia
Yellow Pages (earlier called Tata Press Yellow Pages). Currently, the company's diverse business
areas include Business Directories, Magazine Publishing, Direct Marketing, Printing services, and
Publishing Outsourcing. Infomedia is the market leader in Yellow Pages and Special Interest
Publishing, and is one of the most respected contract printers in India. With offices in 18 cities
and a 1500 strong team, it now has a national footprint and a strong all-India network for ad sales
and distribution.
The buy-out was made through an SPV formed by IAF Series I (fund managed by ICICI Venture)
and was leveraged. The mezzanine fund has stepped in at the second phase and refinanced part
of the buy out leverage in the SPV by subscribing to its Subordinated Optionally Convertible
Debentures (SOCDs). The claims of the SOCDs are subordinated to the claims of the senior
investor who has invested in secured Non Convertible Debentures. The SOCDs will bear quarerly
interest coupons and will provide a high fixed yield through redemption premium. The tenure of
the SOCDs is 2 years; however they can be repaid after six months. The entire indebtedness of
the company has asset cover to the tune of 4 times, with the senior lender being covered at more
than 6 times. There is adequate liquidity to service the interest payment to the debenture holders,
further, I-Ven is stipulated to hold cash equivalent of one year of interest to be paid to the
debenture holders.

Other Types of Private Equity Funds

Fund-of-Funds :a Fund that invests in a basket of Private Equity Funds:

Has expertise in doing due diligence on PE Funds
Provides investors with access to a diversified portfolio of top quartile PE Funds, which they
might not have otherwise
e.g. pantheon Capital, HabourVest Patners

PE Fund Managers


Hedge Fund

Other Types of Private Equity

Listed Funds: Investors hold shares in a
fund, where shares are publicly traded

Fund returns are based on Net Asset Value

Provide an element of liquidity where a share
holder can sell their shares in the open
Either partnership interest in fund port-folio is
listed, e.g. KKR, Ripplewood Holdings or fund
manager company is listed, e.g. Blackstone

Fund Structure/Terms

Limited Liability partnership(LLP)

Parties include GP :The fund manager
Limited Partner (LP) : The investor
Fees involved
Annual Management fee :
Carried Interest : A returns based incentive fee paid to GP after
hurdle returns to LP have been achieved usually 20% of the
funds profit and can be higher.
Terms of the Fund
10years close ended with no redemption
Vintage Year : Years of Fund inceptions
Assessing funds of the same vintage allows for more
comparable performances.

Valuation Methodology of Funds
Fund Manager Assessment
Organisational Mgmt/Deal Sourcing/Value
adding/Investment process/Track record
Corporate Life Cycle (firms life cycle)
Process of investments

Categorization of Funds
Mezzanine financing is usually provided as debt to a
company, very often with features of conversion to equity
such as options and warrants. Such financing is usually
made to companies on the threshold of a initial public
Special situation funds look for investment opportunities
in companies that become attractive as an investment
opportunity because of an anticipated event such as a
turnaround in the operations of a distressed company
Buyout funds seek to take over a company with a
combination of equity and borrowed funds. The debt is
usually taken against the collateral of the assets of the
company being taken over. The loan is repaid from the
cash flow of the acquired company.

Categorization of Funds

PE funds specialize in bringing in capital and expertise at various stages of

the life cycle of a company. Based on this criterion, PE funds may be
categorized as
Early seeding funds provide capital and expertise in the concept srtage of a
company's lifecycle.
Venture capital funds provide capital, skills and managerial expertise for
start-up companies and small businesses with growth potential. Start-up
companies are identified as those that have been formed but may have
either not started marketing its products or making profits.
The focus in early stage funding selection is more on the industry and
viability of the project proposal. Valuation is a less important criterion since
companies are in a stage where revenue streams and margins may still be
Expansion funds provide funds to companies to scale up operations and
make the business more viable.

The J-Curve Effect on Returns

Investors in PE funds find that early valuations of a private equity
portfolio decline relative to the capital contributed. The investment
gains come later as the companies mature and valuations improve.
This effect of time on the returns from a PE fund is called the Jcurve effect. See Picture.
The J-curve is caused when the initial costs and management
fees are charged as a percentage of the capital committed while the
paid-in capital may be much lower. These costs are deducted from
the value of the portfolio before calculating TVPI thus pulling the
multiple low in the initial years. The second reason is the write-offs
for investments gone wrong which are identified earlier in the funds
life cycle. As the investments of the fund start creating value and
realizations are made, the returns from the fund goes up steeply. A
private equity portfolio may exhibit a series of J-curves as funds are
invested at various times.

Features of PE Funds
Long-term investment: The nature of investments made by PE
funds implies long investment periods. PE funds are typically set up
as 10-15 year closed-end funds with few or low redemption
Valuation & transparency issues: The investments made by a PE
fund may be difficult to value since they are usually not traded.
Moreover, such funds have low levels of regulations which do not
require periodic disclosures to investors or regulate nature and levels
of investment. All this exposes an investor to manager risk and
investment risk.
In India operations of PE funds are regulated by Sebi(Venture Capital
Funds)Regulations,1996 and Sebi( Foreign Venture Capital Fund)
Regulations, 2000. The regulations specify the structure, activities
and nature of investments that the funds can undertake. See List.
Read More

Evaluation of Fund Performance

The return from the fund may either be distributed to the investors or
retained in the value of the fund. The parameters that are used to
evaluate the performance of a fund are:
Total Value to Paid in Multiple (TVPI)= (Cumulative distributions+
Residual value)/Paid-in capital
Distributions to Paid in Multiple (DPI)= Cumulative
distributions/Paid in capital
Residual Value to Paid in Multiple(RVPI)= Residual value/Paid in
IRR is the internal rate of return that the fund has generated since
its first investment. It takes into consideration the timing of the
capital contributions and distributions and the investment holding

Valuation Methodologies of Funds

Fund portfolio companies held at cost unless there is an

event of:
new financing

Reported valuation are not true economic values:

Listed portfolio companies are often valued at publicly traded prices, subject to a
liquidity discount
Unlisted portfolio companies should valued based on conservative projections

Not marked to market, so one cannot reliably calculate:

Periodic return

Importance of Fund Manager Selection

Difference in Returns of Top Quartile U.S. and Europe vs Median
ones, makes fund manager selection critical!
Average IRR (%p.a.) as of 31-Dec-06 for funds raised 1984-2006
Upper Quartile

Upper Quartile

Median IRR

Median IRR

Venture Capital











Source: Venture Economics

Past performance is not indicative future result, which will vary.

The distribution of return from private equity suggests that:

Returns are asymmetrically distributed

Manager selection is rewarded
Investing in an index constructed across the asset class is neither possible, nor

Fund Manager Assessment Criteria

Organization / Management market reputation, support from parent company or

affiliates, team size and composition, background of team members, team stability
and dynamics, incentive structures, etc

Deal Sourcing pipeline, % of deals sourced on proprietary vs competitive basis,

business network, relationship with peer fund managers, etc

Value Adding post investment involvement, ability to add value, business

operating experience, etc

Investment Process - decision making process, due diligence capabilities and

process, investment judgment, etc

Investment Track Record number of deals completed, number and realised

performance of deals exited, condition and expected returns of existing portfolio, etc

Assessing a Private Equity Fund

-Normalise Returns for Anomalies
-Analyse IRRs over Variable Time Periods
-Judge GP Fisk Tolerance

-Structure and Key Terms of Deals

-Typical Investment Size

PE funds offer investor exposure to unlisted equity investments. Exit optins
are a key parameter in evaluating opportunities
PE funds can be categorized based on the stage at which funds are
The returns from PE funds may either be distributed or retained by the fund.
Gold ETFs that can be bought and sold on the stock exchange have
emerged a popular method to invest in gold.
International commodity markets can be accessed through international
International funds are subject to elaborate Sebi Regulation. They offer
diversification benefits, but carry additional risks from currency exposure.
Real estate is a cyclical and high risk investment. Several new investment
vehicles such as private equity funds are tapping the potential of this