Pooled Investment Vehicles: Keeping assets (and families) together

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HK: Welcome to our Wealth Advisory series, where we discuss topics related to Life and Legacy. Today we will be discussing the growing use of pooled investment vehicles.

I’m Hannamari Koivikko, a wealth advisor for J.P. Morgan´s European team.

AW: and I am Andrew Whitaker, wealth advisor for J.P. Morgan’s Latin American team.

HK: Many of our clients organize their wealth with trusts, foundations and companies, and have done so for generations. These are typically established by a single family member in order to transfer wealth to future generations in an orderly manner. 

With increasing frequency, however, we are seeing family members who want to gather their assets together in a consolidated structure – aka a pooled investment vehicle. 

Families investing jointly is not a new theme, but the way of organizing the pooling is getting more sophisticated.

AW:  Fully agree, I would say almost one third of my conversations with clients involve the objective of having multiple branches and even generations of the family invest together. 

For example, it’s very common to have a family business that was founded several generations ago now owned by family members in two or even three generations.  When the company is sold, those family members often want to continue to invest together as a “family business.”  How and why these family members invest together, and some of the strategies used to do so effectively, are important topics for any family.

But Hannamari, let´s first start from the very beginning: what is a pooled investment vehicle?

HK: Sure Andrew! A pooled investment vehicle is a separate legal entity (trust, family partnership, company...) that is owned by multiple people, who can be comprised of more than one generation or branch of a family. 

One driver of the interest in pooled investment vehicles is consolidating investment control in one family member, while permitting economic ownership among many members.

For example, we recently worked with a family with significant liquid assets spread in various entities across the globe. The family was comprised of three branches, with two adult generations.  They had a very clear vision established by the patriarch almost 70 years ago that the liquid assets were to be used as a reserve for the family business.   This meant that the families’ pooled investment vehicle (in their case a regulated fund) had to be invested in a manner that ensured such liquidity would be available to the family business in the event of an emergency.  While the individual family members generally had a high risk tolerance, the governance of the family fund permitted the family member who controlled the investment decisions to restrict the investments of the fund to ensure minimum volatility and risk. 

AW:  My experience is similar.  A joint vision as to how investment decisions should be made is probably one of the key hallmarks of a successful family pooled investment vehicle.  In a family we worked with recently, the passion that the third generation had about the environment drove how a portion of the family’s pooled investment vehicle was invested.  Here, the family created a specific vehicle, owned by the family’s fund to invest in sustainable ventures.   The family carefully carved out a portion of their liquidity and capitalized a new subfund, and transferred control over the investments of such fund to the next generation.    

It was a brilliant solution to not only diversify their holdings, use a passion of the younger generation to involve them in the family wealth and grow their investment experience.

HK:  Another important feature of a pooled investment vehicle is that it can enable family members with divergent profiles continue to invest together – but in ways that each one’s individual preferences are met. 

For example, a fund can be structured to be an umbrella under which you can lodge an unlimited number of segregated sub-funds, each having a dedicated investment strategy –with one or several investment managers. The sub-funds can have different currencies, risk profiles, have hedging (or not), and different liquidity. Each family member can decide which sub-funds he or she wants to invest in, in order to meet their own investment objectives.  Theoretically, you can end up with a myriad of options – all with a clear mechanism for transparency, valuation, and reporting. 

AW:  Of course, this kind of flexibility makes the pooled investment vehicle much more complex, and the administration can be costly.  The administrative burdens of a pooled investment vehicle have to be clear to the family.  On the other hand, the transparency and clarity it provides to all family members should not be understated

One of our clients, for example, has a  sophisticated single family office that managed separate accounts for multiple family members – some very large accounts and some small accounts.  Each family member has accounts at multiple financial institutions.  The family office struggled to consolidate the movements necessary to track asset allocation across accounts as family members contributed cash or distributed cash in uneven manners to their separate accounts and holding vehicles.  The solution that solved all of these issues was a family pooled investment vehicle, which formalized the accounting and reporting and provided clear valuation to each family member. 

HK:  And it’s not just the purely administrative efficiencies. Often the complexity and cost related to tax reporting can be the main driver to pool assets to a vehicle.  Some funds may not even accept individual investors, but are only open to organized entities.  Of course, the vehicles may also change the taxation of the investments.

AW: True, I know of a few jurisdictions where a properly structured pooled investment vehicle has tax efficiencies that other structures do not. Structures may, for example, enable tax deferral, where the same investments done by the family members individually would be subject to tax.   In particular, when working cross border or family members with disparate tax residencies, it is important to assess how the different countries would treat the entity.

HK: Indeed Andrew. Family pooled investment vehicles are becoming more sophisticated partially because families are becoming more complex, for example with members living in different countries or holding different citizenships. The tax and regulations regimes can be very different, and the selected type of pooled vehicle must address these differences. For example, a European investor is likely going to need a fund that is highly regulated, such as a Luxembourg SICAV or Irish fund; a Latin American investor may need a simpler Cayman fund; and a US investor may require a straightforward partnership. Regardless of the legal form, investors need to agree on similar aspects, such as:

·         Frequency of redemptions and valuation

·         Governance - voting or no voting participation

·         Investment strategy and decision making

·         Rights of investors with respect to transferability, inheritance, exit, pledging

AW:  To summarize, the key element to a successful pooled investment vehicle is to understand the needs of each family member and provide flexibility to adapt to changing circumstances – both in terms of the investment strategies and preferences, but also with respect to the tax, legal and regulatory environment where each family member resides. 

HK: That’s a great note to end on! Thank you to our audience for joining us in this episode.  Your J.P. Morgan Wealth Advisors are here to engage with you and your family on topics of Life and Legacy.  We look forward to hearing from you.