COMMENT: Panama leak reignites transparency row over private funds

Real estate managers must be ready for extra scrutiny from their investors which themselves feel the public’s fury about tax havens.

Public anger erupted after it was shown that high-profile companies and wealthy individuals, including public officials, were funnelling capital through so-called ‘tax havens’ as revealed by the vast leak of confidential information from Panamanian law firm Mossack Fonseca.

Private real estate funds use these jurisdictions for many practical reasons, and not merely for optimizing tax positions. For instance, offshore jurisdictions will have tax treaties with a host of other countries. A fund which has investors from, and invests in, a wide range of countries which have a tax treaty with an offshore jurisdiction saves itself a compliance headache by channeling investments through a central structure.

Irrespective of this, while the majority of the public’s resentment has not been aimed at the private funds industry it will have a knock-on effect. Already Norwegians protested outside the offices of Norges Bank Investment Management, steward of the world’s biggest sovereign wealth fund, criticizing its investments in companies that use tax havens. And already some Norwegian lawmakers said they would consider examining the sovereign wealth fund’s investments in companies that are incorporated in low tax locations. Meanwhile, a spokesperson for Norges Bank told Bloomberg that he expected the managers the fund invests with to provide openness around the issue, and called for greater levels of information sharing on tax structuring.

Of course, investor pressure on fund managers being open about the jurisdictions they choose to conduct their business is not a new phenomenon. In fact, some investors, such as German pension funds, cannot invest through structures that are not domiciled in a member country of the OECD.

But while the dust settles on the Panama Papers, investment managers will likely receive some probing phone calls from investors which want to better understand the firm’s offshore structures in a bid to cover their own backs and be perceived as transparent.

This is what happened to Vietnamese asset management and real estate firm VinaCapital, for instance. It recently moved its VinaCapital Vietnam Opportunity Fund Limited (VOF) from the Cayman Islands to Guernsey and has switched the fund from listing on the UK’s AIM to the main market of the London Stock Exchange (LSE). The rationale behind the switch: the fund's place of domicile and its quotation on AIM were barriers to certain potential new investors. To be fair, VinaCapital originally announced the plans to move the fund’s domicile last October, long before the Panama debacle. Still, the move takes on a whole new connotation in light of the recent drama in Middle America.

The reality now is that private fund managers should expect a renewed wave of tax scrutiny, regardless of whether they have done anything wrong. Fair or not, that is what comes with managing capital that is subject to public inspection.