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Can someone explain why Matheson is using charities to cut hedge fund's tax bills?

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    #2
    One More Toy
    Registered Users Posts: 3,765 ✭✭✭One More Toy


    Any insight? I'm really curious as to this structure!


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    #3
    Ardeehey
    Registered Users Posts: 193 ✭✭Ardeehey


    I encountered this a couple of years back speaking to a charity working friend of mine. The idea is that distressed assets on the balance sheet would be handed off to a charity, for free obviously. This asset would the unwind in it's own time and the charity would receive whatever is coming out of the asset. Win for them, win for the fund as it clears the asset off it's balance sheet and so reduces it's exposure to illiquid assets and decreases it's asset basis for tax calculations.


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    #4
    Marcusm
    Registered Users Posts: 10,232 ✭✭✭✭Marcusm


    It's amazing how crap business reporting can be. There is no underlying tax advantage or avoidance involved in those structures, in fact they are substantially the same orphan SPV ownership structure as is used for securitisations.

    The first thing you need to understand is that the investors need satisfaction that the underlying risks or assets will flow through to them without having to concern themselves with the solvency or bankruptcy remoteness of the promoter, usually a bank or insurance company.

    This is done by establishing a special purpose company or trust (depending on jurisdiction) referred to generically as an SPV. because this vehicle has no business history, the investor (generally the holders of a bond but not always) can get comfortable that whatever assets or contracts the vehicle invests in will not be commingled (meaning mixed up or aggregated with) with other assets of the bank/insurer in the event that the bank/insurer goes bankrupt, becomes insolvent etc.

    That of course doesn't explain the charity. That will generally have two functions. Firstly, the bank/insurer will not want to consolidate the vehicle. For many accounting standards in the early 1990s when these structures originated, simply not owning the equity or having the ability to appoint directors was sufficient. Secondly, in certain jurisdiction, especially the US, being part of a corporate group generally meant that the assets of the vehicle would be consolidated with the parent in the event of a bankruptcy completely negating the purpose in the first place.

    It's easier for Matheson which has been involved in pushing Ireland as a securitisation/SPV centre to establish some captive charities which it could offer to own the equity. This is better than it involving charities in (even) less well regulated environments.

    The whole structure is set out so that the financial flows pass through the vehicle and a small fraction is left behind. When the structure is wound up, that fraction gets applied for charitable purposes.

    No harm, no foul.


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