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There are many persons out there that continuously ask themselves, “Why would I want to invest internationally?” That question has been asked for many years, and will in all likelihood continue to be asked for many years to come. The answer is quite simple, yet at the same time complex. Freedom. This word means different things to different people, so I will present my opinion. Freedom when it comes to investing means that I can invest globally, in large ventures or small ones. Make my investments in tax advantageous venues, and lastly, assess interest at the true going rate. A venture fund, or vulture fund if you prefer, is one that is designed to take full advantage of numerous types of opportunities. These can include any combination of the following:
Why is this? Well, perhaps the proposal is not sound. This is typically the first answer to the question. I grant you that not every proposal is financable nor is every proposal worthy of consideration. These are easily weeded out with standard due diligence questions. Yet, there are numerous opportunities abound in the international market. Consider this: A friend of a friend of mine was starting a commercial fishing operation based in Africa. He had taken the time to have a proper business plan prepared; complete with his own audited financial statement. This person was in need of a business loan to complete the purchase of a boat and equipment. He has had 12 years of commercial fishing experience, is familiar with various wholesalers to sell to, and had roughly 30% of his own cash in the deal. He could NOT get this deal done in the US! I could not believe this at all. Here was a gentleman that has the experience, and has his own equity at risk. What was the problem? First, the institutions that he went to were US based. These companies could not get past the fact he did not want the boats or the loan registered to a US entity. Aside from whatever tax motivation he held with regard to the US, the country in Africa was granting him a year moratorium on duty, and local tax. Second, as the wholesalers (typically US based) pay on terms, he also needed some form of accounts receivable financing as well. Most institution in the US prefer to do one or the other – if at all – of this type of financing. Lastly, he would have settled for a partner in the business. A MAJORITY partner to begin, and as the “loan” is repaid, release part of the equity over time. Had this opportunity
been presented to an international venture fund it may have been structured
something like this:
The equity position held by the fund decreases by 12% per year, provided that all payments are made on time. This ensures that the fund will be paid back with a very nice return, and upon completion, the fund will retain a small equity piece. Surprisingly, this deal can not be completed within the US. Even more surprising, there are a lot of these types of deals looking for funding! Let's review
what the venture fund made over a 5 year period:
This of course does not take into account the equity splits nor does it take into account receivable financing. Deals such as the one outlined above would be very difficult to complete in the US for many reasons: An Untapped Market Presently there are a few reputable companies that do provide financing as illustrated above, however, most of what is advertised amounts to nothing more than a scam. There exists a need for a well capitalized fund based in an advantageous venue such as the Caribbean or Central America. Local banks and brokers are more than willing to introduce deals to a fund, once it has determined that the fund actually has capital to invest. The same holds true for developing countries that are initiating economic zones and those that are actively seeking foreign investment. This is yet one additional – of many – source of worthy projects in need of funding. In the case of countries seeking foreign investment, the fund can in essence become the joint venture partner for either the country or the group seeking to operate a business. Deal Scrutiny Any potential investment made by the fund undergoes stringent due diligence. This includes a need assessment, business model review, accounting review, legal reviews, and good old fashion “horse sense.” Once the determination that an investment can be made, an outline or term sheet is put forth. Upon its acceptance, closing is scheduled. Deal scrutiny or due diligence is accomplished both in-house, and through the use of outside advisors. Some of the world's best accounting companies are located in tax advantageous countries, these include KPMG, Ernst and Young, and many others. These can be called upon to perform various functions. Local lawyers or solicitors are also available in all locations. Lastly, as these funds are structured as limited partnerships, partners that have a desire, and qualification may be asked to perform various functions of due diligence. This is done to augment the in-house investment bankers, accountants, and analysts. Investments Investments into these funds typically are on a five to ten year basis depending on the fund. Investment ranges are from USD 5,000 to USD 500,000 minimums. While the return is not set in stone, generally a 15-20% per annum return is the norm. When the fund makes an investment that includes an equity “kicker”, this is kicker typically liquidated in either the third year or no later than the date of expiration of the fund. Distributions are generally made quarterly, and may return part interest or earnings, and part principal should the fund have new funds being formed, you may have the opportunity to “roll over” your disbursements. In any case it is best to check with the individual fund. There are many ways to take ownership of the partnership shares. It is best to speak with a lawyer or solicitor that is FAMILIAR with international law. If you do not presently know one, please let me know and I will send you a list as well as links to numerous law firms around the globe. These types
of investments are not for everyone. Individuals that can stay invested
for the term, are seeking diversity, and that are seeking diversity of
an international nature should carefully determine your individual acceptable
level of risk, and proceed accordingly. Thank you.
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