The International Arbitrage - Superior Returns From “Small Play” International Projects?

I am an International tax lawyer.? Although I have a master’s in mathematical finance I am not an investment or financial Analyst.? I work with a lot of clients who have investments which are typically management structures, trust structures, and international cross-border, investment structures. While I don’t advise, on the actual financial or investment aspect of these structures, I have been in a? position to have observed over many years, hundreds of clients and the people that they have worked with. So I have had a front row seat learning what people invest in and how they invest in it.

Selling investments or tax structures.

I do not promote investments I am not involved in or know nothing about.? I do not earn commissions from selling or marketing investments that I am not involved in. This is something I learned from one of my mentors who runs a very successful large corporate services business in Dallas.? She always told me to choose carefully whether I was in the services business or the investment promotion business.? Just because you have a relationship with someone, it may be tempting to engage them in discussion about investments or financial investments, that you do not really know or understand.

Over the last few years, our firm has begun to focus more and more on helping “small play” international SME families, or fund managers.?? I help my clients and people that I’m working with as much as possible to understand all the things that they need to do to be able to raise capital in different countries.

If one is promoting any investment, then one needs to be in a position to be able to be transparent, with the people that you’re talking to.? You shouldn’t have an undeclared conflict of interest or some other involvement that prevents you from being transparent.? Regulated investments require disclosure.

The International Arbitrage.

One of my most asked questions is “why would I invest outside of the United States of America?” What they are really asking is:

“Why would I take all of that international compliance, risk and potential of fraud especially for an investment which is less than $100 million. Given that the sponsor of the investment is not an institution, it is an owner manager, of a closely held family business who are not even based in the United States.? Why would I invest in that? There’s no need to invest outside of the USA.”

My friends and colleagues in the US have told me that there is no need for them to invest outside of the USA. However, the largest global corporations are US global multinational corporations for example Amazon, Apple, FedEx, General Electric, Halliburton, and others. US brands are the largest brands in the world, and they define the global economy.? Multinational Brands from other countries are not so well known globally.

By going international, US firms acquire, or achieve what I call an INTERNATIONAL ARBITRAGE, which is essentially an international risk premium.

The reality is that US international tax law is written to facilitate international profits for International Business and investment by US multinational corporations. It is interesting for me to hear US Advisors and financiers and the persons they advise say that they are only investing within the domestic US when the highest returns and growth are achieved from international business and investment.?

Those US investors who do invest internationally and generate significant international risk premium really obtain the International Arbitrage.

?US investors and their advisors who do not see the need to invest outside the domestic U.S.

?Having?spent the last five years in Miami, I have been fortunate enough to spend a lot of time with my US international tax planning, corporate services friends in Miami and the financial advisors that they work with.?

I just want to make it clear I’m not writing this article to suggest to anyone that they should, especially if you are a US investor that you should invest outside of the United States but simply to discuss some things that I see.

In capitalism, there is no return without risk.? But the return has to be in line with the risk taken.? The potential for fraud can be managed, risk can be mitigated and managed, with structure, project management, captive insurance and taking the time to get to know people.

Canadian cross border or International alternative investment.

It is noticeable that Canadian corporations are particularly adept at investing heavily in cross-border projects at the US 100 million levels.? It might even be the case that they are global leaders in international SME investment and business.? Canada is facilitating this international SME investment, especially in the oil and?gas and mining sectors.

Canadian SME firms have significant international investments and are very good at investing in Latin America. Like the USA, Canada is very adept at writing its tax law systems for facilitating international business and investment?for its homegrown corporations.

I could be wrong but my perception is that Canadian investors and corporations at the 100 million level do far more international cross-border investment than US accredited investors.

What does the international arbitrage look like?

International projects and businesses deliver superior returns compared to domestic US Projects, especially in the area of less than $100 million.

I know an owner-manager who four years ago bought an oil field for US$600,000, four years later after doing $3 million into that field, they are selling it today for $15 million.? One of the main demands was that they are able to buy the operational oil & gas services company with all of its history and established relationships. What was most interesting about this deal was that the owner manager and his son, both longtime experienced oil and gas engineers, have been propositioned in the last six months by a number of family offices and regulated fund managers.?

I have come to the conclusion that some family offices and fund managers managing long term accumulated wealth are liquidating some portfolios that generate passive wealth and are investing in alternative investment funds.? The US SEC guide on the new Private Fund Adviser rules has outlined that in the US Private fund investments have gone from US$8 trillion in 2008 to US$23 trillion today.?

Many owner operators are not great at international fundraising.

As an international tax advisor it is a big part of my job to help owner manager clients and their families do these transactions and transition to new international arrangements while minimizing taxation. Based on the evidence that I can see from owner managers, Canadian investors, and large US multinationals, I think my friends who are advising US high net worth clients to ‘not invest in international SMEs’ are wrong in their absolute position.?

The real question is whether investors can find the owner-managers or family owned businesses that they can trust and verify they have the right experience and capability.? The problem is most international SME owner operators are really bad at telling their story, or they just do not see the point of telling it.? Then they question why they cannot raise funds from US investors.

International investment requires truly getting to know people.

There are many mechanisms to mitigate international risk and the potential for fraud. U.S investors should take their time and educate themselves on international opportunities.? It may take a long time, but they can continue doing what they’re doing in the meantime.?

Watching owners and their families engage in transactions, including investment, disposal, and acquisition, when it comes to closely held?businesses and owner managers it is clear that the most difficult part of the entire transaction is for the principals to get to know each other.

Getting to know each other and building a relationship, ultimately enables communication.? So that when the due diligence stage is entered, and when the time for discussions about investor protection, risk mitigation, compliance and protection against fraud come up, then?the parties have already established the ability to communicate.

?When you know...You can Trust?

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