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29
Jun
2009

The concept of Special Purpose Vehicle (SPV) is not new. In Europe and Americas these are the limited liability companies or partnerships to perform some specific tasks with out exposing the whole original firms on risk. They usually transfer some asset for management to the SPV or different companies start a new project via SPV to giver cover to original companies from Risks.

There are some objections on SPV that it is more to fabricate losses and poor performance or strategic escape for big companies. I don’t know how much I can agree with this. It can be done in many ways with out creating SPV. Losses can be fabricated and losses can be escaped. If some one wants to create a corporate fraud so company like SATYAM computers in India can be a victim even audited by PWC.

Anyways, here my objective is not discussing corporate fraud management or curing it.

The idea behind creating the context is giving brief information for SPV to a head on real topic. The real topic is Investment function of a non investment company. It is in relation to the disaster that companies have got in financial crises by investment in securities and real estate portfolios.

The problem is a bit more psychological. It is obvious that the company doing manufacturing business can not have focus on investment function. They could have more engineers, senior manufacturing master minds and entrepreneurs in their board of directors. To the extent of middle management there would hardly be any finance or investment professional other than one director finance with two or three accountants. This is because of the role that company pursues and the corporate image. Here following will be features that can create mess in the company at INVESTMENT FUNCTION LEVEL that can also be larger to hurt company in full;

The person who is managing investments will be free in his decision making. The check and balance on quality of investment decision would not be the best.

The excess funds utilized for INVESTMENTS other than core business will consider company’s cash so there will be no recovery time lines. The problem is more financially psychological. I am really sorry that I am giving a way to new discipline Financial Psychology. In my view it exists. So I am using the term.

If accounting system is not so sound and audit standards are not met properly (like Middle East) so the value of investments will be there on historical cost. This again can create confusion in decision makers mind. The decision makers in these sorts of companies are not Investment experts.

The issue I have raised is not hypothetical. We can find lot of examples in today’s world where businesses of 40 to 50 years in age shut down with in two months. The reason is poor investment portfolio management for non investment company.

In my view the solution of the problem is “Investment Function SPV (IFSPV)”. It will be a separate company established by a non investment company to manage their investment functions. This company will serve the following objectives.

The IFSPV role would be specialized towards investments. So there will be more concern in IFSPV management to perform well.

THE IFSPV shall take funds from Mother Company as a loan or fund transfer that will be there for certain period. In this way the doctrine of TARGET INVESTMENTS come a live. The returns of this company are highly specific so the performance of investment manager will be accounted for. It is difficult in one setup to evaluate financial manager for operational finance and investments together.

They can generate there separate records. Even if the company is in Middle East where compliance of accounting standards and auditing is highly absent, they could manage at least some thing to report.

Now it looks very simple for big non manufacturing companies. They can afford the cost of creating IFSPV with three or four head counts. Even, if company is virtually set, the expertise has to be hired. This is the cost. May small companies can not bear it. Here caring financial psychology can damage their physique.

So the solution is simple. It is good and cost efficient that four or more companies can create IFSPV together. This is how they can reduce their cost. They can take some fund on monthly basis out and put it in IFSPV. Here the specialist investment professionals utilize their money in limited spans to make profits. The Investment professional in this company would not run for investment product sale as the money is coming from very specific sources. He just has to ensure good portfolio management.

The times when stock markets and real estate gets boom, these companies could be larger than mother companies in worth. The time when bubble gets burst, they will be lesser healthy. The best IFSPV can work for the Mother Company or companies will be in following way;

The financial manager of the mother company will not involve in investment decision. This will ensure his focus towards operational finance. His performance and decision making would be better, as he would not consider the investments intact as funds for targeted period. Many times when you see SHARES IN ABC or REAL ESTATE PROPERTY on balance sheet, you start counting on it or offsetting it to any operational ambition. It happens many times that it is not the easiest to mature these investments in expected worth when required regardless of its nature as short term or long term.

The IFSPV can easily be formed in countries like U.A.E. where free zone companies (FZC) are less costly to be structured virtually or physically. Small companies can put their funds together to create a big investment company in shape of IFSPV. They will have their own investment manager who can work on salaries or commissions. This is where can save the brokerage cost also.

This is it. It is very brief about IFSPV. If you are anywhere in the Middle East or Pakistan, you can write me on saqibomersaeed@bizomer.com for further consultation. If you are facing any problem on your corporate structure from finance, operations, marketing, HR to anything do write me. May I can learn from your experience, information or situation.


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Mr. Omer

Mr. Omer [1982 born] started  his professional career as a commercial / investment banker after achieving Gold Medal in Finance at master level from University of Karachi in 2006.

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