The alternative funds industry, now managing over $12 trillion—up from just $3.1 trillion in 2008—accounts for approximately 15% of global financial assets. As the sector expands, driven by increasing retail investor interest and mainstream funds branching into alternatives, tax is shifting from an afterthought to a critical business risk.
Why Tax Matters
Alternative fund managers excel at raising and deploying capital but often lack the tax expertise needed to navigate complex structures and regulatory landscapes. A strong tax strategy involves identifying and managing key risks across four core areas:
Capital Raising
Structuring funds to meet investor tax requirements while demonstrating robust tax governance to limited partners.
Deals
Assessing tax risks in acquisitions, ensuring deal structures align with fund frameworks, and securing timely, relevant tax advice.
Cash Returns
Maximising tax efficiency for both investors and carry holders.
Compliance
Ensuring accurate and timely tax reporting to meet regulatory obligations.
While tax optimisation is crucial, managers must also prioritise effectively. Over-optimising processes can drain resources from higher-value activities. Furthermore, outsourced tax advisers often operate within narrow scopes, answering specific questions rather than proactively identifying broader risks. Without in-house oversight, critical tax issues may go unnoticed.
The Case for In-House Tax Expertise
Many fund managers continue to rely on external tax advisers, but as firms scale, they often reach a point where hiring in-house tax professionals becomes essential for quality control and strategic oversight. Industry trends suggest that real estate managers typically make their first tax hire around $2 billion in assets under management (AUM), while private equity firms do so at approximately $4 billion.
An in-house tax team adds value by:
Ensuring Quality Control
Overseeing outsourced tax work to maintain accuracy and compliance.
Providing Strategic Oversight
Identifying risks that external advisers might overlook, such as cross-functional tax impacts that affect multiple areas of the business.
However, hiring a tax professional is not a silver bullet. Managers must integrate tax expertise effectively into their operations.
Common challenges include:
- Defining the tax hire’s role in deal-related tax matters—should they lead the process or support the investment team when needed?
- Preventing the finance team from offloading all tax compliance and reporting tasks onto the new hire, which may not be the best use of their expertise.
Choosing the Right Model
Before hiring, managers must first assess their needs and define clear objectives. This typically involves:
- Reviewing key tax advice and identifying material risks across the platform.
- Mapping existing tax processes to highlight gaps and responsibility misalignments.
From here, firms can adopt one of three models:
1. Defer Hiring
Assign tax responsibilities to non-tax staff under senior executive oversight. This is becoming increasingly rare as tax complexity grows.
2. Small Tax Team
Hire one to four senior tax professionals to oversee tax strategy, manage risk, and ensure compliance, while operational teams handle day-to-day tax functions.
3. Tax Centre of Excellence
Build a dedicated tax team responsible for fund structuring, deal execution, and compliance, fully integrating tax expertise across the firm. This model frees other functions to focus on their core responsibilities.
Conclusion
Tax has become a vital factor in alternative fund management, directly impacting net returns, regulatory compliance, and investor relationships. To remain competitive, managers must:
- Gain a deep understanding of their funds’ tax profiles.
- Hire tax professionals strategically.
- Set tax hires up for success with clearly defined roles and responsibilities.
In an industry where complexity is increasing, firms that proactively address tax will be best positioned for long-term success.
Click here for full article in Tax Weekly (£)
