#7 Sean Green - How to Launch an Investment Product in Weeks, Not Months

The Vesta Securitization Podcast with Stefan Wagner. Unlocking investment innovation. Vesta's end-to-end platform enables securitization providers and investment managers to streamline the lifecycle of dynamic investment solutions, ensuring better results for their clients and their operations. Hello and welcome.

In this series, we explore the cutting edge of investment innovation. I sit down with leading asset managers who use securitization vehicles to execute their unique investment strategy. There will always be a market for traditional funds, maybe on the larger side. But I think we can sweep up anything under, you know, 100 million.

Really, I think the market is huge for us. The information in this presentation is for informational purposes only and does not constitute an offer, solicitation or recommendation to buy or sell any financial products. It is not intended as investment, legal, tax or accounting advice. Always seek the advice of your financial advisor or other qualified professional regarding your investments.

Good morning. I'm very excited here. my guest today Sean Green head of distribution at Kairos Capital we've been talking for a while to get you on the podcast I'm very excited we finally manage it so thank you very much Sean for taking the time thank you for having me where did we catch you this morning where are you calling from so I'm actually based in Singapore so I'm originally English but I've been in Asia for 20 years 10 in Hong Kong and 10 in Singapore I mean, maybe you could share a little bit more for the listeners who may not know you, a bit about your background.

No, yeah. I actually, previously to Kairos, I was in fund administration and fund structuring. So I used to help family officers and fund managers set up structures for fund vehicles. And those fund vehicles could have been for private wealth.

So family officers in Asia restructuring their assets into a fund or helping hedge funds, PE funds, VC funds set up and structure in either Hong Kong or Singapore. And that was mainly through either a Cayman vehicle, typically a Cayman SPC, or if it was a smaller fund, maybe a BVI. um i'm more recently a singapore vcc which is akin to a cayman spc and hong kong also has its own uh structure now which is called a hong kong ofc but they're they're all i would say corporate vehicles that are structured as a as a fund i was also the first person to help launch a crypto fund in Singapore and a tokenized fund in Hong Kong as well.

And what made you switch from the fund side to AMCs, Actively Managed Certificates? Yeah, I've got to be honest with you. In Asia, AMCs or Actively Managed Certificates, they're not super popular. They're not well-known, let's say.

And somebody tried to explain to me about four years ago what an AMC was, and they did an unbelievably bad job. And I just kind of dismissed him. And then I met Alessandro, who's the founder of Kairos, and he explained in depth what an AMC is, how it works, the cost structure, the flexibility, the quickness in the way you can deploy and set up an AMC. and all of a sudden I just like an epiphany really um I saw all the kind of advantages um and all the struggles that your typical fund manager deals with when setting up a fund and and how an AMC would um really answer all those questions that they had or all those struggles that they had and uh so for the last two years we've been uh speaking to fund managers uh external asset managers family officers i'm really doing a lot of education work in in asia and what is what is sort of usually your let's say your elevator pitch when you get the chance to talk to somebody who hasn't heard about amcs yeah so i just i typically say yeah you know if you could set up a fund like vehicle in in two to three weeks with no upfront costs and uh works exactly the same way as a fund, but just easier and you can have a daily NAV instead of a monthly NAV with a T plus 10 or 20.

Would that be something that you'd be interested in? And most people say, I don't think I believe that exists, basically. Exactly, yeah, yeah. But maybe a little bit go into the structure that actually Kairos uses, you know, it's a securitization structure, but maybe you can go a little bit into explain what that means, what benefits it brings.

And I think particularly you have a very interesting way how it's been implemented. I mean, there's thousands of securitization vehicles, but I think Cairo stands out quite a bit in that. Yeah, thank you. For those who are listening, typically AMCs were originally issued by banks, your UBSs or your Von Tobels, your Julius Beers, and more recently, particularly in Asia, Goldman Sachs and Morgan Stanley.

But because they were issuing them on balance sheet, then they would typically only do long only, maybe some futures, certainly no leverage. They can't do private assets and they're definitely not going to do any crypto assets. So I think people came along about 15 years ago and said, all right, we're going to offer something slightly different. And so there's a lot of people in the market that structure an AMC through a corporate vehicle.

So they would set up a corporate SPV in, let's say, Guernsey or the Cayman or maybe even Luxembourg. And then they would issue the notes out of all the certificates out of a corporate SPV. Now, I think we'd all agree that from 15 years ago to today, the world has changed drastically, especially after 2008. Now you have things like consolidation risks.

You have off-balance sheet problematics. Trying to create an off-balance sheet vehicle is very hard. And also corporate SPVs now fall under a different tax regime. So the way we do it is we have a Luxembourg securitization fund.

And each, we set up segregated cells or segregated compartments or subfunds. These subfunds are off balance sheet from us. So we're just the arranger of the deal. Carus Capital is what's called the arranger or maybe like the salesperson of the deal.

But if we go bankrupt, then the assets within the compartment do not come onto our balance sheet. And if there's a problem with any of the other ring fence sub funds, then they're not contaminated either because they're also ring fence from each other. I always give an example of if Blackstone or Blackrock set up a fund if Blackrock goes bankrupt or Blackstone goes bankrupt you don have to consolidate the fund onto BlackRock balance sheet The assets are still there. Maybe you need to liquidate the fund to get your money back, but you don't lose your assets.

And now if a bank, for example, sets up an SPV, they have to consolidate that SPV onto their balance sheet. That is always a challenge for the banks of ensuring that it doesn't need to get conserved because that's the super goal, what I call it. I've been through that one at a large investment bank of trying to avoid that risk. And we had clients, to be very honest, on our side at Vesta who suddenly stopped their business because a regular said, hold on, you're going to have to consolidate it.

So it's definitely something one needs to think about. And everybody said, I want my own vehicle. No, maybe speak to Kairos first, use their vehicle and avoid all that nightmare. You mentioned something interesting here, which you called it the Luxembourg's, I think, securitization fund.

Normally that doesn't come, you don't use the word securitization and vehicle and corporate vehicle and fund. Maybe you can a little bit more explain why in your case that's unique, why that is the case. So the securitization law has been around in Luxembourg since 2004. And the amount of funds that use this law, I can tell you, when we set up, were 90, 9-0.

So our incorporation number is 0-9-0. Now, about 45 of those have already been liquidated. And typically, they were used by insurance companies as one-off transactions. But as I said, because tax laws have changed drastically in the last 15 years, when we looked at the tax laws, we said that, okay, if we go down the route of setting up, let's say, a corporate SPV structure, we're going to fall and we're going to be full foul of these new tax laws.

For example, AMCs, if you're issuing them out of a corporate SPV, you fall under the corporate SPV laws or corporate laws in your tax law. If you issue it out of a fund, then you fall under the fund laws. So they're two completely different laws. They're two completely different tax laws.

And so our workaround was to use a fund. The downside of that is setting up a whole fund infrastructure in Luxembourg is, I could tell you now, extremely expensive. I can only echo that out of experience, yes. You touched on something here, which is taxation.

And that's obviously something many of the investors potentially could be concerned with. I mean I'm not a tax expert but I think there could be a potential issue with taxation with many other AMCs I think you called it the tax time bomb can you a little bit double click on that one and go into a bit deeper yeah so after 2008 I think a lot of countries got fed up with people essentially setting up BVI's or Cayman's or maybe Guernsey companies, Jersey companies, Isle of Man companies.

I essentially saying, look, my company is based in the Cayman or it's based in the BVI or it's based in Guernsey. I don't have to pay any tax in the jurisdiction I am in. So essentially the G20 got together and the OECD and they said, no, no, you can't just set up a company above a nightclub in the Cayman Islands and claim that you don't need to pay any tax because the Cayman Islands don't charge you any tax. So they introduced something called substance over form.

And substance over form essentially means who is in control, who has the rights to the company, who is managing the company, where are the revenues derived from. That is where it will be taxed, not where the entity itself is. And so from there, there was actually some other laws that came in. One of them was called a foreign control company law, CSC.

And CSC rules are, if you're, let's say, a German company or you're a Swiss company, and you happen to set up an SPV in Guernsey or in the Cayman Islands, you can't just say, I don't pay any tax in Guernsey or in the Cayman Islands anymore, because you are controlling that company. You're in Switzerland or Germany. So you are then now subject to German tax laws or Swiss tax laws. Now, the reason we chose a fund structure is tax-wise, a fund structure is a pass-through structure.

So investors always pay the tax on their capital gains. And the manager always pays the tax or the index sponsor always pays the tax on his or her income that they derive from the product in a sense. But a lot of these rules, they were not brought in for AMCs. They were brought in for Google, Microsoft, a lot of the banks.

That was taking advantage of a lot of these tax loopholes. But it's just, it's under corporate law and corporate tax law changed and developed. So when we came to set up our structure, we said, right, there's a massive time bomb waiting for these AMC corporate structures or corporate SPD structures. So we prefer to use a fund structure.

Now it cost us 10x more to set up and it took us probably 18 months longer than it should have done to set up. But I think in the long run, it's certainly we could sleep at night. In 2008, you saw everything that the banks used to do. They moved into fund structures and you saw the explosion in assets under management of Blackstone, Blackrock, Millennium.

And essentially, the banks became service providers to these fund vehicles. what you didn't see happen is blackstone blackrock or millennium set up corporate vehicles for for their investors to uh to invest in because they know that if you set up a corporate vehicle then you then have to consolidate that onto your balance sheet and just by putting it into a trust and say well now this belongs to the to the trust uh you know tax regulators and an accounting regulation says no no that's not true just because you are the legal owner does not mean you are the actual owner of the vehicle.

So if you are taking benefit from the vehicle, if you're the one who decided to set up the vehicle, if you decide what's happening within the company, then you're the one who owns the company. Even though it may say trustee XYZ is the company, technically you are the one controlling the company. So then therefore you need to consolidate onto your balance sheet and because it's a corporate vehicle then you have to pay taxes on your on your capital gains um just because you're in jersey guernsey the isle of man the cayman uh and you set up a company does not mean that gives you the right to then not pay any tax if you're managing that company from another jurisdiction that has a higher tax rate for a fund it generally a pass through entity because the investors are taxed in their own jurisdiction, wherever they are because they holding an investment and then they pay tax on their investment there But if you a company you then fall under the same as I said before you then fall under the same laws as Microsoft as Google as UBS as used to be Credit Suisse, obviously, or Lehman Brothers previously.

You can't just say, no, sorry, this company belongs to a trustee and it's got nothing to do with me. even though I control the company, I take all the benefit out of the company, and I just tell the trustee what to do. It doesn't work like that. Lehman tried it.

Lehman wanted to repackage all their bad debt into a company and put it into a trust, and the regulator just said, you know, you're crazy. You can't do this. So in our opinion, there is a big ticking time bomb there where we believe that a lot of these SPVs that have been set up have potentially got a huge tax liability for the investors. They're structured as if the world was 15 years ago and not the world for today.

I mean, you are located in Singapore. Maybe you can tell us, the listeners, a little bit what you sort of see in Asia, particularly in Hong Kong and Singapore, and maybe how they differ, the two markets. Yeah, well, I lived in both. I've actually spent 10 years in both.

Um, historically Hong Kong has been investment banking center and an IPO center where Singapore was more a wealth management hub and a, uh, a regional place to do business in, in Southeast Asia. Um, but typically the IPO market, for example, is bigger in Hong Kong than it is in Singapore. People don't list in, in, on the Singapore stock exchange. Uh, but, uh, people want to list on the, on the Hong Kong stock exchange.

in Singapore have come across, I think it's called the Variable Contribution Fund. No, Variable Capital Company. Variable Capital, pardon, I apologize. How does this sort of compare to an AMC?

Yeah, I would say Variable Capital Company. I'll probably get into trouble for this in Singapore. Maybe I'll lose my visa here. But essentially, it's a Cayman SPC with a Singapore flag.

So it's a corporate vehicle. Okay, it is a corporate vehicle. Yeah, it's a corporate vehicle. It's a new vehicle.

So it's only been around for about five years. And it's typically used by Singapore managers. So the Singapore MAS, which I guess is a little bit like FIMMA, but also the de facto central bank, gave a lot of subsidies to promote the VCC. so you find a lot of people in singapore have a vcc because essentially it was free to set up but it's still a fund it still takes three four five six nine months to set up you still have to go to a lawyer and pay 50 60 70 000 for a template ppm you have to wait three months to get a bank account open um it's very much a uh a slow methodical process um i mean how does then in the sense uh let's go back to the amcs we talked about you know there's unbalance sheet issues you you might have a great brand name with it but you take clearly the credit risk of that issue versus we call i call them the off balance sheet the securitization vehicle spvs what is sort of the preference of that in Asia?

Or how do people look in Asia? Do they understand the risk between them? Or is it branding matters more than ring fencing of assets? No, I think there's two things that when they have used them or they've come across them, typically it's been an on-balance sheet experience.

So it's been with typically one of the Swiss private banks. and I think what they realize when they use let's say one of these on balance sheet vehicles is that they're very restrictive they can only do equities typically it's long only certainly maybe U.S. stocks maybe some Japanese stocks but it's certainly not going to be Malaysia Taiwan Indonesia it's not going to be anything what I guess some people would call exotic in that sense there's no private assets uh and certainly no no no no crypto assets uh either but i think once people use one of these bank amcs they also realize that once you're in a bank amc or an on balance sheet amc you're kind of trapped in there so so the the the on balance sheet provider then has you you know you you you can't change the broker right so if for one if you know you were being charged two basis points for a trade and then it goes to four or six or eight, you're kind of stuck.

It's not an open architecture, it's a closed architecture and you take their pricing and you also take whatever markets they want to provide to you. I know one unbalance sheet provider, they did Korea and then all of a sudden their head office in Zurich decided, Korea, we don't want to deal with this. Korea is a big market in Asia, and they just turned it off. So you don't have that option to then go and use another broker in that sense.

And ultimately, as a manager, I always think you're there to mitigate risk. And if you're using an on-balance sheet vehicle, you simply cannot mitigate that risk. And sure, if you're a UBS, is UBS going to go bankrupt? Probably not.

But we've had Credit Suisse. We've had Lehman Brothers. We've had Royal Bank of Scotland. We've had Merrill Lynch.

So there's been plenty of banks that have gone, or investment banks, that have gone lost over the years. Maybe something you can tell us, maybe don't name names, but you know, of an interesting structure that you put together, how you were able to help that specific client and maybe something that wasn't possible a few years ago or is even not possible for an unbalance sheet issue. Yeah, so we're currently doing a deal where we're essentially securitizing some real estate and then we are tokenizing the AMC.

We work with a licensed digital bank in Singapore. So essentially, they will provide, let's say, the token issuance. And we securitize the prop code. And we issue, obviously, the AMCs or the notes.

And then the digital bank then issues a token so people can subscribe in cash through the Ishnor route, through their private bank or a brokerage. One of the big things here in Singapore is there's a company called Mumu, who are the interactive brokers of Asia. I think one out of every two people in Singapore has a Mumu. You can also purchase the notes through them.

Or if you've got, let's say, digital assets, Let's say you've got USDT, you're on board with the digital bank in Singapore, they do all their KYC. They also do the KYT on the wallet and the stablecoins that are being used. And you can subscribe through stablecoins as well So I think that quite an interesting deal that we doing at the moment And why did the client choose to tokenize it as well? Yeah, so the client has an investor pool that has USDT.

Some of them are, but he also has an investor pool that have traditional cash. I guess for people who are in digital assets, digital assets, it's a bit of a religion in that sense. So they want to stay in USDT. Not many want to come out of it again and back into fear.

I've noticed that. Yeah, so this is the way of getting access to traditional assets while still being in crypto or stable coins. and amcs are getting more and more traction asia but what is sort of your future outlook for for what's going to happen there in the industry i think it's massive you know if i look at my previous background the the the the complaints were always the same why does it take so long to set up why am i being charged 50 to 100 000 for a lawyer for for a template that they probably use with 10 other funds uh why can why does my fund administrator take t plus 10 t plus 20 to do to deliver me an nav um why is it why do i have to uh you know send a subscription form with a wet ink um signature the list goes on yeah and obviously cost is is very prohibitive right you know it it's a couple of hundred thousand dollars to set up a fund it it's probably the same to uh to to administer it you've got to go find an administrator you've got to go find an auditor um it's a very cumbersome process.

So when we meet managers and I say to them, look, if you just want to do something simple, let's say you just want to do a U.S. equities or you want to do a long short or you want to buy some Malaysian shares or maybe some Southeast Asian or some Swiss or whatever it may be, anything listed, we can be up and running in two weeks and you can be raising money in, you can be investing, investor money in three weeks. They fall off the chair, to be honest with you.

They actually don't believe me until later. No, no. And how sort of does that, would you expect what sort of the vision for Kairos going forward in the coming years? I think there will always be a market for traditional funds maybe on the larger side but I think we can sweep up anything under $100 million really.

I think the market is huge for us. I always like to ask a few personal questions if that's okay. I mean, you probably as many people in this industry spend all day thinking about how do I best allocate my waking hours when I'm awake. So how do you deal with it?

How do you call it the information diet? You know, where do you get your information for? What do you prioritize and what do you deprioritize? Ah, well, yeah, it's probably a bit boring, really.

It's pretty standard stuff. There's Bloomberg. There's a few podcasts. If you're at the gym or you're running.

Obviously, we do a lot of meetings. If you're walking between meetings, you can plug into the news for five or ten minutes. But it's mostly standard stuff. And then, obviously, there's more on the tact side and the structuring side, which is what you would call bedtime reading.

that tends to put people to sleep quite quickly. It works very quickly. And the other question I always like to ask is what is your favorite finance book? One, two, three, I mean.

Yeah, there's a great one called The Quiet Risk. The author is Alessandro Ginestra. I recently read a book called Too Big to Fail. And then also actually it was a pretty interesting book called 1929.

People always think the market collapsed 80% in 1929, but actually it was over three or four years. I mean, I poked you with a lot of questions today. Is there any question you would like to ask me? Yeah, I mean, where do you see, obviously you speak to a lot of people who deal with AMCs.

Where do you see the market go in the next five to 10 years? I mean, number one, I would say there's more and more, I could call it, markets or regions coming online and realizing it. I mean, all the banks that have been operating in Switzerland, most of them operate outside Switzerland as well and have been taking it there. Also the same thing with the securitization vehicles.

so there's new markets coming I think who are becoming more comfortable with it more I would say jurisdictions who are historically maybe didn't have a secure utilization vehicles setups that allow the AMCs are getting interested in allowing that one and a trend that I definitely see is that it's becoming much more professional in the sense of sophisticated strategies that are being traded. And there's still a significant trend, I would say, of securitizing non-bankable assets.

That's definitely, if you see that growing. Sometimes not even to get access, let's say, to commodities or something like this. Not even purely for performance reasons or getting access or exposure, but to actually make it in a security, which you can then turn around, you can get booked, and either it's for inheritance reasons, you want to give everybody a share in something. It's a very easy way.

They call it then a fractional bond sometimes. Or it's because you can turn around to the private bank and say, can you give me loanable value against this asset? And maybe the last thing is also, I will see a little bit as a trend, is more and more that the vehicle, because it's so easy and affordable to set up. It's getting used also much more to express individual, wealthy individuals' view and how they want their money invested.

And because of the macro environment, we see more and more people being able to add value through active management back into it. Fantastic, John. If anybody wants to get in contact with you, how can people get in contact with you? Yeah, so they can drop me an email at green at kairoscap.

com, or they can find me on LinkedIn if you go to Kairos Capital, Singapore, and then you can find me there under people that work there. Excellent. Thank you, John. Yeah, thank you very much.

The Vesta Securitization Podcast with Stefan Wagner. Unlocking investment innovation. Vesta's end-to-end platform enables securitization providers and investment managers to streamline the lifecycle of dynamic investment solutions, ensuring better results for their clients and their operations. The information in this presentation is for informational purposes only and does not constitute an offer, solicitation, or recommendation to buy or sell any financial products.

It is not intended as investment, legal, tax, or accounting advice. Always seek the advice of your financial advisor or other qualified professional regarding your investments.