Tax Cheats’ $500 Billion Targeted for Argentina Fund Revival

  • Closed-end fund industry has been dormant for over a decade
  • Amnesty looks to attract money from abroad for infrastructure

Argentina is counting on tax cheats to revive a moribund corner of its capital markets.

Closed-end mutual funds -- all but non-existent in Argentina during the past two decades -- are suddenly hot again as President Mauricio Macri ushers in sweeping changes to boost investment after 15 years of neglect. He’s championing a program that lets Argentines with some $500 billion of undeclared overseas assets avoid harsher tax penalties by bringing back the money and investing in the funds. The goal is to provide much-needed capital for infrastructure, agricultural and housing projects.

That’s prompted brokerages to start closed-end funds to meet an expected surge in demand before a March 31 deadline. After leaving the investments for dead in the past decade, at least six firms say they’re now hiring specialists to structure the funds and analysts to scout for projects.

“This is the beginning of a new type of financing in Argentina,” said Claudio Porcel, the chief executive officer of Balanz Capital, which plans to start offering the funds for the first time in its 14-year history. “We’re working like crazy, every day, to get them set up fast.”

Federico Tomasevich, the chairman of Puente Hnos SA, says investments could reach $10 billion in four years as money from tax dodgers is supplemented by investors looking for higher returns so long as interest rates worldwide remain low. In Colombia, the funds have grown from a $900 million industry in 2010 to $13 billion at the end of last year as the government undertook a building push, according to a report by Bancoldex and the Inter-American Development Bank.

For most Argentines, the closed-end funds will be entirely new. Middle- and upper-class families that were burned by currency devaluations and asset confiscations over the years often saved in dollars or bought hard assets such as real estate to store their wealth.

Juan Politi, vice-president of Allaria Ledesma & Cia, which is creating funds focused on real-estate development, estimates $3 billion will flow into the closed-end funds from tax amnesty. He holds at least 10 meetings per week to find projects to invest in.

To be sure, none of the previous four amnesties organized by the government in the last 30 years were very successful. This time, the government is betting that improved tax sharing agreements among countries will motivate Argentines to participate now or risk harsher consequences in the future.

Argentines who participate in the tax amnesty may choose to pay a penalty of as much as 15 percent of their undeclared assets; buy government bonds that pay no interest and come with trading restrictions; or invest in closed-end funds for a minimum of five years. The country has already attracted $4.6 billion in undeclared cash holdings and expects the total number to grow in the weeks ahead, Finance Minister Alfonso Prat-Gay said at a press conference Oct. 31.

Ernesto Allaria, the president of the Merval stock exchange, said that about 40 closed-end funds are currently being reviewed by regulators.

The funds will satisfy both the government’s need for infrastructure and project development, as well as investor appetite for higher returns, said Jacqueline Maubre, a senior investment officer at Buenos Aires-based brokerage Cohen SA. She expects Cohen’s funds will offer annual returns of 6 percent to 12 percent in dollars.

Argentina has been starved of foreign investment for over a decade as currency controls and its pariah status following a default in 2001 dissuaded investors from betting on the country. That led to stagnation in infrastructure investment, especially in renewable energy, the rail system and the electricity system, leading to regular blackouts in extreme temperatures.

Closed-end funds differ from traditional mutual funds because they invest solely in projects, not securities such as stocks or bonds, and have a limited amount of shares. To exit a stake, an investor must wait for the project to be completed or find someone to buy it.

At this stage, brokers expect the first wave of investors to be mostly individuals and families with a few million dollars stashed abroad, according to Porcel. Several funds also plan to structure their funds so institutional and foreign investors can participate.

The March 31 deadline is the biggest challenge for the brokers. Politi describes it as a race against the clock to evaluate projects, sign contracts with developers and get regulator approval. Brokerages are also expecting lawmakers to revise tax regulations more favorably as part of a bill to be discussed in October.

"This market was going to wake up sooner or later, but the tax amnesty plan has catalyzed its growth, so we expect it will develop faster than in regional peers," said Juan Martin Molinari, the director of investment banking for AdCap Securities LLC, a Miami-based brokerage that’s assessing real estate and energy funds. "The market is poised to take off in the longer term and we are preparing with that in mind."

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