Adapting to Global Economic Conditions: Tax Perspectives for Asian Funds and Investors

The potential global economic downturn, accentuated further by the recent U.S. trade tariffs, continues to reshape the financial landscape and add complexities, creating both challenges and opportunities for Asian funds and investors.

In this environment, fund managers and investors must adopt innovative strategies to address valuation pressures, liquidity needs and tax complexities.

Potential tax risks — including indirect transfer taxation, cost of tax insurance and withholding tax — have become central. This article explores how these issues are reshaping fund strategies and the growing role of tax insurance, restructuring and liquidity solutions in managing them.

Lessons and Opportunities:

• Secondaries and Continuation Vehicles (Unlocking Value Amid Uncertainty): With assets under pressure, secondaries and continuation vehicles have become critical tools for preserving value and providing much needed liquidity, often at a slight discount.
• Smaller, Targeted Funds: A notable trend is the shift toward smaller, niche funds, as opposed to large, blind-pool structures. Such funds may comprise less complicated structures, lean documentation, lower fees, and a focus on cost efficiency.
• Mergers and Acquisitions (M&A): M&A in the asset management space will continue to thrive as larger players look at options to increase assets under management, enter new growth markets, or diversify asset classes.
• Separately Managed Accounts (SMAs) and Funds of One: SMAs and Funds of One offer customized investment solutions. In the current environment, however, the General Partner may have to cede some control and settle for lower fees.
• Open-Ended Funds With Soft Lockups: Liquidity pressures have spurred demand for open-ended funds with soft lock-up provisions.
• Diversification Through Fund of Funds: Fund of Funds with multi-strategy exposure are gaining traction for diversification. Innovative financial arrangements are being explored to optimize tax and cost efficiency, liquidity, risk management, or gaining exposure to specific markets.
• First-Time Fund Managers: A stagnant market may lead experienced dealmakers to step away from large institutions and establish first-time funds.
• IPO in the Non-U.S. Market: As U.S. markets face headwinds, Asian funds are increasingly considering IPOs in non-U.S. markets. However, such moves may entail inversion-related concerns, lengthy cross-border court and regulatory approvals, and compliance with laws.
• Other Dynamics: Revisiting fund terms and capital call mechanics, exploring liquidity solutions like net asset value financing, isolating high risk jurisdictions within dedicated vehicles, etc., are in the cards.

Key Considerations:

• Indirect Transfer Taxes: Whilst exploring secondaries or continuation vehicles, the transfer of underlying assets across jurisdictions demands precise analysis to comply with local regulations. Several Asian countries, such as India, China, Indonesia and Vietnam have complex indirect transfer rules that can impact both the “Seller” and the “Buyer.” 
• Tax Insurance: Risk mitigation through tax insurance is increasingly being leveraged, addressing some uncertainties in exits and indirect transfers, and offering cash flow protection.
• Transfer Pricing (TP) and Withholding Tax Considerations: Shifts in supply chain or value creation, re-characterisation of inter-company payments, intra-group financing, or external debt arrangements may create TP and withholding tax obligations.
• Continuation of Tax Incentives: Exercise caution regarding prevailing tax incentive conditions. While the opportunities can provide strategic benefits, it is equally important to ensure compliance and avoid potential pitfalls that may result in noncompliance or derailing of tax incentive awards.
• Complex Valuation and Reporting: Volatility in margins, uncertain future cash flows, impairment risks, and additional tax and compliance adjustments may add to overall complexity, leading to additional Limited Partner (LP) reporting expectations and audits.

Conclusion

The evolving global macro-economic position and corresponding tax rules are adding significant complexity for Asian funds and investors — impacting valuations, tax exposure and fund structures. Proactive planning, targeted structures, tax insurance, and transparent investor communication are critical to managing these risks.

Alvarez & Marsal can help funds navigate this landscape through integrated solutions — combining tax advisory, transaction structuring, valuation support and risk mitigation strategies — to protect investor value and drive execution certainty.