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...an emerging asset class to add depth and vibrancy to the capital market
Business Trusts offer investors a new way to invest in cash-generating assets.
Business Trusts are business enterprises set up as trusts, instead of companies. They are hybrid structures with elements of both companies and trusts.
Like a company, a business trust operates and runs a business enterprise. But unlike a company, a business trust is not a separate legal entity. It is created by a trust deed under which the trustee has legal ownership of the trust assets and manages the assets for the benefit of the beneficiaries of the trust.
Purchasers of units in the business trusts, being beneficiaries of the trust, hold beneficial interest in assets of the Business Trust.
The Business Trust structure is more suited for businesses with stable growth and cash flow, such as infrastructure and utilities businesses, vehicle leases and charters, etc.
While REITs are regulated as property funds under the Code on Collective Investment Schemes, Business Trusts are governed by the Business Trusts Act under a different regime.
One of the key differences between Business Trusts and REITs is that Business Trusts are premised on a single responsible entity the Trustee-Manager, whereas in the case of REITs, while the assets are legally owned by the Trustee, they are managed by a separate Asset Manager, more like unit trusts and mutual funds.
The shares in the Trustee-Manager will likely be owned by the sponsor of the Business Trust, which is likely to sponsor the trust by injecting assets into the Business Trust. The Trustee-Manager will raise funds from public investors by issuing Business Trust units in an initial public offering. The proceeds from the initial public offering, together with any borrowings will be used to acquire the trust assets.
The Trustee-Manager of Business Trusts thus has dual responsibility of safeguarding the interests of unitholders and managing the Business Trusts. This stems from the difficulty in apportioning the fiduciary responsibility between two roles given the nature of Business Trusts as active enterprises.
To address any potential conflict of duties of the Trustee-Manager to the shareholders of the Trustee-Manager and to the unitholders of the Business Trust, the Business Trust Act stipulates higher requirement on corporate governance.
Another key difference is in taxation. While REITs with Singapore assets are tax-transparent investment structure focused on real estate assets, Business Trusts are like companies, subject to the Income Tax Act. However, certain assets or businesses that enjoy tax benefits under the Income Tax Act will continue to enjoy these benefits.
Whereas companies are restricted to paying dividends out of accounting profits, there are no such restrictions on trusts. Business trusts can therefore pay distributions to investors out of operating cash flows and is suited to businesses involving high initial capital expenditures with stable operating cash flows.
Business Trusts allow investors to have a direct exposure to cashflow-generating assets, such as utilities, shipping or aircraft. The structure unitises big ticket assets into liquid and affordable units which are traded on the SGX, giving investors a new alternative to existing yield plays.
Business Trusts typically have high payout ratio because of its ability to distribute cash flows in excess of accounting profits and this imposes discipline on Trustee-Manager when considering acquisitions.
In addition to maintaining the payout, Trustee-Manager as the responsible entity is also expected to actively manage the business for growth via acquisitions and expansion to enhance returns to investors. The incentives of Trust-Managers are typically structured to align their interests with unitholders.
Investors can invest in Business Trusts during the initial public offering, or by buying the Business Trust units listed on the stock exchange the way they invest into listed companies or REITs.
The risks of investing in Business Trusts will largely depend on the kind of assets and investment focus that the Business Trust has. These include, but are not limited to, risks that the value of the units may fluctuate and that the projected distributions may not be achieved, as well as other risks. Investors should carefully read the prospectus and seek advice from the relevant professionals in evaluating any potential investments in Business Trusts.
“ All information, opinions and statements expressed are subject to change without notice and not intended to provide any recommendation and advice on investing. Readers should seek professional advice before making any decisions ”
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