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The business case for cost-control

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By Nicholas Zahra, CFA, Bastion Wealth,  & Anabel Mifsud, SGGG FEXserv Fund Services – Malta is one of the smaller players in the asset management world, which tends to appeal to the smaller managers, and to investors who have a business case for their choice of jurisdiction. 

As a domicile and financial centre, one can fairly summarise both Malta’s advantages and disadvantages as being its small size, where the chances are that smaller players get levels of attention reserved for large players in the established jurisdictions.

The choice of jurisdiction is just one question from many that should be asked, with each answer having a bearing on the others. Funds, SPV’s, partnerships and so on, are not a means to an end, but best-fit conduits for attracting capital to your business model. 

The conduit’s ideal legal structure should be the one that ticks the most objectives, and therefore one should reverse-engineer the business model to figure out the optimal conduit. We recommend focusing on two critical areas: knowing your business model, and knowing your investors. 

These seemingly obvious points belie the fact that many start-ups begin by focusing on the conduit’s legal structure, and then proceed to fit it to their business model, effectively working the other way round.

It’s also quite common for managers to think that the more regulated and `compliant’ their conduit is, the more successful they will be. This is not necessarily true. Applied correctly, compliance and regulations provide a balance between the investors’ interests and the manager’s interests, but they also increase costs, which decreases a business’ performance and returns to investors, which in turn increases the chances of failure during a venture’s delicate initial stages. 

Questions associated with knowing one’s business model should begin from the characteristics of the assets, together with any operational concerns, their tax treatment, both at the asset level, as well as at the investor level. Once the business model is complete and it’s time to focus on financing, useful questions to ask would be how much committed capital you have raised before launch, who are your investors, where are they from, why are they investing, and how much capital you think you can raise during future funding rounds. 

Only once a clear and concise picture, including all of the above points, has been put collated, ideally with some committed capital in a suitable holding vehicle, should any attempt be made to build the entity from which to execute your strategy.

Again, the rule when setting up your operation is to go for the most cost-effective solution in relation to the amount of committed capital raised. One can always ratchet up regulatory compliance if one is successful, but one cannot roll back the clock if excessive costs during the initial stages caused the strategy to fail. 

The initial stages are critical to any business, which is why one should proceed with extreme caution, keeping costs low, and a lean, flexible infrastructure. The reality is that business plans are invariably optimistic, deadlines missed and all manner of unforeseen circumstances can and do arise. Under these conditions, keeping sunk costs to a minimum and overheads light is the best way to maximise the probability of success. 

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