News events like this week’s ‘Paradise Papers’ document leak provide an interesting challenge to journalists.

Nothing illegal has been alleged, but offshore activity of various hues is being held up to the light and – if you will forgive the mixed metaphors – subjected to the “smell test”.

The stash of documents – as with the previous version, the Panama Papers – is huge: 13.4 million files leaked mostly from law firm Appleby to the German newspaper Süddeutsche Zeitung and subsequently shared with the International Consortium of Investigative Journalists. Many of the revelations are no doubt still to come but, for the moment, references to the private equity industry have been few and unsurprising to anyone in this industry.

The papers revealed that the British Queen had invested – through her Duchy of Lancaster trust – in one of HarbourVest Partners’ secondaries funds, sparking one of the finest headlines ever to grace the pages of sister title Secondaries Investor (in this editor’s opinion).

The revelation sparked some fuss about the Queen’s affairs, with calls from the political left for her to make a public apology. A monarch who benefits directly from her nation’s taxes and at the same time holds offshore investments is certainly a smell test fail, but there is one point worth noting on this (besides the fact the Queen is also the monarch of Bermuda and Cayman and probably knows little of the structure of her financial holdings).

The structure of private funds is primarily about achieving tax neutrality for investors, ensuring they pay no more tax than they would do if they were investing directly into the assets. It is also a question of keeping tax reporting – itself a cost – to a minimum. This latter item may seem a fringe benefit, but it is not: it can make the difference between an investment or divestment being worthwhile or not.

The more complex a fund’s holdings, the greater the need for efficient structures. For example, a secondaries fund like HarbourVest’s Dover Street VI will end up exposed to assets all over the world through all types of structure; it therefore has a pressing need to achieve tax neutrality. Would it even have been possible to invest in a fund like this without using an offshore vehicle? HarbourVest did not respond to a request for comment. The answer, according to the general counsel at one fund of funds investor, is probably not.

The case for tax neutrality is compelling: whether it passes the smell test is another question. It is a nuance easily overlooked in a discussion about how a private equity firm structures a loan to a struggling care home business, for example.

Should the private equity industry worry about what comes out of the Paradise Papers? It is unlikely that there will be any one revelation that gives private fund managers or investors cause for concern beyond the odd PR headache.

Beyond the media coverage, tax experts have previously told us that it is becoming increasingly difficult to maintain tax neutrality, in part because of BEPS, the OECD’s global initiative to prevent base erosion and profits shifting, which is slowly being translated into tax codes around the world.

This trend is far more relevant to private markets than details of how the Queen is trying to counteract the J-curve by accessing the secondaries market … titillating as it may be for a private markets nut.

toby.m@peimedia.com