Manager put investor committee in driving seat to negotiate IPIF’s extension, writes Jane Roberts
Fund manager Legal & General Investment Management and investors in the Industrial Property Investment Fund have broken new ground in agreeing the fund’s extension.
Usually when an unlisted fund is due to terminate, the manager deals with investors individually and attempts to reach a consensus about whether to extend or wind up the vehicle. But Legal & General Property decided to invite IPIF’s investors to come together to decide what they wanted to do, without any input from the manager.
LGP business development manager Dan Batterton says the manager stepped back because it wanted to be as fair as possible to investors and, if they wanted to extend, let them update the fund’s corporate governance. When IPIF was set up in 1997 it had four investors and a requirement for 75% agreement to extend the fund, with no redemption provisions. However, since then, IPIF has amassed a £779m portfolio owned by 93 investors.
“We told investors that if they decided to extend, we’d like them to make any changes to the key terms. We said: “you have invested in hundreds of funds, tell us what you think the cutting edge is” Dan Batterton, LGP
“Up to 25% of unit holders would have had to stay in even if they said no to an extension but it had been voted through,” Batterton says. “What was sensible then didn’t seem corporate governance best practice now.”
LGP proposed establishing an advisory committee of investors, made easier by the fact that the 93 investors were advised by just 10 advisers, six of them – Aviva Investors, BlackRock, CBRE Global Investors, Schroders, SWIP and Legal & General’s in-house clients – advising investors holding about 95% of the units.
Those six investors joined the investor group, while the fund’s administrator, State Street, acted as independent chair for the discussions while also representing the remaining investors and their advisers.
Batterton says: “We told them we’d like to extend, while enabling investors who wanted to leave to do so. We said: ‘you recommend to us what you want’. The instruction from Bill [Hughes, head of property] was that if they wanted to shut down the fund, we would – we weren’t trying to protect our fees.
“A lot of fund managers see extensions as a battle to protect fees. We told them that if they decided to extend, we’d like them to make any changes that they wanted to the key terms. We said: ‘you guys have invested in hundreds of funds so tell us what you think the cutting edge is’.”
A limited role for LGP
LGP’s role was limited to an initial presentation to the investor group recommending an extension, and attending future meetings when invited, to write up notes.
The process could be seen as a gamble for the manager: talks could have ended in a stalemate, investors could have voted to wind up the fund, or slash LGP’s fees. It required the individuals involved to wade through huge amounts of paperwork. Was LGP confident the experiment would work?
Batterton says three key things about IPIF favoured an extension on better terms. One is the portfolio quality: it is large, diversified, lowly geared and 75% in London and southern England – “the aim is property, not finance risk”. Secondly, it is “hugely well-resourced, with 40 staff dedicated to it”, says Batterton. The majority are at property asset manager Jones Lang LaSalle.
A third factor is IPIF’s track record: it has averaged 6% annual income distribution; outperformed the industrial sector every year bar one; and outperformed the PPFI balanced funds benchmark by 2.1% on average over 10 years (see table, right).
Also, while IPIF averages £30m-£35m in secondary market trades per quarter, according to Batterton, it doesn’t have any overseas, large pension fund or sovereign wealth fund investors. “They tend to invest for a finite period and want to redeem,” he says. “So while there is a lot of trading, the fund is stable and owned by UK investors looking for UK industrial market exposure.”
Graeme Rutter, head of multi manager at Schroders and a member of the investor group, says the experiment worked because IPIF has “a good performance track record, stable management and trust between investors and management. Investors were of a similar profile and generally very keen to extend. It would have been immeasurably harder had this not been the case.”
But Rutter, who also chairs the Investment Property Forum’s unlisted funds group, sees the process as a template for others and an example of best practice: “We have suggested the IPIF model to two other managers with imminent fund extensions,” he says.
After two months of meetings, the investor group came up with nine resolutions 100% backed by its members. The main changes were: to extend to 2020; hold rolling extension votes every five years thereafter; introduce a redemption window this year and every five years (for up to 25% of equity); and allow the manager to raise fresh equity of up to 10% of the fund’s value annually without an investor vote (see panel, left).
“The ability to raise new equity means we can move quicker if we see an opportunity,” Batterton says. But with units recently trading on the secondary market at a modest 4-5% discount to net asset value and the need to raise equity at a small premium to cover transaction costs, he believes an equity raising is unlikely this year.
“Gearing is 21% and we could go to 30%, the higher end of our range,” he adds. “The industrial market is strong and that would give us around £50m-£60m of firepower.”
The investors didn’t change the basic management fee, 70 basis points of net asset value, or the performance fee hurdles. The deadline for redemption requests is the end of this month; LGP is not expecting many.
Investor group has 12-month remit
The investor group considered the option of having a non-executive director for the fund, but decided it wasn’t necessary while the group was meeting. It will stay in place for the next 12 months “with the ability to disband themselves, because they didn’t want to meet if there was nothing to discuss”.
LGP’s UK Property Income Fund also has an investor committee to consider issues such as potential conflicts and has leeway to extend the time for sales in the fund’s wind-up period. UKPIF is a private-equity-style fund with a clearly defined shelf life and most of its investors are from overseas.
Batterton believes the IPIF extension shows “how multi managers can add value for their investors; they were very active”.
Rutter says one of the biggest and most welcome changes was LGP’s recognition that IPIF is “owned by the investors and the outcome had to be right for them. Previously there has been less consultation and often the result is a compromise to pacify individual investors, with the outcome being less than the sum of the parts.”
Hansteen and Henderson offer IPIF fresh competition
Investors’ decision to extend IPIF was partly down to a lack of serious competition in the specialist funds world. Some 70% of investors in the open-ended industrial Falcon Property Trust want to redeem their units, while Aviva Investors’ Ashtenne Industrial Fund has had problems with high gearing and is not being extended.
Two new industrial funds are being launched: Hansteen’s UK Industrial Property Unit Trust 2, effectively a vehicle for Aviva Investors’ clients, who supplied two thirds of the £107m of equity; and Henderson’s Industrial Income Fund, now fund raising and to be managed jointly with industrial specialist Centurion Properties.
Henderson Global Investors’ Myles White is not involved with the industrial fund but is director of retail property and manages Henderson’s recently extended Shopping Centre Fund. His team met all 55 investors individually before bringing together larger investors to agree terms.
“Trends are emerging from funds that are receiving support from investors to extend,” he says. “If a manager says, ‘here are my terms to extend and these are my fees’ he will get short shrift from investors. I would support managers stepping back, because it is the unit holders’ money that is being invested.
“There must be trust between manager and investors. It sounds like good practice – if unit holders have similar objectives.”