L&G’s £1bn UK fund aims to put investors in driving seat

Legal & General Property has raised £175m of equity for a £1bn UK property fund that it claims gives its institutional investors a new level of flexibility and influence. The Legal & General UK Property Income Fund is a fully discretionary fund run by LGP, but offers geared or ungeared returns, an investor advisory committee and alignment of interest via private capital investment by four LGP managers.

Its performance fees will only be paid on fund expiry, subject to reaching a predetermined hurdle rate. The £175m was raised at the fund’s first closing this month from four cornerstone investors, which have joined a unit holder advisory committee.

LGP head of property Bill Hughes said the fund’s structure was the result of listening to investors concerns “over two years in a very difficult market, when misalignment between fund managers and investors has been in the spotlight.

We have talked to investors for nine months and listened closely to what they think is best practice.” The investment management team, led by Charlie Walker, is obliged to meet investors three times a year, inform them of any significant changes to the fund and work with them on any conflicts of interests that arise.

Hughes said it was normal for managers of boutique or private equity-style funds to co-invest, but was unusual for institutional fund managers to do so, and is new for LGP. “It is difficult for individuals to find cash to invest in businesses, but to show true commitment it is a valid concept and will become more common, I think,” he said.

Walker said the fund’s strategy is to buy larger lot sizes of core or core-plus property than were now popular with investors and most of the banks funding them.

We are targeting £50m to £100m assets, where the market is less congested, and aim to create a balanced fund of 15-20 properties, worth £1bn,” he said. The fund has a central London allocation and will also buy shopping centres, large regional offices, business parks and distribution centres.

Investors will choose whether to take geared or ungeared units at a ratio that suits them, but Walker said he expected a majority will come in on a geared basis. The maximum gearing is 50%. The fund is targeting net returns of 15% geared and 10% ungeared over seven years.

LGP has put a debt facility in place with one bank, which can be drawn down in tranches to fund acquisitions. About 80 funds with a UK strategy were launched last year, but only a handful had hit their capital raising targets by this quarter.

Cushman & Wakefield Corporate Finance is the placement agent for L&G’s new fund. Clifford Chance advised on its structuring.