Continuing story of funds pits managers against investors

 INREV study finds investors suspect managers’ motives for fund extensions, reports Jane Roberts

Fund managers and investors are at logger-heads over winding up funds and selling assets. INREV’s Fund termination study 2011 found that managers of 56 funds due to close between 2011 and 2013 are “more reluctant” than before to wind them up. Investors claim managers “are unnecessarily delaying final decision-making to make extension the most attractive and only viable option”, in order to hang on to fees. The figures support this idea: only 20 of the 56 had made a decision, with eight out of 18  due to wind up this year not having decided by July, when the survey was carried out.

Of the 20 that had taken a decision, eight had chosen liquidation, while 12 chose to extend or roll over the fund (see fig 1). A majority of the 36 that hadn’t decided preferred to continue the fund; 10 expected to liquidate and 24 to continue. Last year’s survey found funds that hadn’t yet made a decision were equally likely to liquidate or extend. This time, 30%  expect to liquidate.

INREV says previous survey respondents “have generally supported managers’ plans to extend funds in current market circumstances. But this year, investors are more inclined to opt for asset sales, in line with the original business plan, particularly in markets showing signs of improvement. “Investors seem keen to start liquidating funds well in advance, to encourage the  manager to explore opportunities as they become available, rather than waiting until the end of the fund’s life to sell the assets.”

But investors said opportunity funds were reacting earlier than core funds, while funds investing in France are more likely to be liquidated than funds investing elsewhere – perhaps because of “relatively good liquidity and performance in the French market”. The seven out of 10 opportunity funds that wanted extensions were generally asking for short periods, with managers and investors accepting that it might take longer to sell  assets because of the characteristics of the assets or sub-markets they are invested in.

Fund managers cited current market circumstances as the main issue affecting termination decisions (see fig 2). They said they were disinclined to sell in the current market and where they had plans to improve assets’ saleability, investors tended to agree. The second most important factor was  fund performance versus target performance, with managers saying investors are more likely to agree to an extension if this allows the fund to achieve its target return.

Investors acknowledged that the timing of decisions should be related to performance, but said a manager that does not expect to be able to liquidate on time should open talks early so alternatives could be explored. They also speculated that with extensions due to unachieved target returns “the aim can partly be to avoid realising poor returns and crystallising the manager’s track record”.

The report says some investors were keen to hang on to good-quality assets, if not the funds that held them: “Some investors said they would prefer to retain exposure to specific assets outside the fund framework, via joint ventures, clubs or direct ownership.” None of the 56 have considered floating portfolios through IPOs, an exit for private funds previously proposed by public market analysts, no doubt due to market conditions.

Ten funds were considering other options, including a fund’s sale or merger with another. For example, three investors are selling a UK logistics fund (see box below). Loennike Löwik, INREV’s director of research and information, said: “There is a disconnect between investors and managers, with some investors feeling cornered. Investors and managers could benefit from more transparent talks on fund termination and a much earlier start to discussions.”

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Sold on whole fund disposals

Investors in the UK Logistics Fund are exiting via a sale of the portfolio. Legal & General Property, LaSalle Investment Management and Hermes REIM have appointed Jones Lang LaSalle to sell the portfolio’s 12 buildings, two of which are un-let and one a development site, last valued at £320m.

Launched in 2006, the fund has outperformed the IPD Industrial Index by 1.2%, 2.9% and 0.7% over the past one, three and five years. Paul Edwards, the fund’s director, said: “The investors believe this is an ideal time to sell the portfolio. This is an opportunity for the investors to review their holdings to ensure they deliver the best returns for their clients.”