INREV, the European trade association for investors in non-listed funds, today claimed that some fund managers were delaying decisions about the future of funds for so long that extension became the only viable alternative.
The Netherlands-based body, whose members include limited partners, fund managers and advisors, laid the accusation at the door of some sponsors after receiving feedback to its 2011 Termination Study.
In line with previous studies on the same topic, INREV found that two thirds of non-listed real estate funds scheduled to terminate between 2011 and 2013 will be extended. But this time, the organisation went on to say that while investors were keen to “engage with fund managers much earlier over their fund termination strategies”, there was a continued trend from last year toward delaying decisions about fund termination.
“Some investors felt this was being driven by fund managers’ deliberate attempts to make the decision to extend a fund the only viable option. Furthermore, a number of investors perceived that the decision to extend a fund was motivated more by fund managers’ desire to maintain fee income than by what may be in the best interests of the investors,” said INREV. Fund managers, on the other hand, cited the need to allow time to consider all the termination options as the main reason for delaying a decision, with 56 percent of funds due to terminate between 2011 and 2013 falling into this category.
Lonneke Löwik, director of research and information, said: “This is an interesting revelation. It suggests that, while not a universal theme, there is a level of disconnect between investors and fund managers, with some investors feeling cornered. The study implies that investors and fund managers could benefit from more transparent conversations around fund termination decisions, and a much earlier start to their discussions on the subject.”
A majority of the funds opting to continue beyond their original termination date were aiming at extensions of between one and three years. But one in three said they would seek to liquidate.
Of the funds that decided to terminate, the majority were disinclined to dispose of assets. Both investors and fund managers expressed the desire to keep hold of high quality assets, because of the uncertainty over current market conditions. However, a number of investors were keen to explore the option of retaining their assets outside the framework of a fund, for example, through joint ventures, club deals or direct ownership, denoting an interesting shift in approach.
The study also examined trends in termination strategies looking back to 2006, when the first INREV Termination Study was conducted.
It revealed that between 2009 and 2011 nearly 60 percent of funds changed their termination plans at least once. The most common change was from an extension to liquidation, reflecting the peaks and troughs of different markets. However, none of the funds with original termination dates in 2009-2010 changed their strategies from liquidation to extension.
Fund-specific factors and investor preferences were important influencing factors, but prevailing market conditions were the key reason most funds changed their termination strategies.
Of the funds originally due to terminate in 2009 or 2010, 15 percent had stated they would pursue a termination strategy of liquidation, but none had disposed of all their assets within the original lifetime of the fund.
“This trend demonstrates how investors and fund managers inject a powerful dose of pragmatism when it comes to deciding the ultimate termination strategy for their funds, despite the guiding principles laid down in the fund documentation at the outset,” said Löwik. “The fact that a number of changes to strategy are made along the way also shows how investing in a closed-ended fund doesn’t necessarily mean investors will know exactly when the fund will terminate, or when or whether capital will be returned.”