Almost 90 percent of the fund managers of European opportunity funds due to terminate between this year and 2015 report that extending the life of their fund is an option, according to a study produced by the European Association for Investors in Non-listed Real Estate Vehicles (INREV). In its 2013 Fund Termination Study, the association stated that the finding probably is explained by the fact that investment periods of many of the funds had been longer than expected due to the global financial crisis.
INREV sampled 179 funds of different styles for its study, with 18 percent of those being opportunity funds. It concluded from its research that, while nearly 90 percent said extension of the fund would be an option for them, the extensions themselves were expected to be “relatively short” in contrast to some of the core funds that had taken extensions of up to 10 years.
“As a result of this, liquidation is not a popular option for opportunity funds at present, and only 22 percent declared an interest in this specific strategy,” INREV stated. “None of these funds are considering IPOs, sales or mergers either.”
The dominant reasons for decisions affecting termination decisions remained “current market circumstances,” in line with previous studies, said INREV. The quality of the portfolio and terms set for termination also were primary issues.
For all funds and strategies, INREV said a form of continuation via extension or “roll over” of the fund was the most preferred form of termination strategy, as 54 percent of funds due to terminate between 2013 and 2015 said they would, or were likely to, choose extension as a strategy.
The industry association also found that liquidation was a strategy under consideration by 60 percent of value-added funds. This was closely followed by 58 percent of core funds. Further, in 33 percent of cases for funds of all styles and strategies, investors’ liquidity requirements were a key consideration. Examples given of “other issues” affecting termination decisions were difficulties in extending leases, co-investment and corporate government issues.
After conducting interviews with several investors, INREV added that limited partners had reported back that any fund extension or renewal process should be accompanied by “modernization” of existing fund terms and realignment of fund manager and investor interests. This could be via a change of terms concerning fees, governance, investment and debt strategy and exit strategy.
Indeed, when a fund had been extended, structural changes had been made in the majority of cases. Revising fee structures from a gross asset value basis to a net asset value basis is one example. Others include reduced leverage, new restrictions on lot sizes and voting changes.
For those yet to agree on an extension, fee structure was the top priority among structural changes. Greater involvement of large investors in fund operations, non-fault divorce clauses and governance changes also were cited as important alternations needed in order to extend the fund.