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EUROPE NEWS: Mind the gap

Managers, fundraisers and lawyers beware: INREV could start pushing for new corporate governance guidelines after it revealed one-third of GPs could transfer their co-investment capital without penalty.

The European Association for Investors in Non-listed Real Estate Funds has found that in many of the fund documents it has assessed, there is nothing to stop a fund manager transferring its interest in a vehicle. For INREV, that runs counter to the alignment of interests between investors and general partners.

INREV has been investigating fund documents of vehicles established over the past three years to determine the extent of compliance with it’s corporate governance guidelines, first published in December 2006. 

In particular, it is looking at circumstances in which a manager can transfer its co-investment stake in a fund. It found that in a third of cases, there was no restriction on such transfers by the manager.

The issue was highlighted at INREV’s recent UK and Amsterdam member seminars. A summary report will now be prepared for members.

Alasdair Evans, chairman of the INREV corporate governance committee and chief operating officer at UK fund manager Hermes Real Estate, said corporate governance of funds was generally good. However, INREV had uncovered some gaps where improvements could be made. “This seems to be one of those gaps,” said Evans.
“We think there could be some improvement in the governance which would align managers and investors more closely for longer,” he said.

He explained in most cases there was co-investment in funds from the fund manager, sponsor or individuals running the fund. However, if managers had the ability to subsequently transfer their interest, the danger was that there would no longer be an alignment of interest.

Evans added some protection was afforded to investors through GP removal clauses for when fund managers transferred their interest, investor consent or through the loss to the manager of their carried interest. However, protection was not available in every situation. “Investors need to think about this. In about one third of cases, the manager can sell its interest freely without penalty,” said Evans.