EUROPE NEWS: Debt mix and match

Here’s a lesson for opportunity funds looking to launch core, core-plus vehicles: Legal & General Property has found a neat solution to raising such a fund when investors want different gearing levels.

While soft marketing its latest core vehicle, the UK Property Income Fund – which has just held a first close on £175 million (€199 million; $267 million) – the London-based fund manager discovered that, while some were fine to accept 50 percent loan-to-values, others wanted zero debt and others something in between.

The answer, explained business development manager Dan Batterton, was to establish two English limited partnerships for the fund – one with 50 percent gearing and the other no gearing at all. The two partnerships allow LPs to co-invest in each property the fund acquires.

“The type of properties investors wanted to own were common across all the jurisdictions, but they almost wanted the financial structure tailored to them,” Batterton said. “So, we said ‘we are not going to manage the debt decision, the investors can manage it’. “

The fund is designed to be more flexible than investors simply having zero or 50 percent gearing ratios. If an investor wants a gearing ratio of 25 percent it can buy a combination of units in the two partnerships. Mix and match, if you like.

To get the fund off the ground, Legal & General also had to get banks comfortable with the risks involved, added Batterton. If the borrower defaults, the bank only has a claim over 50 percent of the asset. The ungeared investors’ 50 percent remains untouched.