Legal & General Property, the London-based property arm of British insurer Legal & General, last month raised £403 million (€554 million; $631 million) in equity for its second UK fund.
The fund is notable for a couple of reasons, firstly, UK Property Income Fund (UKPIF II), is the largest fundraise for a UK-focused closed-ended property fund in the last 12 months.
But, perhaps more interesting is that the fund’s architecture permits investors to choose how much leverage they have exposure to. The structure effectively enables them to choose a level of gearing from 0 percent to 50 percent.
L&G’s first fund in the series, UKPIF I launched in 2009, also had the same structure which came out of the firm’s feeling that investors wanted to be able to make a choice about their debt exposure coming out of the global financial crisis.
“It was very notable that a lot of people felt they didn’t have enough control or input into what really was the bête noire of that phase which was over-levered funds at the choosing of the fund manager to scale up and charge fees against,” said Charlie Walker, director and fund manager of UKPIF I and UKPIF II.
Investors in the latest fund came from across the globe, including Asia, North America, Europe and the Middle East, with seven of the 16 investors having invested in L&G’s UKPIF I, which closed at the end of 2011 on £300 million.
And the final split between investors who want gearing and those who did not shows that the optionality was an important factor as half the investors opted to have no gearing at all, favoring a pure property exposure, whereas the other half choose a modest risk exposure, with levels ranging from 20 percent to 50 percent.
“We noticed a trend that in Europe and in Asia there tended to be a lower appetite for leverage but there are exceptions within that,” said James O’Neill, head of international distribution, L&G Property.
“Middle Eastern clients have been happy to use leverage and you expect that might be because they are relatively new to the real estate investing world and perhaps don’t have the hangovers, or didn’t experience such challenges, during and post the GFC as some of the more experienced European and Asian investors.”
The chosen leverage levels has given L&G a buying power of £610 million for UKPIF II including gearing. This means returns are different between the two ‘sleeves’ and are expected to be net IRRs of 8 percent to 9 percent for ungeared investors and 12 percent to 14 percent for geared investors.