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Working with numbers
More funds facing termination are now taking a decision on their future strategy well in advance
INREV, the European association for the non-listed funds sector, has just published its eighth annual Fund Termination Study, which suggests that, in sign of increasing market confidence, more fund investors are opting to liquidate poorly-performing funds that are facing termination.
The 2013 Study analysed 179 closed-end funds originally due for termination between 2007 and 2015, combining a gross asset value (GAV) of €70.8bn. The data shows that more funds facing termination are now taking a decision on their future strategy well in advance, with the number deciding on their termination strategy a full two years ahead of time increasing to 26% in 2013 from only 6% last year.
However, the fragility of Europe’s economic recovery is still evident in the number of decisions being taken close to the termination date, and while investors and fund managers are still starting to look at options 2-3 years before termination, more than half of funds due to end between 2013 and 2015 have still not decided whether to continue, according to the report.
According to Casper Hesp, director of research and market information at INREV, “While most investors are still waiting for funds to recover from lacklustre performance during the economic downturn, our study shows that more investors are opting to liquidate poorly performing assets.”
Total returns for funds being extended are 6 percentage points higher on average since the financial crisis than those for funds choosing to liquidate, data shows. Around one-third (€23.1bn) of the total GAV belonged to funds that were in extension already or would extend after this year, it says.
Geographically as well, there is a clear preference for holding onto assets in the stronger European markets, Hesp said. The study shows investors clearly prefer Western Europe, with the UK, France, Germany and Belgium accounting for 57% of the assets of funds being extended. In contrast, 52% of the assets being liquidated between 2007 and 2015 are in Southern Europe, according to the study. Spain and Portugal combined accounted for less than 16% of all assets in or due for extension.
More than half of funds that are being extended include changes as part of the extension, INREV said, with 60% of the sample surveyed reporting that changes have been made to the funds. Examples of these are alterations to fund structures, fee arrangements, leverage and overall strategy, it said.
To get a clearer picture of fund managers’ motivations, INREV scrutinised in detail 68 funds due to terminate in the next two years, while interviewing ten fund managers in depth about their behaviour and experiences. Hesp commented, “It is still an unsettled time for the non-listed real estate industry – so gathering more information on the challenges faced by both fund managers and investors is key to improving our understanding of emerging best practice for fund terminations.”