Investors liquidate poorly performing funds, says INREV study
Investors are opting to liquidate poorly performing funds due for termination, according to a study by INREV.
The INREV Fund Termination Study 2013 analysed 179 closed-end funds originally due for termination between 2007 and 2015, which together have a gross asset value (GAV) of EUR70.8bn.
Approximately one third (EUR23.1bn) of the total GAV belongs to funds that are in extension already or will extend after 2013. INREV’s performance data indicate that total returns (since the financial crisis) for funds that have been extended are on average six percentage points higher than for funds opting to liquidate.
The study shows that the location of assets held by investors is another important factor affecting termination decisions, with investors demonstrating a strong preference for Western Europe – again indicating a link to performance. Just four countries – the UK, France, Germany and Belgium – account for 57 per cent of the assets of funds in extension. By comparison 52 per cent of the assets being liquidated between 2007 and 2015 are in Southern Europe. Spain and Portugal combined account for less than 16 per cent of all assets in, or due for, extension.
This increased level of confidence in some territories is also highlighted by the more than four-fold increase in the number of funds deciding their termination strategy two years ahead of time, from six per cent in 2012 to 26 per cent in 2013.
However, the high proportion of decisions being taken close to the termination date points at the still fragile nature of the economic recovery in Europe. Although the data suggest that investors and fund managers still begin looking at options two to three years out, over half of funds due to end between 2013 and 2015 have yet to decide whether or not they will continue.
“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,” says Casper Hesp, director of research and market information, INREV. “There is a clear preference for retaining assets in the stronger European markets.”
Where funds are being extended, 60 per cent of the sample surveyed reported that changes have been made to the funds - for example to their structure, fee arrangements, leverage or overall strategy.
INREV surveyed 68 funds due to terminate in the next two years to find out more about the factors that influence the decision-making process for fund terminations. Additionally, a total of ten fund managers and institutional investors were interviewed in depth about their experiences.
“It is still an unsettled time for the non-listed real estate industry,” Hesp says. “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.”