Refinancing raises a number of concerns for investors but these are not always in the best interest of the fund, as Deborah Lloyd explains
Real estate funds in breach of their banking covenants are part of the funds' landscape today and 20% of real estate funds face refinancing in the next 12 months.
It may be the case that without restructuring and new equity, banks will call in their loans and investors will face the loss of their investments. Where new equity is required, this inevitably involves restructuring funds.
While fund managers should seek to put the interest of the investors first, there are occasionally conflicting views with minority investors as to what is the best course of action. Investor concerns will focus around the following areas:
So while some investors may not agree with fund manager proposals, many of the changes go to the heart of the constitution of the fund and require the consent of investors.
Unless a fund manager is confident that all the investors will back the proposed changes, its first port of call will be to examine the fund documentation to decide how to manage the proposed changes and any dissenting investors. There are three matters to which fund managers should be alive:
Fund managers have a tough time dealing with the banks where the lack of debt over the next two years means there will be increasing competition for it and some funds will struggle on refinancing. Raising new equity is a tough call for fund managers and funds lucky enough to secure it, to save themselves from liquidation or bank enforcement, pay a high price.
The fund manager then has to manage investors' expectations. Investors may have different views on the proposed course of action. In the end, the manager should put the investors' interests first, take a firm course of action, keep investors informed and talk to banks early.
Deborah Lloyd is partner at law firm Nabarro