Fund of funds activity falls but sector sees new opportunities

Five equity investments totalling a mere EUR 75 mln were made into non-listed property fund of funds in the first nine months of 2009, according to the latest Fund of Funds survey by Inrev, the organisation for the non-listed real estate sector. This compares with 97 investments totalling EUR 2.2 bn in 2007. In 2008, 50 investments were made totalling EUR 548 mln.

While funds of funds may have seen a year of low investment activity, they are now poised to target opportunities in the secondary market, the survey concluded. Two thirds of respondents said the secondary market was now a more important part of their investment strategy. All respondents said this was driven by opportunities to enter funds at advantageous prices. Other main drivers were immediate access to locations/sectors as well as potential capital growth if the units purchased are re-valued to the fund’s published net asset value (NAV). Of the sample, 93% said they would consider trades to either increase exposure to existing funds, those that are not currently invested in or both.

'The slowdown in activity shows that fund of funds managers are choosing to step back from further commitments while the market direction is still unclear. It also reflects the fact that a continued focus for fund of funds managers in these conditions is to ensure that existing fund investments are on track. However, the results also show that fund of funds managers see opportunities opening up for 2010 for un-invested capital with a focus on potential secondary market transactions as well as vintage 2010 funds,' said Lonneke Löwik, director of Research and Market Information, INREV.

However, interest in secondary markets has not yet translated into investments with only 4% of funds of funds completing a trade in the last 12 months. This is due to the inability to price fund/underlying assets which was selected by 96% of respondents as the main barrier for investment.

The results show that market conditions are both driving and hindering funds of funds in their investment decisions. When asked what the main drivers for making fund investments in the last 12 months were, 70% of respondents selected the ability to take advantage of market opportunities. Again, the secondary market was highlighted as 52% noted that the current market opened up possibilities of investing in an existing fund at a discount.

When asked what are the main barriers for making fund investments it was again market conditions that were raised with 72% concerned that conditions may worsen.

The main barriers also highlighted concerns over the stability of fund sponsors. One half of respondents raised this as an issue while, related to this, 39% of respondents were worried that fund managers are distracted by legacy issues.

'One result of concerns over fund sponsors has been the increased reporting requests for fund managers from investors. In the short term this has resulted in increased workloads for fund managers but there will be a long term benefit for both sides with improved transparency, particularly on issues pertinent to this market such as risk management and reporting on debt issues,' said Andrea Carpenter, Interim CEO, Inrev.

The survey was completed by 16 fund of funds managers who manage 30 funds with a total target equity of EUR 10 bn. The Inrev Fund of Funds Database now holds information on 52 funds of funds representing EUR 17 bn of target equity. This compared to 57 funds of funds targeting EUR 18.8 bn in September 2008. Since the last update, six have been removed and one new fund of funds has been added.