There seems to have been a steady procession recently of fund managers shunning closed-ended structures in favour of perpetual vehicles. Internos Global Investors provides the latest example, writes Robin Marriott, editor of PropertyEU CapitalWatch.
One of the hottest debates currently in European private equity real estate is about structures. Tristan Capital got tongues wagging at the start of this year when it launched its latest core-plus fund with perpetual open-ended characteristics. Up until now, its funds had been purely closed-ended.
One of the good reasons for such an approach is to get away from the merry-go-round of fixed-term products. Typically, once a fund becomes 75% invested, the fund manager returns to the fundraising trail to raise the follow-on. Such a dynamic not only distracts the manager and costs time and money, but it also forces existing investors to re-evaluate the fund manager.
That’s not the only downside with fixed-term funds. From the outset, you are asking investors to take a leap of faith that the time to exit investments will coincide with an optimal point in the cycle. But what if it isn’t? In this scenario, the interests of fund managers and investors can be misaligned.
I would say that it has been at least 18 months that fund managers have expressed growing interest in European open-ended structures. I recall hosting a discussion with several law firms and real estate accountants in September 2015. One of them was working for TH Real Estate on its European Cities Fund (though it was confidential at the time). Since then, there seems to have been a steady procession of those shunning closed-ended in favour of perpetual.
Internos Global Investors provides the latest example. On May 4, the firm announced it had reached first close on €135 mln for its Core European Balanced Open-Ended Fund, and in speaking with CEO Andrew Thornton, it becomes clear that this fundraise holds certain truths for fund managers seeking to raise capital in today's market.
One is that investors want core. As any business contemplating a new product should do, before going to market, Internos firstly asked the rhetorical question why European real estate appealed to investors. Well, even though there are pockets of investors that are seeking to go up the risk curve, the majority are looking to real estate as an attractive alternative to bonds. They know European property is not historically cheap and we are well past the bottom of the cycle. What they want is decent income from real assets.
If inflation kicks in, they believe they have a reasonable chance of preserving capital. Clearly, core property that works for occupiers is the right sort of real estate for this purpose.
The second truth is that managers and investor need to maximize confidence and minimalize risk. As Thornton explained, given the requirement for income and capital preservation, what investors certainly do not want is a structure where the manager is forced into a sales cycle at the wrong time.
In addition, it makes sense to be pan-European in terms of geographic focus and pan-asset class in terms of strategy to spread risk. Internos’ fund is exactly this. Not only that, but the firm has offered investors a seed portfolio so they know what they are getting to start with.
But there is a big downside to open-ended funds. If investors in a fund are seeking the same thing now, won’t they all think alike when it comes to pivotal timing issues? The nightmare scenario for managers of open-ended funds is when all the investors want to sell their interests in a fund at the same time. That’s an inescapable truth no matter what lock-up structures you have.
The common sense strategy that Internos has followed is to actively seek investors that do not share the same outlook. According to Thornton, the Townsend Group has introduced six institutional investor clients from Europe and Asia, including insurance companies and public and private sector pension funds, that give Internos comfort it will not face the uncomfortable scenario described above.
Internos' fund also demonstrates another fundamental truth. As a group, German institutional investors are a reliable source of capital for core real estate. This is why Internos has structured its fund as a German open ended Special-AIF.
The twist and potential catch for Internos was whether a German Spezialfond would appeal to international investors. Given Townsend's backing, it would certainly seem so.
