The manager should demonstrate that its interests are truly aligned with those of investors through vehicle structures.
The vehicle is established to deliver investment performance to investors. The manager is expected to act in the interests of investors. As far as possible, this can be assured by creating structures in the vehicle to ensure the alignment of the manager’s interests with those of the investors.
Alignment of interest may be achieved by the manager investing a meaningful amount in the vehicle. See section 6 of the Corporate Governance Assessment tool. INREV recognises that there may be circumstances in which co-investment by the manager may not be appropriate, however.
Alignment of interest may also be achieved through the fee structure, including payment of performance fees to the manager based on vehicle performance. This may not fully align the manager to downside risks, however. Any performance fee structure should incentivise the manager to behave in a manner consistent with the risk profile of the vehicle and should reflect the added value that the manager is expected to provide. For example, the element of manager remuneration related to performance is typically less for a core vehicle than for an opportunistic vehicle. See section 6 of the Corporate Governance Assessment tool.
Remuneration policies are required for those employees of the manager whose professional activities have a material impact on the investment strategy or the risk profile of the vehicle they manage. The remuneration policies should promote sound and effective risk management and not encourage risk-taking which is inconsistent with the risk profile of the vehicle.
The constitutional terms should set out the provisions to be applied in the event that key personnel leave the manager.
Where certain employees of the manager have been identified in the documentation as key men or personnel, the constitutional terms will often contain specific provisions to cover the situation where these personnel leave the manager. The provisions may extend to the manager being prohibited from making further investments, or even face losing its mandate. See section 6 of the Corporate Governance Assessment tool.
The manager and the vehicle should implement a written protocol documenting how to handle conflicts of interest within the vehicle.
Conflicts of interest between the manager and the vehicle may arise in a number of circumstances, such as where:
- the manager (or another vehicle controlled by the manager, or a related party to the manager) competes with the vehicle to acquire assets;
- the manager (or another vehicle managed by the manager, or a related party to the manager) buys or sells assets from the vehicle;
- changes are proposed to the fee structure or other arrangements between the manager and the vehicle;
- the manager seeks to sell its interest in the vehicle;
- investors are in conflict over a decision that is required to be made by them.
Conflicts of interest may also arise with third party service providers. For example, the external valuer may make an offer to provide additional property services to a vehicle. This could potentially compromise the independence of its valuations.
When potential conflicts of interest arise, the manager should bring them immediately to the attention of the vehicle and the non-executive officers or investor representatives, and implement the agreed conflict procedure. The manager should always ensure that dealings in related-party transactions are on an arm’s-length terms basis. For example, if the manager (or another vehicle managed by the manager) wants to compete with the vehicle to acquire assets, the manager should disclose this to the vehicle, together with a policy for ensuring fair treatment for all its clients. See section 6 of the Corporate Governance Assessment tool.
The vehicle should set out how all investors will be treated on new issues, redemptions and transfers of equity (or debt investments) in the vehicle.
Conflicts of interest can arise whenever investors vary their holdings in a vehicle. The manager should ensure that the rules governing new issues, redemptions and transfers are clearly and transparently set out for all investors. Such rules should be in accordance with guidance provided in the INREV liquidity guidelines and should be fairly and consistently applied. Conflicts of interest can also arise for the manager in providing a service for secondary transfers between investors, and its role in raising new capital, if applicable. At the outset the manager should clearly articulate the role that it provides in respect of secondary transfers, including any fees charged or interaction with third party trading platforms or placement agents.
Guidelines of conduct as a non-executive officer or investor representative
Non-executive officers or investor representatives should ensure that the manager demonstrates that its interests are aligned with investors’ interests.
During the life of the vehicle, the role of the non-executive officer or the investor representative is to protect investors’ interests. One way in which the non-executive officer or investor representative can do this is by ensuring that the manager’s interests are aligned with those of the investors.
Non-executive officers should ensure that the manager has a written protocol documenting how conflicts of interest should be managed.
If conflicts are identified, non-executive officers should ensure that the manager implements the agreed conflict procedure. Non-executive officers may have to make decisions on behalf of the vehicle if the manager is conflicted. If non-executive officers are not satisfied that a conflict has been fairly and properly resolved, they would be expected to refer the matter to investors. Non-executive officers are expected to be actively involved in overseeing transactions between the manager and the vehicle, such as changes in the fee structure, and to be satisfied that the terms of such transactions are at arm’s length and are reported to investors.
Guidelines of conduct as an investor
The vehicle should be run in the interests of investors to deliver anticipated returns.
Investors should advise the vehicle and non-executive officers in a timely manner if they consider that the vehicle is not being run in their best interests.
Investors should disclose conflicts of interests to other participants in the vehicle and act appropriately.
Conflicts of interest between an investor and the vehicle may arise in a number of circumstances, such as where an investor competes with the vehicle to acquire assets or an investor buys assets from, or sells assets to, the vehicle. Investors need to act with integrity, and to disclose appropriate information to the particular vehicle, the manager and other investors, in a timely and proper manner. For example, if an investor competes with the vehicle, or buys an asset from, or sells an asset to, the vehicle, the investor would normally excuse itself from the relevant discussions in the vehicle or from receiving any information. In such circumstances, an investor may have to create ‘Chinese Walls’ so that different individuals or teams of people are able to act for the different parties.