INREV’s objective is to ensure all investors fully understand the liquidity rights that they have when investing into a vehicle and to establish common standards of behaviour among managers and investors in non-listed real estate vehicles in the context of the exercise of liquidity rights.
The way equity (or debt investment) is subscribed to and redeemed from a vehicle has a material impact on the interests of new and existing investors. Overseeing the establishment of a fair liquidity mechanism and the disclosure of it to investors should be one of the objectives of a vehicle’s corporate governance activities. In some jurisdictions and in relation to certain vehicle structures the mechanism is prescribed by legislation or government regulations. In these cases, full disclosure of the rights, obligations and process should still be considered best practice to ensure the vehicle is suitable for the investor.
INREV recognises that non-listed real estate vehicles in Europe are set up under, and governed by, a variety of different national laws. To minimise the conflict between local legislation and the liquidity guidelines, care has been taken to limit the scope of the liquidity guidelines. INREV intends to expand the Tax and Regulations Guide to include information on liquidity mechanisms relating to open end vehicles in the various countries covered.
The importance of liquidity to individual investors varies enormously. Therefore, it is for the manager and the investors to determine at the launch of the vehicle the extent to which the vehicle should adopt these best practices. INREV expects the manager to adopt the best practices as a matter of policy and to diverge from them only with the express consent request of all the investors in a vehicle. The manager should report throughout the life of the vehicle on the level of adoption of the liquidity best practices.
Relationship with other INREV products
Given the liquidity guidelines’ focus on disclosure, there is significant overlap with other guidelines, tools and examples published by INREV. The reader is encouraged to review and to comply with the following:
- Corporate Governance guidelines;
- Reporting guidelines.
The vehicle documentation should clearly explain the liquidity rights of the investor. The way equity (or debt investment) is subscribed to and redeemed from a vehicle has a material impact on the interests of new and existing investors. Overseeing the establishment of a fair liquidity mechanism and the disclosure of it to investors should be one of the objectives of a vehicle’s corporate governance activities. In some jurisdictions and in relation to certain vehicle structures the mechanism is prescribed by legislation or government regulations. In these cases, full disclosure of the rights, obligations and process should still be considered best practice to ensure the vehicle is suitable for the investor.
The terms and pricing of a new equity (or debt) issue should be fair to both new and existing investors. Where this is not possible and a conflict of interest exists, the manager should fully explain the issues and impact on the respective investors’ interests.
Investors should, where possible, have the right to transfer their interests in non-listed real estate vehicles without unreasonable restrictions if it does not prejudice the manager or other investors.
Constitutional documents should provide a clear legal and regulatory framework as to how such secondary transfers should be conducted.
Confidentiality arrangements in vehicle documentation should not, where possible, prevent the development of secondary market transactions.
Potential new investors ideally should have access, subject to signing a standard non-disclosure agreement, to the same information as existing investors with respect to the vehicle’s constitution, activities and performance. Additional information may be provided, subject to consent, but is not required by these guidelines.
Additional information may include, though not as a compulsory requirement:
Investors’ register (number of investors, largest investors, investors managed by the manager or external investors, etc.);
Unit issue/redemption disclosures (typically disclosed in the vehicle’s financial statements);
Any further financial disclosures, forecasts, property portfolio details, valuation information, which are not specifically required by these guidelines.
Confidentiality agreements may be appropriate for additional information and the manager should be entitled to restrict access to such detailed information if the manager believes that its release to the third party could be prejudicial to the interests of the vehicle and all its investors. Further guidance regarding confidentiality requirements can be found in 4.3.7.
Management decisions (both asset and fund management related) throughout the life of the vehicle should be mindful of the vehicle termination date.
The overriding assumption on any vehicle is that the vehicle will wind up within the length of the vehicle life as stated in the vehicle documentation. Any derogation from this assumption needs to be agreed by investors, with dissenting investors given the option to exit.
Investment managers and investors should fully engage in any consultation process and ensure communication, transparency and timeliness.
The vehicle’s constitutional and marketing documentation should include liquidity rights of the investor and how and when to execute these rights, in both normal and exceptional circumstances, as well as detailed consideration of the exit strategy, and existing redemption arrangements.
The fund documentation should include a liquidity protocol document explaining how all investors will be treated in different liquidity events including new equity (or debt) issues, redemptions, secondary market transfers and exit. This document should be reviewed and updated throughout the life of the vehicle and made available to both existing and prospective investors.
The vehicle’s constitutional documents should include a statement of risk factors relating to liquidity. These should include as a minimum an analysis of the potential impact on the investors’ interest if the manager exercises its rights in full to either defer payment or adjust the price payable on redemption. For open end vehicles the risks associated with the vehicle not reaching the optimal size should be clearly set out, with particular reference to the impact on portfolio construction and any liquidity events.
Investment managers should ensure that all documentation relating to liquidity is fit for purpose.
Investors should ensure they fully read all relevant vehicle documentation and material provided as part of the liquidity process.
Within any subscription agreement signed by investors when entering the vehicle, there should be a specific acknowledgement that they fully understand the liquidity restrictions in the fund documentation which should be written in a clear and comprehensive manner.
For open end vehicles the timing for issuance and redemption of units should reflect the independent valuation cycle for the assets. This will help to ensure that all investors are treated fairly.
Any adjustment to the basis of valuation adopted by the manager which impacts the price of subscription or redemption should be disclosed to all investors in the vehicle documentation, including the rationale for the adjustment.
The pricing mechanism for the issue of new units should, subject to local laws and regulations, be fair to all investors and be clear and unambiguous.
New issues should be based on a price determined using an up-to-date independent valuation of the underlying real estate assets and an up-to-date assessment of all other assets and liabilities of the vehicle.
Any special assumptions used by either the manager or the independent valuer should be disclosed to all parties.
The manager should maintain its anti-money laundering or “know your client” requirements for each type of investor that may subscribe to the vehicle. This should reflect the requirements of all those regulated bodies involved in the administration or management of the vehicle (including trustees, depositories and administrators).
The issue of new equity (or debt investments) into a vehicle would normally be based on either the NAV at the time or at cost with a form of equalisation payment from those investors who commit after the first close of the vehicle.
In the event that the NAV approach is used, managers should:
- identify any subscription premium that is payable and explain the approach to its calculation;
- ensure that the NAV is based on an up-to-date independent valuation of the underlying real estate assets;
- identify any special assumptions used by either the manager or the independent valuer in the calculation of NAV.
In the event that the cost plus equalisation approach is used, managers should provide a worked example to show the calculation of the equalisation amount to the incoming investor.
Related Tools & Examples
The manager should regularly advise investors of the redemption process, including the notice periods, redemption dates, pricing policy and timing of payments.
The manager should be required to disclose any rights it has to use discretion in setting the redemption price or the assumptions adopted by others in key components of the redemption price (e.g., property valuation). Any changes to normal practice as a result of the exercise of these rights should be communicated to investors without delay and including the rationale.
The manager should be under an obligation to disclose all its rights to defer payment of redemption proceeds. In circumstances in which such rights are exercised, the manager should communicate this to the redeeming investors without delay and provide reasons.
In the event a manager exercises its rights to either defer payment or materially amend the expected redemption price, the redeeming investors should have the right to withdraw their redemption request within a defined period.
The manager should document a policy on secondary transfers setting out which factors it will take into account when considering any transfer request. The policy should explain how fairness to all investors is achieved, including how any potential conflicts between primary and secondary issues are dealt with.
The manager should identify their anti-money laundering or “know your client” requirements for any potential investor. This should reflect the requirements of all those regulated bodies involved in the administration or management of the vehicle (including trustees, depositaries and administrators).
The manager should state within the constitutional documents if a confidentiality agreement is required for the release of information to a third party (including potential investors, placement agents and third party trading platforms) and, if so, the manager should make a standard confidentiality agreement available for the respective parties’ use at all times. A clear definition of “qualifying investor” should be incorporated into the constitutional documents identifying any specific restrictions in respect of domicile, financial strength, type of investor (e.g., any restrictions on competitors), minimum or maximum holding.
If pre-emption rights for holders are required by the founding investors, they should be drafted on the basis of a right of first refusal during a limited period from service of notice. In the event that investors choose not to exercise their rights, the selling investor should be free to sell its interest in the open market, within an agreed range of the original offer price during an agreed period.
A draft transfer agreement should be provided at launch, incorporating the minimum representations and warranties required from the relevant parties on any transfer, subject to any variations reasonably required by the manager from time to time. It is acknowledged that the final form of transfer agreement will be negotiated by all parties including the buyer, selling investor and the manager.
Investors should carefully review the constitutional documents and the liquidity protocol document or section to ensure that both documents suit their needs.
The non-executive or compliance officer, if any, should oversee the establishment of a fair pricing mechanism for the issue and redemption of units and an appropriate secondary market transaction framework.
The manager should maintain an up-to-date protocol on liquidity mechanisms for the vehicle including its policy on secondary transfers. The policy should explain what services the manager will perform in relation to any secondary transfers and any fees or expenses to be charged by the manager or the vehicle. It should also state how the manager will interact with any placement agent appointed by the selling holder and any third party trading platform.
The manager should facilitate secondary trading by its existing investors (whether the trade is executed by the manager, via a broker or otherwise) by:
- Using all reasonable endeavours to co-operate with any investor wishing to sell its interest, subject to the agreement of reasonable representations and warranties to reflect the services being undertaken in the sale by the manager and any fees agreed between the parties for those services;
- Providing regular reports to investors which contain the information set out in 9.3.7 Reporting Requirements;
- advising all holders as soon as reasonably practicable when it becomes aware of any equity (or debt investments) available on the secondary market. The manager is not obliged to release details of the seller.
If the vehicle does not have external valuations carried out at least quarterly, then the manager should be under an obligation to disclose all reasonable information required by a valuer and other financial advisers appointed by the selling investor and/or potential investors, subject to all parties entering into a confidentiality agreement restricting the use of the information. It is reasonable for a manager to refuse consent to a transfer under certain valid circumstances. These could include:
- if it is prejudicial to the tax status of the vehicle or its investors;
- if it affects the regulatory status of the vehicle;
- if, in the manager’s opinion, the proposed transferee has insufficient financial strength to meet any undrawn commitments or is unwilling or unable to provide acceptable guarantees;
- if the proposed transferee is unable to comply with all reasonable anti-money laundering requirements of the manager;
- if the proposed transferee is not a “qualifying investor” as defined.
In the event the manager becomes aware of any information which, in its opinion, renders any document or announcement materially inaccurate, incomplete or misleading or results in the failure to comply with any obligations in the constitutional documents, the manager may require the selling investor to cease distributing the offending document or announcement and/or make a correcting announcement.
The selling investor should be able to communicate with potential investors, subject to certain consents and indemnifications:
- subject to appropriate consent, be permitted to provide any potential investor introduced by an existing investor or its adviser with the information set out in the most recent annual and interim report and the SDDS. The manager should be indemnified against any claims by any third party, although it is reasonable for the existing investor to expect the manager to co-operate in the disclosure of material to assist in the verification of any marketing material that the investor produces;
- indemnify the manager in respect of any third-party costs incurred by the manager or the vehicle in facilitating any transfer request;
- indemnify the manager and the vehicle in respect of any costs arising out of any misrepresentation in respect of the vehicle in any selling documents.
The manager should take specific steps when facilitating or arranging secondary trading in the manager’s vehicle:
- inform all holders of the services that it is willing to provide for facilitating a secondary market in the vehicle and the fees charged for these services;
- publish a policy statement on secondary transfers setting out what factors it will consider when considering any transfer request. For open end vehicles the statement must explain how fairness to all investors is achieved, including how any conflicts between primary and secondary issues are dealt with. This should be readily available to existing and potential investors at all times;
- provide potential investors with reasonable access to its staff to explain the strategy of the vehicle and to arrange access to properties where appropriate subject to reimbursement of appropriate costs;
- advise the seller if any potential investor or group of potential investors would be considered unacceptable as a qualifying investor if requested to do so;
- provide a standard confidentiality agreement which it finds acceptable on request or, if appropriate, provide input into a confidentiality agreement prepared by the selling investor. The manager shall act reasonably in dictating the terms of any such agreement;
- maintain a statement of anti-money laundering requirements identifying the information required from any new investor or transferee. The statement should reflect the requirements of all those regulated bodies involved in the administration or management of the vehicle, such as trustees and administrators, to ensure that the requirements are comprehensive;
- treat all information provided to it on potential investors as confidential and not disclose it to any third party without consent unless required to do so by law;
- take all reasonable steps to ensure that the register of investors is updated without delay once in receipt of all valid documentation.
The compliance officer should oversee the activities of the manager in relation to secondary market transactions, to ensure they are in compliance with the law and constitutional terms of the vehicle.
The selling investor should:
- inform the manager of its intention to market its interest or part of its interest in the vehicle;
- prior to commencing any marketing of an interest in a vehicle, review the constitutional documents to ensure it is fully aware of its rights and obligations;
- consult with the manager on the acceptability of potential investors at an early stage;
- investigate fully any selling restrictions imposed in any jurisdiction in which it intends to sell;
- ensure that any advisers instructed to act as placement agents on its behalf are properly authorised to act in that capacity in the countries in which the selling investor intends to market its interest;
- ensure that any marketing material used for the sale of its interest and any distribution of the material is in accordance with the terms of the vehicle’s constitution and all relevant regulatory requirements;
- take all reasonable steps to restrict the marketing of its interest to “qualifying investors” as defined in the vehicle’s constitutional documents;
- in any public statements regarding the sale, make it clear that it is speaking in its capacity as an investor and its comments do not necessarily reflect the views or beliefs of the manager and other investors.
The manager should seek to mitigate the scale and duration of any ongoing liabilities when making management decisions towards the end of the vehicle life so that all underlying vehicle entities can be wound up as early as is reasonably possible.
The manager should keep investors advised of any ongoing liabilities once assets are sold and the impact on the timing of the ultimate winding up of the vehicle. Ongoing liabilities should be reported as a percentage of capital commitments s to each project and in aggregate.
The manager should limit the amount of capital that can be recalled by the manager once distributed to investors. The period in which the capital can be recalled should also be limited in time and clearly disclosed in vehicle documentation and reports.
The manager should keep investors regularly advised on the level of recallable capital and the manager’s expectations for its use.
Any investment restrictions imposed on a closed end vehicle should cease to apply during the liquidation phase of the vehicle.
During the vehicle wind-up process, any conflicts should be declared by the conflicted party at the earliest opportunity. If the conflict occurs because of the sales process, the investment manager should ensure an independent representative is involved, investor agreement is reached and valuations properly reflect market conditions. When a portfolio is to be sold and the investment manager potentially retained by the buyer, two deal teams should be created by the investment manager with ‘Chinese walls’ in place and senior representation on each team.
During the vehicle wind-up process, asset management and wind-up fees earned by the investment manager or involved third party should adequately reflect the amount of work involved. For example, any fixed fee asset management arrangement should be adjusted if few assets remain.
The vehicle’s constitutional documents should state the rights and obligations of unit holders and the manager regarding extensions (e.g., investor approval rights and changes to management fees during an extension period).
Where the manager has discretion to extend the vehicle life, the manager should disclose in the annual and quarterly reports well in advance whether it believes such an extension will be necessary.
If the manager elects to extend the life of the vehicle, the manager should provide a clear business case, including the financial benefits to the investors expected from doing so.
Where the manager wishes to extend the vehicle term with the consent of its investors, the manager should provide the following information to all investors:
- financial analysis of the effect of liquidations now as against during a delayed period;
- full impact assessment of deferred exit (e.g., debt maturities, hedging instruments, joint venture termination provisions etc.);
- cost implications;
- revised business plan for each asset;
- confirmation of the manager’s terms of appointment (including fees) during the extension period. The presumption is that fees will be discussed for the extension period.
Investors should have the right to appoint advisors to act for them jointly at the vehicle’s cost. Appointments are to be approved by the Investment Advisory Committee (IAC) or a majority of investors if there is no IAC.
In the event the vehicle life is extended beyond the original term, best practice is for the manager’s appointment to be terminable without cause with the approval of a supermajority (usually 75%) of investors at any time after the original term.
In quarterly and annual reports to investors, the manager should provide data on the vehicle’s equity (or debt investments) and on key risks related to liquidity:
- Provide a table showing the equity (or debt) issued, equity (or debt) redeemed, and equity (or debt) transferred during the financial year.
- State the outstanding redemption or subscription requests and outstanding lock-in restrictions as at year-end or quarter-end.
- Identify the risks to the vehicle or to the pricing of the vehicle NAV as a result of liquidity events. Liquidity events should include equity (or debt investments) inflows, redemptions and any actual or potential breaches of debt covenants.
The managers should advise all investors of the risks that any one investor, or a group of investors controlled by one decision-maker/adviser, may gain negative control over key decisions of the vehicle.
If appropriate, the investment manager should provide vehicle extension proposals as soon as it becomes clear that an extension may be required, and in any event a minimum of one year prior to the original vehicle termination date.
If appropriate, the investment manager should provide appropriate notice of the decision to wind up a vehicle to investors, no later than one year before the end of the vehicle life but ideally two years.
The investment manager should provide a clear timetable for any wind-up or extension process. The timetable should be part of the vehicle documentation and include a set of procedures for the investment manager and investors to follow during the entire wind-up or extension process. Details of any information provided by the investment manager to investors should also be disclosed.
The investment manager should allow investors a minimum period of eight weeks to consider proposals prior to a formal vote.
Investors should respond fully to any proposals within the timeframe provided.
Both investment manager and investors are obliged to ensure adequate senior management time is given to the end of vehicle life process. Managers and investors should also ensure that those involved are actively engaged in the consultation process. Where possible, an alternative senior manager (appropriately experienced) is responsible for the extension process rather than the individual investment manager.
An investor should have a consistent, documented house view of a vehicle shared by all personnel involved to avoid last minute difficulties.
At the end of the vehicle’s life, it is recommended an investor advisory committee be put in place, if it does not already exist, to participate in the wind-up or extension process.
The investment manager should be prepared to wind up the vehicle if agreement on an extension cannot be reached.