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Many investors wanting to invest for the long term are not attracted by the perceived short-term nature of the closed-ended fund model, where assets are divested and capital returned even though the investors may want to keep the capital deployed. The lack of attractiveness of the closed-ended model in this respect for some investors does not mean that such investors are attracted to the high degree of liquidity of the fully open- ended fund model either.
The report concluded that AREF should continue the dialogue regarding the fundamental issues that need to be considered for both the open- ended and closed-ended fund model. The range of fund vehicles already covers a spectrum, with funds that fall between the strict open and closed-ended model. The challenges in the downturn for open-ended funds of maintaining liquidity, and for closed-ended funds of raising capital outside the commitment period to meet loan-to-value covenant breaches, may encourage greater interest in hybrid vehicles with some of the characteristics of both.
As has been mentioned above, we have seen open-ended funds introduce measures to restrict liquidity. A number of closed-ended funds have also moved toward to a more open-ended model, of which the conversion of Aberdeen Asset Management's Airport Industrial Property Unit Trust is the most recent and arguably most innovative. It has been fascinating to represent the investors in this process.
We are now seeing these developments to be reflected in new fund launches. This will mean that one of the most promising conclusions of the original report come to pass - that the lessons learnt from the crisis would trigger a period of significant innovation in product development.
A variety of governance models were explored in my paper "The pressure for global corporate governance standards for the real estate investment management industry", a presentation to the RICS and SPR "Cutting Edge" conference on 22nd October 2013. It can be found here.
Communication with investors
A key finding of the report three years ago was that managers needed to improve communication with investors. This was also commented upon in the AREF / IPF seminar in May last year, with Howard Meaney from UBS encouraging all fund managers to at least achieve the standards required by the AREF Code of Practice. Many managers have gone well beyond this and have given considerable thought to both the quantity and quality of information provided to investors. Communication is a two way process and seeking the views of investors is as important as providing information.
At the time of the original report for AREF, regulation had not been considered a major constraint on behaviour, other than for authorised funds. This has changed significantly with the introduction of the EU Alternative Investment Fund Managers Directive (AIFMD) and other regulatory changes. Many fund managers are only now beginning to get to grip with the full impact of the changes.
The report four years ago observed that some investors were attracted to open-ended funds because they provide the ability to deploy capital for the long term.