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of anThe development of an active secondary market in fund interests in recent years has provided a route to liquidity for less liquid underlying funds, at least for institutional investors. This in turn allows further development of less liquid structures, such as funds with only occasional liquidity events.
For redemptions and subscriptions in open and semi open-ended funds, there are still important questions as to the price at which this takes place. The starting point for unit pricing is the calculation of Net Asset Value (NAV). The two key bases of NAV calculation are AREF NAV and INREV NAV. The fundamental difference between the two is the treatment of capital costs. Under INREV NAV the cost of establishment of the fund and the cost of acquisition of individual assets is capitalised and amortised over five years. Under AREF NAV assets are reflected throughout their life at fair value. The cost of acquiring and disposing of assets is reflected directly in the unit price through the operation of a bid / offer spread. There is no perfect answer to this and different models have their proponents and opponents. Transfer taxes in property transactions are generally the largest component part. These vary from country to country and therefore there are signficant practical difficulties in dealing with the pricing of multi country funds.
INREV has been investigating this and we understand that a paper will be published in the early Autumn. We will provide our thoughts on it when it appears.
Closed-ended funds still have an important place, particularly for higher return value-added and opportunistic strategies that typically have a shorter-term life span. However, we do now appear to be addressing the issue identified by the 2012 report - investors investing in traditional open-ended funds not because they want the liquidity of open-endedness, but because they do not want to be tied into the straight-jacket of the fixed life of a closed-ended fund.
Some additional reading
In the last year, we have been involved in two reports that are relevant to the establsishment of long term and permanent capital vehicles:
• For conversion of existing closed-ended funds, the AREF / INREV / IPF report on the end of life of closed-ended funds is relevant. John was part of the working party that drafted this. You can find the report, slides etc here.
• In comparing listed and unlisted vehicles, John was the author of the AREF / INREV report "Cost transparency in listed and non-listed real estate vehicles". You can find the report, slides etc here.