One of the key tenets of AREF is to act as a forum for the industry to come together and discuss the issues that matter most. This can take many forms, often larger events bringing together all the key stakeholders on a particular topic. But we also have smaller, more intimate forums, where we invite specific individuals to have frank, in-depth discussions on particular themes that are topical.
Last week, in partnership with the Aztec Group, we held a breakfast roundtable with a select group of senior fund managers. The discussion centred around fund liquidity and how managers deal with the challenges institutional funds, mainly open-ended, face during their lifecycle.
Among the questions explored were how funds are adapting exit timelines in a slower market; what strategies are enabling or hindering liquidity; how investor expectations are evolving and being met; and the broader implications for the fund universe.
The participants’ candid discussions were extremely interesting, especially where their experiences in the market converged. We intend to share with members a more detailed article in the coming weeks – within the parameters of the Chatham House nature of this meeting. Look out for that one.
The managers talked of the contrasting transaction markets for core and value-add stock, and the consequent effects of ‘liquidity at a price’. While there is much more capital seeking value-add stock, the key question seems to be, where is their exit?
Clearly, the well documented lack of liquidity in the past has unfortunately tainted the reputation of diversified open-ended funds. These funds need to improve their appeal to investors. To do this they need to provide better returns and now be even more discerning about what assets they hold to help rebuild confidence. Overall, those present were getting a sense that investor confidence was improving, helped by the firming up of valuations.
Indeed, while real estate is now one of four or five private assets available to investors, it was discussed whether other private asset classes, perhaps better able to catch investors’ interest right now, may face similar liquidity issues during the investment cycle.
Within the UK, the ongoing shift from DB to DC pension schemes is a challenge for real estate funds, though the intensity of this move, triggered by the rapid rise in gilt yields post-Budget September ’22, has since eased.
Changes within the LGPS were also highlighted, with some ‘interesting’ transactions being observed.
The expectation generally was that DC was the capital most likely to come back to diversified real estate funds. Perhaps this will play out over the next two to three years, as we progress into a lower interest rate environment. Furthermore, more recently, fixed income has demonstrated to pension funds that it is not necessarily the ‘safe haven’ it has previously provided.
In light of this, managers are seeing some DB mandates for real estate now being renewed, which is encouraging. All the participants agreed that overall, the tone of the conversations they are having with investors is more positive.
Our thanks to the Aztec Group for sponsoring this forum. We look forward to partnering with them again later this year, for another intimate gathering to discuss more topical issues, yet to be decided.
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