While the disclosure would be available in the full prospectus as already noted, there is no way to ensure investors read the full prospectus, rather than the KID or other summary information.
In addition, a good manager will adapt their approach to reflect market developments. This might be challenging in the face of pre contractual disclosures already made.
Use of specific tools
Suspension of redemptions is not the only liquidity tool available to fund managers. However, intermediaries play an increasingly important role in fund sales, and their IT infrastructure puts practical limits on how liquidity management tools can be deployed.
Platforms do not generally support queued or deferred redemptions, but changing this would require significant IT investment - and regulatory intervention would likely be needed in order to justify this investment.
Portfolio structure and liquidity buffer
The decision as to how much liquidity to run in a portfolio depends on a number of factors, including overall portfolio composition, and hard limits are a blunt tool to address liquidity requirements.
Strict limits would also affect the overall returns to investors who are seeking exposure to the headline illiquid strategy, not an uncorrelated set of liquid investments.
The FCA’s Discussion Paper had a working assumption that the quality of a real estate asset determined its liquidity. However, practice has demonstrated this was not a reliable assumption.
Ultimately, provided that pricing is realistic, all assets are liquid – noting that managers have to balance the need to raise cash to fund exiting investors against realising a fair value for continuing investors.
Secondary market provision
Real estate investment trusts (Reits) and other closed-ended structures are arguably better placed to hold illiquid assets. The permanent capital allows the manager to play a long game with respect to investment and divestment decisions. But the listing allows the investor to exit, even in a stressed scenario, albeit at a market-imposed discount.
Nonetheless, Reits are not a panacea and it is important to recognise that investors need a range of investment products, including open-ended products.
While it might be helpful to introduce rules that facilitate the conversion of open-ended funds to closed-ended funds, the concern would be that this would result in widespread redemptions and the need for significant portfolio realignment to accommodate that.
The International Property Securities Exchange (IPSX) is intended to be a new regulated market for trading single commercial real estate assets and to act as a proxy for direct investment in commercial real estate.
The ability to trade shares in single asset vehicles could offer a new source of liquidity to open-ended real estate funds. There is certainly room for a more joined-up approach with HMRC to make it easier to wrap illiquid assets in vehicles with a view to promoting liquidity.
