INREV has today published its first ever report into fee structures and fee levels across fund of funds operating in the non-listed real estate funds sector. "This report, the first of its kind, covers 80% of fund of funds in the INREV Universe," said Lonneke Löwik, Director of Research and Market Information, INREV. "This strong support from the industry shows us that fund of funds managers are willingly embracing both this opportunity to share knowledge but also to demonstrate their commitment to transparency."
The INREV Fund of Funds Fee Study reveals that every fund reported an annual management fee, and that these varied considerably for a number of factors including date of launch relative to the market cycle and fund structure. Nearly half of the fund of funds base their annual management fees on net asset value, with an average of 0.4%. Performance fees are also common across value added and opportunity fund of funds, but less so in the core market. Overall fund of funds fee structures are simpler and lower than for direct funds.
"The fund of funds industry welcomes this opportunity to give investors an invaluable insight into fee structures," said Antonio Alvarez, Aberdeen Asset Management and Chair of the INREV Fees Committee. "Fund of Funds give investors a cost-effective access to markets where they lack the resources or expertise to make direct investments. However, we must not be complacent and recognise that there is an need amongst investors for the fund of funds industry to further improve transparency in areas such as total expense ratio."
The INREV Fund of Funds Fee study includes details from 34 non-listed real estate funds targeted by institutional investors.
INREV Fund of Funds Fees Study 2010 Executive Summary
- This report summarises the key findings of the first INREV Fund of Funds Fees Study. The study includes detailed information of the fee structures and fee levels of 34 non-listed real estate fund of funds targeted at institutional investors. This covers nearly 80% of the fund of funds in the INREV study universe.
- All the vehicles in the sample reported an annual fund management fee. The fee can be based on NAV, commitments to underlying funds, commitments to the fund of funds or drawn commitment. The average management fee based on NAV was 0.40%.
- The level of the annual fund management fee was found to vary depending on the launch year of the vehicle and the vehicle structure. The lowest management fees were reported by open end fund of funds launched before 2005. The management fee rate of the funds of funds in the sample did not show significant variation by investment style.
- Nearly all value added and opportunity fund of funds include performance fees, compared to only 22% of vehicles targeting core investments. Fund of funds typically report IRR hurdle rates in the region of 9% with on average 11% share of the out-performance paid to the manager. The hurdle rate is on average placed 3 percentage points below the target net IRR of the vehicle.
- In addition to management fees and performance fees various fund level expenses can be charged to the fund of funds or the investors. The most common expenses charged include audit and legal fees, administration fees, custodian fees and set-up fees.
Investor interviewees mentioned the additional layer of fees as one of the key considerations in investing into real estate through funds of funds, but benefits of, in particular, exposure to new markets and, in addition, expert manager selection outweigh the costs. In general with less capital compared to the market peak in 2006-2007 seeking to invest in unlisted real estate interviewees perceived fee rates in funds of funds and direct real estate funds as coming under pressure. Managers who can clearly and transparently illustrate the costs associated with running a fund of funds will be in a better position to negotiate fees that best align the interest of all parties.