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Fund of funds activity falls but sector looks to new opportunities

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Funds of funds have seen a year of low investment activity but are poised to target opportunities in the secondary market, according to a survey by Inrev.

Inrev’s fund of funds survey shows that in the first three quarters of 2009, five equity investments totalling EUR75m were made into non-listed property funds compared to 50 in 2008 totalling EUR548m.

This is a further drop from 2007 when 97 investments totalling EUR2.2bn were made.
 
Lonneke Löwik, director of research and market information at Inrev, says: “The slowdown in activity shows that fund of funds managers are choosing to step back from further commitments while the market direction is still unclear. It also reflects that fact that a continued focus for fund of funds managers in these conditions is to ensure that existing fund investments are on track.
 
“However, the results also show that fund of funds managers see opportunities opening up for 2010 for un-invested capital with a focus on potential secondary market transactions as well as vintage 2010 funds.”
 
Two thirds of respondents said the secondary market was now a more important part of their investment strategy. All respondents said this was driven by opportunities to enter funds at advantageous prices.

Other main drivers were immediate access to locations/sectors as well as potential capital growth if the units purchased are re-valued to the fund’s published net asset value. Of the sample, 93 per cent said they would consider trades to either increase exposure to existing funds, those that are not currently invested in or both.
 
However, this interest in secondary markets has not yet translated into investments with only four per cent of funds of funds completing a trade in the last 12 months. This is due to the inability to price fund/underlying assets which was selected by 96 per cent of respondents as the main barrier for investment.
 
The results show that market conditions are both driving and hindering funds of funds in their investment decisions. When asked what the main drivers for making fund investments in the last 12 months were, 70 per cent of respondents selected the ability to take advantage of market opportunities. Again, the secondary market was highlighted as 52 per cent noted that the current market opened up possibilities of investing in an existing fund at a discount.
 
When asked what are the main barriers for making fund investments it was again market conditions that were raised with 72 per cent concerned that conditions may worsen.
 
The main barriers also highlighted concerns over the stability of fund sponsors. One half of respondents raised this as an issue while, related to this, 39 per cent of respondents were worried that fund managers are distracted by legacy issues.

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