Worldwide: The Real Cost Of Running A PERE Fund

Last Updated: 28 March 2019
Article by Jocelyn Oh

Most Read Contributor in Netherlands, March 2019

The explosive growth of Private Equity and Real Estate (PERE) funds since the 2008 global financial crisis (GFC) has been nothing short of spectacular – and it's a trend that seems to keep picking up speed, even when uncertainties from trade wars and weakening economies loom overhead.

According to the Preqin database, a record amount of capital (US$70 billion) was raised in the first half of 2018, and Q3 delivered the largest average fund size since 2015 at US$589 million. With 634 private real estate vehicles in the market in Q4 2018, the appetite for both value-added and opportunistic investment strategies in the real estate sector does not seem to be waning.

This trend is very much in line with the increased number of new PERE fund set-ups which TMF Group has supported. We've found the increased demand for investment and holding vehicles spans the globe, with jurisdictions such as the Cayman Islands, Jersey, Delaware, Singapore and Hong Kong preferred by limited partners (LPs) and fund managers.

With the launch of each new fund, the fund manager and their team are caught up in non-stop action, diving straight into acquisition mode and sourcing the best opportunities. Firepower is generally expended within the first three years, but the fund manager often does not realise the (realistic) size of their operations until the fund structure has grown to a morbid-sized structure of 100-odd vehicles. That seems fine until one looks at the energy and cost it takes to manage (the horror of) it all.

In this article, we attempt to provide an overview of the real underlying cost in managing these vehicles globally. In doing so, we hope to raise awareness of some potential blind spots, and to reduce the administrative headaches one gets when given the task to run the operations of such structures with a lean team.

Scenario: The true fund cost from the Asia perspective

There are a few common structures being used and favoured by investors globally. Let's consider a US$500 million fund using a common GP/LP structure through the lense of an Asia-based fund manager investing into APAC real estate - much of the literature published has been either US or EU centric, with not much focus on this part of the world to date. 

Some background to our scenario:

  • US$500million PERE Fund
  • South East Asia-focused, growth-oriented (four countries)
  • fund managers are based in Hong Kong and Singapore
  • it's based on a Cayman structure with five institutional investors
  • number of investments deployed is 5-15.

The fund's costs can general be categorised into the following:

  1. Set-up
  2. Annual Ongoing
  3. Ad-hoc

Pre-launch and set-up costs

At the pre-launch phase for a new shop, fund managers are usually focused on fundraising and conducting roadshows while working closely with external legal counsels to have the fund document pack prepared. This forms the bulk of the set-up cost; in APAC this can cost a minimum of US$35,000 and the fees can easily reach US$100,000.

Setting up the fund structure comes next, and a standard Cayman Exempted Limited Partnership (ELP) with five LPs would cost around US$3,000 to US$5,000. Service providers such as legal counsels, banks and fund administrators have seen costs increasing in recent years, largely due to increased Know Your Client (KYC) and compliance requirements. Common additional costs that kick in are express filing costs and incidentals which can increase the set-up costs by up to 10%.

Annual ongoing costs

Once it's set up and is running, we must consider salaries for a team of four experienced portfolio managers to support the fund manager and standard overheads of a physical office space – these could cost around US$500,000 annually.

On the investment front, a typical deployment for a commercial or mixed-use development in Australia, for example, will warrant US$100,000 to US$150,000 annually for a Managed Investment Trust (MIT) structure. In Indonesia, a Perseroan Terbatas Penanaman Modal Asing (PT PMA) structure with two foreign corporate vehicles commonly used to hold real estate could cost a minimum of US$50,000 annually for the fund administration services of a reputable service provider. Countries such as Japan, Korea, Thailand and China – well-known for unique local compliance requirements and tax structuring - will have similar substantial cost structures annually.

Ad-hoc costs

Fund managers do not usually realise the total cost of ad-hoc charges until the invoices turn up. Unscheduled capital calls, drawdowns, additional committed capital and new investors are all good news, but when such changes are not managed in an efficient way, the cost of making changes to the fund structures and vehicles can cost upwards of US$50,000 annually. Factor in restructuring due to tax law changes and the fees can double.

Mitigating costs exceeding planned budget

With all the fees added up, the costs often exceed the original planned budget and fund managers would be hard-pressed for results while answering to increased operational costs.

Are there ways to manage such situations? Yes, indeed. Communication is key. We encourage fund managers to pull in their fund administrators to their structure planning as early as possible. Being part of the conversation means the fund administrator can provide an independent point of view, and an experienced professional will be able to highlight areas which may have been overlooked.

TMF Group's fund services

TMF Group's PERE team operates in a global network offering local expertise in more than 80 jurisdictions, which means we can simplify your operations, lower your risk and help control costs. Read more about our private equity and real estate investment or fund services, or get in touch to discuss how we can help drive efficiency for global operations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
16 May 2019, Webinar, Rotterdam, Netherlands

Summary:

Executing an acquisition integration plan is one of the most difficult assignments in the M&A life cycle. Every merger involves “negative synergies”, including the departure of key talent, sales losses, incompatible systems, productivity declines, turf battles and cultural friction. The key is limiting the costs and preparing for the unknown challenges that may arise.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions