Redemptions in an Open-Ended Property Fund

Meeting 8% of £500 million means finding about £40 million. Cash is £25 million, so the fund would need to sell listed securities and possibly direct property. Using cash and listed securities is quick and avoids a fire sale, but it leaves remaining investors with a portfolio more concentrated in illiquid direct property and a depleted cash buffer. Selling direct property at a 12% discount crystallises a loss for all investors, including those who remain, and may not be possible quickly given the valuation uncertainty.

Suspension protects remaining investors from forced sales and prevents redeeming investors from exiting at a valuation that may be stale or optimistic. It is not costless: it traps the charity and other investors, may damage confidence, and must be justified by exceptional circumstances. A temporary suspension is more defensible where there is material valuation uncertainty and the fund cannot sell assets in an orderly way. The key fairness test is whether the redeeming investors are being paid a price that reflects the true realisable value of the assets and the costs of meeting their exit.

A dilution levy charges exiting investors for the costs they impose on the remaining fund, such as selling property at a discount, legal fees, and cash drag. If the fund reopens after suspension, a levy within the permitted 5% could be applied to redemptions, and possibly to subscriptions, to protect continuing investors. The levy should be explained in advance, applied consistently, and reviewed by the board rather than used as a penalty. It does not solve an underlying liquidity mismatch, but it reduces the transfer of value from stayers to leavers.

Communicate promptly and plainly: why dealing is suspended, what is happening to valuations, when the board will review, what the levy means, and what alternatives investors have. Avoid promising a reopening date that cannot be met. The charity's liquidity needs should be acknowledged, but the board cannot prefer one investor over others. Keep records of the valuation advice, the board's reasoning, and any regulatory notifications.

Suspend dealing temporarily, obtain an independent valuation update, and use the suspension period to sell listed securities only if needed for liquidity and to prepare an orderly disposal plan for direct property. On reopening, apply a dilution levy if redemptions continue and the fund still holds illiquid assets. Do not use the remaining cash to satisfy all redeeming investors, because that would leave the continuing investors with a riskier and less liquid portfolio.

The structural lesson is that daily or frequent dealing is poorly matched to direct property. The fund should review its liquidity bucket, redemption notice period, dilution policy, and stress testing. It might hold a larger cash and listed-securities buffer or move to a longer notice period. The board should also test whether the charity's quarterly liquidity need was ever compatible with the fund's liquidity profile; if not, the suitability of the original investment should be reviewed separately.