Redemption Pressure in an Open-Ended Property Fund
Crestway European Property Fund has €1.9bn NAV, monthly dealing with 30 days' notice, and a 10% monthly redemption gate permitted by its prospectus. Assets are 21% direct property, 7% cash, 11% in two assets whose valuers have suspended valuations pending a market review, and the remainder in listed REITs and bonds. Redemption requests for the next dealing day total 16% of NAV, and the queue has grown for three consecutive months. The 11% suspended assets cannot be sold at a reliable price. A large institutional investor is redeeming and has threatened legal action if the gate is applied. The fund's anti-dilution levy is 2%, currently not applied. The investment manager's fee is charged on NAV. The board meets in 48 hours and the regulator has asked for the fund's liquidity management plan.
1. Recommend which liquidity management tools to use and in what sequence, explaining how each treats redeeming and remaining investors fairly.
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Sequence: levy first, gate second, side pocket third, suspension last.
1. Apply the 2% anti-dilution levy. The fund holds illiquid assets. Meeting redemptions from cash and listed securities forces the remaining investors to bear the cost of rebuilding the portfolio and of selling assets at a discount. The levy is already in the prospectus and is the least restrictive tool. It also removes the incentive for the fastest redeemers to front-run.
2. Apply the 10% gate. Requests are 16% of NAV, so a gate is contractually available and necessary. Allocate pro rata across all requesting investors, including the institutional investor. Pro-rata treatment is the fairness test: selective treatment of a large or litigious investor would be a breach of duty to the others and would not survive scrutiny. Document the allocation method and the reasons.
3. Side-pocket the 11% suspended assets. Carve them into a separate class so that redeeming investors do not exit at an unreliable valuation and remaining investors are not forced to hold them indirectly. This requires an independent valuation committee decision, a clear mechanism for eventual realisation, and disclosure of fees on the side pocket.
4. Suspension only if gates and levies fail to restore order. Suspension is the bluntest tool and should be used when valuation is genuinely unreliable, not to protect fee income.
Governance: the investment manager's fee on NAV creates a conflict when assets are hard to value. Escalate to the board, take independent valuation advice, and confirm the conflict is disclosed. Answer the regulator with this sequence and the evidence behind it.
2. How should the board handle the suspended valuations and the growing redemption queue over the next two quarters, including the manager's fee?
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Valuations: the two suspended assets represent 11% of NAV and cannot be marked with confidence. The board should appoint an independent valuer or a second valuer, set a formal valuation committee with fund, risk and independent representation, and adopt a documented hierarchy for stale or suspended prices. Until then, publish the fund's NAV with an explicit uncertainty disclosure rather than a single point estimate. Continuing to strike a precise monthly NAV while 11% of the book is unvalued is the real misstatement risk.
Queue management: the queue has grown three months running, which signals that the gate is not clearing demand and that investors expect further deterioration. Options are to move to quarterly dealing with longer notice, to impose a redemption queue with a published pro-rata mechanism, or to restructure the fund. The board should choose deliberately rather than let the queue lengthen indefinitely.
Fee: an NAV-based fee on illiquid, suspended assets rewards the manager for assets it cannot price or sell. Suspend the fee on the side-pocketed assets and on any asset under suspended valuation; consider charging the management fee on realised proceeds instead. This is both fair and defensible to the regulator.
Communication: write to all investors with the tool sequence, the valuation uncertainty and the expected timeline. Legal threats from one investor should be handled through the fund's legal advisers and answered with the pro-rata allocation evidence, not with a side deal.
Board decision in 48 hours: approve the levy and gate, mandate independent valuation, suspend fees on suspended assets, and file the liquidity management plan with the regulator.