Nearly 40% of Open-End Real Assets Funds Charge Performance Fees
Institutional investment consulting firm Callan’s debut study of real assets fund fees revealed diverse investor options, with most funds omitting performance fees entirely.
The firm’s Real Assets Open-End Fund Fees and Terms Study analyzed data from 144 open-end real assets funds that invest in real estate, infrastructure, farmland, and timberland. The information, extracted from the firm’s manager database CallanDNA and fund documents examined during the firm’s due diligence process, provided insight into industry-wide fee structures, liquidity conditions, and valuation methodologies preceding investor redemptions.
“What stands out in the study is how many institutional open-end options exist today and how seemingly minor differences in fees and terms can impact investors,” said author Aaron Quach, vice president in Callan’s Real Assets Consulting group.
The firm discovered that fees and terms vary by approach and investor. Funds with more investor-friendly fees and terms may be more competitive in searches.
The analysis discovered that the median management fee for core real estate equity funds is 96 basis points, based on a net asset value of $25 million. Fees vary according to strategy, with core real estate equity funds (NCREIF ODCE Index funds), real estate debt funds, timberland funds, and infrastructure funds having the lowest management fees.
Management fees were higher for sector-specific funds and high-risk strategies. There was also a wider distribution of management fees for residential, real estate debt and infrastructure funds.
“Management fees are in a relatively tight band for most real estate categories, but I was surprised to see a pretty significant dispersion among funds in the residential, real estate debt, and infrastructure funds,” Quach noted. “This can be attributed to meaningful differentiation within the underlying funds in each category.”
Management fees for the 25 diversified core equity real estate funds in the survey were lower for larger investor NAVs, as managers provide fee discounts to larger investors. Only 10 funds in all real estate equity categories had flat fees, regardless of NAV.
The study showed that 55 of 144 open-end real assets funds charge performance fees, while most (84%) that charge fees rely on European waterfalls. However, the figures fluctuate depending on the strategy. Industrial and residential funds were far more likely to charge performance fees, with nine out of 10 and 22 out of 25, respectively. Only six of the 24 real estate debt funds charged performance fees.
Quach stated that Callan anticipates fee structures and terms will remain largely stable through 2025, though he noted that the launch of new funds can affect economics due to founder-specific arrangements.
Although certain open-end fund terms are relatively uniform across the universe, the study discovered that certain nuances, such as redemption notice periods and queue methodology, can have significant implications for investors in the event of a liquidity crisis.
All real estate funds allow investors to file redemption requests at least quarterly. Several infrastructure funds, however, only allow for semi-annual or annual liquidity. Callan believes that shorter notice periods are more attractive to investors. Core real estate index funds’ notice periods can vary greatly, with some needing 30 days’ notice and others requiring 90 days’ notice.
Most other forms of real estate funds have significantly longer notice periods, typically 90 days. Several farmland, timberland, and infrastructure funds stated that there is no official redemption notification period because redemptions are paid at the manager’s discretion, according to the study.
The Callan study revealed that NAV is utilized by 63% of funds to establish redemption queues. While a small number of funds operate on a first-come, first-served basis, the majority of funds treat all investors equally, regardless of timing.
The median preferred return across all strategies charging a performance fee was 7%. Most funds have an absolute return hurdle, but there are funds with a return hurdle of the ODCE index.
Among the 17 real estate diversified core plus equity funds with a preferred return, the most common preferred return was 7%, with a relatively narrow range aside from one outlier at 11%. Industrial and residential funds exhibited a relatively narrow range, while value add and debt funds exhibited a broader range. In the infrastructure sector, 14 of the 20 funds had a preferred return within 4% to 8%.
