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Good corporate governance is key to the success and profitability of your business. Corporate governance means the structure, processes, policies and laws that determine how an investment vehicle is managed and controlled.
The purpose of the Corporate Governance guidelines is to help define the decision-making process for vehicles, ensure their managers are accountable to shareholders, and guide the allocation of roles, responsibilities and rights within the company.
This module will allow investors and managers to compare fund terms against industry best practices and to identify gaps in governance frameworks - as well as giving guidance on how to fix them. It will also help find those variations from best practice that need explaining to investors.
The Committee aim to establish and promote common and workable standards of corporate governance for non-listed real estate vehicles. View the committee page to read more about their objectives and whose involved.
An anonymous investor and fund manager provide their view on the importance of good corporate governance, how it can help to attract new investors and how effective implementation can only take place if it is practiced on a consistent basis.
Benchmark your investment vehicle and determine your compliance rate with the INREV Guidelines via our new tool.
Why should you use the new tool? This Q&A section explains.
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Corporate Governance Module: Get a quick snapshot of the 7 principles
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Good corporate governance is a cornerstone for the success of non-listed real estate investment vehicles and refers to the structure, processes, policies and laws that determine how an investment vehicle is managed and controlled. There are a number of different frameworks, some driven by local or EU regulation, which support this objective and there are many common themes which run through them.
For non-listed real estate investment vehicles that target institutional capital, the level of regulation can be lower than for other investment classes such as retail funds or listed structures. This is mainly due to the nature of non-listed real estate funds, which have typically low liquidity as well as entrepreneurial investment managers. In such cases, a robust corporate governance model is essential. Both INREV Guidelines and the Alternative Investment Fund Managers Directive (the “AIFMD”), which regulates fund managers in Europe, tackle the key principles that are central to a robust corporate governance approach, which:
The constitutional terms of each investment vehicle, stated as fully and completely as possible, should address how principles and best practices should be applied by those involved in the management of the vehicle, thus creating binding contractual obligations for compliance by the vehicle and its investors. This module describes INREV’s best practice principles and sets out guidance on how to apply these in practice.
The INREV Guidelines focus on the vehicle itself, whereas AIFMD focuses on the manager. The INREV Corporate Governance Guidelines are principle based, expecting that people apply the principles in their behavior, whereas the AIFMD is primarily describing what the legal obligations and responsibilities of the manager are. In addition to the Guidelines the AIFMD Manager Guidance report provides a practical guide for managers who fall under the EU regulation. The report explains key functions based upon the specific governance requirements of the AIFMD and the more principle-based governance best practices of INREV.
Local and EU legislation in different jurisdictions will always override principles that do not have the force of law. INREV’s principles and best practices of corporate governance represent a generic framework and can be applied across a wide range of real estate vehicles. In order that a non-listed property vehicle or an investment manager is compliant, careful consideration should be given to both local and EU legislation applicable in the domicile of these entities.
Compliance with the law is the foundation of every corporate governance framework. Being primarily responsible for this, the manager has to have appropriate systems in place to monitor, confirm and disclose compliance to the investors and non-executive officers. The non-executive officers should oversee the manager in all these respects, and should be able to seek external advice on these matters. The investors should make any and all necessary information available to the manager and are expected to immediately highlight any doubts they may have about the vehicle’s legal compliance.
The manager, the non-executive officers and the investors should all have access to sensitive information about the investment vehicle and its involved parties. This information must be treated according to the agreements in the constitutional terms. In general the need to maintain confidentiality has to be balanced against the need to ensure transparency and if there is a conflict, the need for transparency should prevail. However, information which, when disclosed, would create a competitive disadvantage to the vehicle, is expected to be treated as confidential and not to be disclosed widely. Confidentiality provisions should indenture all investors with the same restrictions and may not effectively prohibit investors exercising their rights under the constitutional documents.
Compliance with the law - The investment vehicle and its manager should always comply with the relevant legislation and regulations applicable in the jurisdiction in which it is established.
Compliance with constitutional terms - The vehicle's constitutional terms should clearly articulate the key corporate governance principles which should always be applied.
Skill, care, diligence and integrity - Investors, investor representatives, non-executive officers and managers should manage the protection of investors’ interests and their investments, with due skill, care, diligence and integrity, and should ensure adequate levels of human, financial and operational resources.
Accountability - Managers, non-executive officers, investor representatives and investors, and those they have delegated to, should always be accountable for their actions.
Transparency - All relevant information relating to the vehicle should be communicated in a way which is clear, fair, complete, timely and not misleading.
Acting in investors’ interests, including alignment of interests and conflicts of interest - Vehicles should be run in the interests of all investors. Where they arise, conflicts of interest should be managed fairly between investors, vehicles and managers; the alignment of interests between investors and managers can reduce the risk of such conflicts.
Confidentiality - Information regarding vehicles and investors’ interests in vehicles which is not publicly available should always be treated confidentially.
Describe the vehicle governance framework and the organisation of management and administration. For example, identify the AIFM, administrators, trustees, depositories, general partners, risk managers, investment advisors, portfolio managers, asset and property managers, valuers and other key functions as appropriate. Identify and discuss vehicle governance and oversight frameworks such as the use of independent directors and investor or other special committees, and how they operate. | Annual |
Interim Describe material changes |
Describe the structure and governance principles within the manager organisation (rather than vehicle) for instance on potential areas of conflict between alternative capital sources under management, conflicts management processes, Investment Committee composition and processes, alignment through promote distribution etc. | Annual |
Interim Describe material changes |
Describe the level of adoption of INREV corporate governance best practices. | Annual |
Interim Describe material changes |
Annual and interim reports should describe any material changes to the level of compliance with the corporate governance framework defined in the fund documentation. | Annual | Interim |
Guidelines of conduct as a manager
Vehicles must comply with all laws and regulations applicable in the jurisdiction in which they are established.
The manager should ensure that the vehicle complies with all laws and regulations.
The manager should confirm to the vehicle, the non-executive officers and investors that the vehicle is compliant with applicable laws and regulations.
The manager has primary responsibility for compliance by the vehicle with applicable laws and regulations, including AIFMD, anti-money laundering regulations and tax legislation.
The manager should have in place appropriate systems and processes to monitor compliance and should hold regular meetings with the vehicle, non-executive officers, investor representatives and, if appropriate, investors.
The manager should ensure that it has the necessary systems to monitor compliance, that the vehicle is compliant with the laws applicable in the jurisdiction in which it has been established, and that it can continue to operate without risk of breach of law. The manager should also consider the structure of the vehicle, and illustrate that it has been structured in such a way as to be tax efficient. The manager is normally expected to meet with the vehicle and non-executive officers or investor representatives, and, if the issue is sufficiently material, with investors, to brief them on relevant changes in law, including tax legislation, where these are likely to affect the vehicle.
Guidelines of conduct as a non-executive officer or investor representative
Non-executive officers or investor representatives should ensure that the manager has in place adequate systems to monitor compliance with applicable laws and regulations.
Non-executive officers or investor representatives have a role in monitoring compliance, by, for example, receiving regular reports from, and having regular meetings with, the manager. Non-executive officers may themselves incur liability in certain jurisdictions through holding their office. They should have the ability to seek separate legal advice paid for by the vehicle, if they consider this advisable or necessary. The vehicle should also provide insurance cover for non-executive officers if it is not otherwise available.
Guidelines of conduct as an investor
The investor should support the manager in ensuring that the vehicle is compliant with applicable laws and regulations.
The manager on behalf of the board of the vehicle has primary responsibility for compliance with applicable laws and regulations. Investors may be required to provide information legitimately required by the manager (such as for tax purposes) and in such circumstances should do so promptly.
Investors always need to consider carefully all information supplied by the vehicle, the manager and non-executive officers, take due note of any identified potential risks and raise questions with the manager or non-executive officers whenever appropriate, including any concerns regarding compliance, or failure to comply, with applicable laws and regulations.
Guidelines of conduct as a manager
The manager should establish systems and processes to ensure that the constitutional terms are monitored and adhered to, and should confirm to the vehicle, non-executive officers, investor representatives and investors that the vehicle is compliant with its constitutional terms.
The contractual obligations of the manager will normally include the obligation to ensure compliance by the vehicle with its constitutional terms. These will usually be disclosed to investors and potential investors through a prospectus or information memorandum, which would include the investment strategy for the vehicle and the initial business plan.
The manager needs to be fully aware of the constitutional terms, and therefore able to confirm to the vehicle, non-executive officers, investor representatives and investors that the vehicle is compliant with its constitutional terms. The constitutional documents of the vehicle should also set out the remedies that are available to investors and others if there is a breach.
The constitutional terms should contain a clear investment policy setting well-defined restrictions and address how these principles and best practices should be applied in practice by those involved in the vehicle. They should be stated as fully and completely as possible, thus creating binding contractual obligations for compliance by the vehicle and its investors.
The manager should adopt the corporate governance best practices as a matter of policy from the outset of the vehicle. Thereafter the manager should assess the extent to which the vehicle complies with these best practices, and should report on compliance in the vehicle’s annual report or elsewhere, explaining the reasons for any departures from the best practices. Investors will then be able to form their own opinions on the corporate governance of the vehicle.
The constitutional terms should set out the role of the non-executive officer, investor representatives and investors in relation to decision-making on reserved issues.
At the inception of a vehicle investors should agree to certain key parameters of the vehicle. Any changes in or breaches of such parameters would be decisions reserved for investors such as:
Examples of reserved matters for non-executive officers or investor representatives may include:
For such reserved issues, investors would expect the manager to provide them, or non-executive officers or investor representatives, with appropriate information on which to base their decision, including any professional advice. Where there is to be prior consultation between non-executive officers and investors, investors would expect such consultation and subsequent reporting to be conducted on a timely basis.
As the number of investors in a vehicle grows, so a lesser threshold for key decisions is likely to be more appropriate. Open end vehicles with established liquidity mechanisms enabling investors to exit may offer less opportunity for influence or control by investors than closed end vehicles, where the investors’ ability to exit the vehicle may be very limited.
While approval of the annual business plan may not be a matter reserved for the decision of non-executive officers or investor representatives, it is best practice for the manager to present the annual business plan to investors each year and establish a mechanism by which they can take feedback. In this way investors can make their views on the annual business plan known to the manager.
See section 2 of the Corporate Governance Assessment tool.
The constitutional terms should set out the way equity is issued and redeemed in a vehicle.
The manager should clearly articulate how equity is to be issued and redeemed. In the case of closed end vehicles, the issue of equity is likely to be through one or more initial closings where a number of investors subscribe at the same time, with redemption being towards the end of the life of the vehicle. In the case of open end vehicles, the process of issue and redemption of equity would be on a periodic basis. This may be annually, quarterly, monthly or even daily. The method of valuation of the equity should be clearly set out, including the underlying valuation and accounting principles applied. In some jurisdictions and vehicle structures, the mechanism is prescribed by legislation or government regulations.
Vehicle extensions provide an opportunity for the manager to review the corporate governance with investors.
Where the manager presents proposals for an extension of the life of the vehicle or a short run-off period to allow properties to be sold (which is not a fixed extension specified in the constitutional terms), this is in effect a new vehicle and provides an opportunity to review the constitutional terms of the vehicle.
Guidelines of conduct as a non-executive officer or investor representative
Non-executive officers or investor representatives should ensure that the manager has in place adequate systems to monitor the extent of compliance with the vehicle’s constitutional terms.
Since the manager is obliged to ensure that the vehicle complies with its constitutional terms, the role of the non-executive officer or investor representative is to monitor compliance through receiving reports and having regular meetings with the manager. The non-executive officer or investor representative should have the ability to engage advisors (at the cost of the vehicle) to assist with legal or technical matters.
In circumstances where the termination of the manager’s mandate is activated, the non-executive officers or investor representatives should oversee the process to ensure stability during the transitional period.
Non-executive officers (where independent of investors) are expected to act as mediators between investors and managers and to review with investors the consequences and costs associated with the process of manager change.
Guidelines of conduct as an investor
Investors should fully understand the constitutional terms before investing. Acceptance of the constitutional terms is demonstrated by signing the subscription agreement.
In order to allow an investor to fully understand the investment, the constitutional terms should state the vehicle strategy and vehicle operation, the relationship and obligations between investors and the vehicle (including investor decisions, meetings and votes), and the liquidity opportunities for investors, including the eventual exit procedures upon winding-up, if appropriate. Investors are expected to comply with these obligations. The constitutional terms should be clear and unambiguous, and include the appropriate jurisdiction in which meetings to decide on important issues which are reserved to investors are to be held.
Guidelines of conduct as a manager
The manager should implement a code of ethics to demonstrate integrity.
The manager operates under a duty of care to the vehicle which has appointed it, and, through the vehicle, to investors. Investors, when deciding to invest, have usually relied upon the manager’s track record, and its acknowledged standing, integrity and reputation. The manager needs to be able to satisfy both the vehicle and investors that it has performed its duties with the required degree of integrity, and that it has behaved ethically in its dealings with the vehicle, non-executive officers, investor representatives, the vehicle’s external advisers and investors.
The manager should exercise the necessary control over its staff, external advisers and third party service providers to ensure that it can operate in the best interests of the vehicle and its investors.
The manager has to demonstrate to investors that it has the required skill to meet its obligations as a manager. This may include using third party service providers. See section 3 of the Corporate Governance Assessment tool. The manager is expected to have the required level and quality of expertise in terms of staffing, external advisers and third party service providers, as well as the necessary resources, in particular:
The manager should follow INREV guidance.
The manager, in order to show that it has acted and is acting diligently, both upon the establishment of the vehicle and during its life, is expected to be able to demonstrate to investors that it conducted the necessary due diligence (in line with the INREV due diligence protocol) upon the establishment of the vehicle, and that the vehicle is legally able to adopt its strategy to achieve its anticipated returns.
The manager should implement an agreed policy on risk identification and management for the vehicle, and establish and maintain a permanent risk management function.
The manager should identify risks early and manage them in a timely and proper manner. The manager needs to be able to show that potential risks are identified, monitored and managed quickly and diligently. This can only be achieved if the manager has competent staff, external advisers and service providers with the requisite expertise. The manager should also implement an adequate system of internal controls and ensure that information on the effectiveness of such a control framework is provided regularly to investors. See section 3 of the Corporate Governance Assessment tool.
Guidelines of conduct as a non-executive officer
Non-executive officers should have the appropriate level of skill, training and access to external advisers and service providers to ensure that the interests of investors are protected.
Non-executive officers should be appropriately trained so as to be up-to-date on relevant issues, and to have access to the vehicle’s external advisers and service providers. In particular, non-executive officers need to have the opportunity to discuss with the vehicle’s external valuers matters regarding property valuations.
Non-executive officers should ensure the monitoring of internal controls, risk management and reporting.
Non-executive officers should satisfy themselves that the manager has in place secure systems which monitor the vehicle's activities, that adequate internal controls are established by the manager to identify and manage risks on a timely basis and in a proper manner, and that the manager complies with its reporting obligations in a regular and timely manner.
Non-executive officers should have regular meetings with the manager and other external advisers and service providers, and with investors (if appropriate, with the manager absent), when considered necessary.
Non-executive officers are expected to attend meetings with the manager, other external advisers and service providers, and with investors when circumstances require, and to refer to investors’ matters of concern. See section 3 of the Corporate Governance Assessment tool. They may also need to call upon independent professional advice. To ensure that non-executive officers are able to act free from influence by vehicles or managers, it is necessary that they have the opportunity to discuss freely and openly with investors (without the manager being present) matters of a particularly sensitive nature.
Guidelines of conduct as an investor
Investors should employ staff or other resources with the requisite market experience, skills, expertise and knowledge.
Investors need to ensure that they and their representatives have had the appropriate training and are up-to-date with relevant developments, so as to be in a position to seek the appropriate information from the vehicle or the manager in understanding the performance and development of the vehicle. Investors should act diligently when requested to consent to proposals made by the manager, and should respond in a timely and proper manner.
The constitutional terms of the vehicle should contain provisions dealing with circumstances in which investors fail to meet their obligations to the vehicle. See section 3 of the Corporate Governance Assessment tool.
Investors should act diligently to assess and monitor the identification and management of risks.
Investors should obtain from the manager, before investing, information they consider necessary to satisfy themselves that the vehicle strategy is appropriate, that the risks are appropriate relative to the rewards, and that the manager has the requisite experience and resources (human, financial and information) to be able to deliver the expected returns. INREV has published a recommended questionnaire for investment evaluation to assist investors in their due diligence investigations.
Investors should regularly review the performance of non-executive officers, and should periodically ratify their reappointment.
Investors will need to be satisfied that non-executive officers are properly performing their role to protect the interests of investors and so should assess their performance annually.
The manager should demonstrate how it is accountable to investors.
The manager is accountable to the vehicle and the investors as a whole. Investors will rely on the manager to ensure that the objectives established at the outset and investment plans are achieved and that the vehicle operates in accordance with its constitutional terms and all applicable laws and regulations. The manager can demonstrate this accountability, for example, by being available, upon reasonable notice, to meet with non-executive officers, investor representatives and investors to review and discuss matters relating to the vehicle. The manager would also normally be expected to exercise control over, and maintain close relations with, the external advisers and service providers, including external auditors, valuers, portfolio and property managers and risk managers.
The manager should be indemnified by the vehicle, except where the manager is negligent.
The manager should be willing to accept a certain level of liability for its actions but would generally expect to be indemnified by the vehicle for losses where the manager has not been negligent or in breach. See section 4 of the Corporate Governance Assessment tool.
The manager should be able to be terminated with or without cause.
The ability of the investors to terminate the contract of the manager, both for cause and without cause, is an indication of the extent to which the manager is accountable. Greatest accountability is achieved with a no-fault termination mechanism, after a special resolution of investors. Reasonable compensation may be due to the manager depending on the circumstances of the termination. See section 4 of the Corporate Governance Assessment tool.
Investors will expect protection against circumstances where the performance of the manager (whether measured quantitatively or qualitatively) is sub-standard. In such circumstances it may be appropriate to establish a process of dialogue with a timetable between the manager and the investors (through the non-executive officers or investor representatives) to address such underperformance. In circumstances where the plan agreed from such a process is not followed by the manager then the investors may consider suspension of the investment period or even termination of the manager after a special resolution.
Guidelines of conduct as a non-executive officer or investor representative
Non-executive officers and investor representatives should be accountable to investors.
Non-executive officers and investor representatives are accountable to investors in their role as monitors of the performance and compliance of the vehicle. This may be by participation on a non-executive board or advisory committee. Such accountability should, however, not be coupled with liability to other investors other than in the case of wilful misconduct or bad faith on the part of the non-executive officer or investor representative.
See section 4 of the Corporate Governance Assessment tool.
Guidelines of conduct as an investor
Investors should ensure that the manager and, where appropriate, non-executive officers are held accountable for the performance of the vehicle.
Investors are accountable to their own relevant bodies, but not to the vehicle, non-executive officers or the manager. They are, however, responsible for holding the manager and non-executive officers accountable. For example, they are expected to attend relevant investor meetings and consider carefully and diligently all information and reports supplied by non-executive officers, the manager and external advisers. They are expected to conduct themselves in such a way as not to be open to criticism that they have acted in an unethical manner.
The manager should make available to the vehicle, non-executive officers, investor representatives and investors, in a timely manner, all relevant information and reports.
During the life of a vehicle the manager provides information (including reports) relevant to the vehicle, in order to enable investors to understand the performance of the vehicle and its compliance with the vehicle strategy, and to be satisfied that it meets the objectives established in the business plan. See section 5 of the Corporate Governance Assessment tool. Investors and non-executive officers need to be in a position to, for example:
The manager should respond in a timely and transparent manner to all reasonable questions and enquiries raised by non-executive officers, investor representatives and investors. Material events, such as a change in key personnel, should be reported to investors immediately.
The manager should have regard to INREV Guidelines on property valuations.
During the life of the vehicle the manager will provide investors, investor representatives and non-executive officers with property valuations. Investors would expect external property valuers to be independent. In order to ensure that valuations are adequately monitored, and that the interests of investors are protected, the rotation of external valuers upon the expiry of their mandates is encouraged, and the fees paid to external valuers should be structured in such a way as not to compromise the independence of valuations. See section 5 of the Corporate Governance Assessment tool.
The manager should report to investors on the extent of compliance with INREV corporate governance principles and guidelines including any circumstances in which best practice is not followed and the explanation as to why this is so.
The constitutional terms of a vehicle should set out the use of side letters, which should be disclosed to all investors.
We recognise that there may be circumstances in which different investors will have different arrangements with a vehicle. For example, larger investors may receive a discount on fees payable to the manager. The manager should set out how side letters and similar individual investor agreements will be dealt with. The manager should disclose the terms of such side letters, while recognising that certain investors may request anonymity in such matters. See section 5 of the Corporate Governance Assessment tool.
AIFMD specific requirement: In case of an externally managed AIF, the AIFM is responsible for compliance with the transparency requirements of the AIFMD.
Guidelines of conduct as a non-executive officer or investor representative
Non-executive officers or investor representatives should be satisfied that procedures are in place to ensure that investors are in receipt of information prepared by the manager.
Throughout the life of the vehicle, the manager is under an obligation to ensure that all relevant information and reports are made available to investors, investor representatives and non-executive officers, in a timely, proper and comprehensive manner, so as to inform investors, investor representatives and non-executive officers on matters such as strategy, achievement of targets and the progress and performance of the vehicle. Non-executive officers and investor representatives have a role in seeing that the manager meets these obligations.
Guidelines of conduct as an investor
Investors should feed back to the manager their precise information requirements, and whether they are being satisfied by the vehicle.
This should help ensure that the vehicle's reporting is managed as efficiently as possible.
The manager should demonstrate that its interests are truly aligned with those of investors through vehicle structures.
The vehicle is established to deliver investment performance to investors. The manager is expected to act in the interests of investors. As far as possible, this can be assured by creating structures in the vehicle to ensure the alignment of the manager’s interests with those of the investors.
Alignment of interest may be achieved by the manager investing a meaningful amount in the vehicle. See section 6 of the Corporate Governance Assessment tool. INREV recognises that there may be circumstances in which co-investment by the manager may not be appropriate, however.
Alignment of interest may also be achieved through the fee structure, including payment of performance fees to the manager based on vehicle performance. This may not fully align the manager to downside risks, however. Any performance fee structure should incentivise the manager to behave in a manner consistent with the risk profile of the vehicle and should reflect the added value that the manager is expected to provide. For example, the element of manager remuneration related to performance is typically less for a core vehicle than for an opportunistic vehicle. See section 6 of the Corporate Governance Assessment tool.
Remuneration policies are required for those employees of the manager whose professional activities have a material impact on the investment strategy or the risk profile of the vehicle they manage. The remuneration policies should promote sound and effective risk management and not encourage risk-taking which is inconsistent with the risk profile of the vehicle.
The constitutional terms should set out the provisions to be applied in the event that key personnel leave the manager.
Where certain employees of the manager have been identified in the documentation as key men or personnel, the constitutional terms will often contain specific provisions to cover the situation where these personnel leave the manager. The provisions may extend to the manager being prohibited from making further investments, or even face losing its mandate. See section 6 of the Corporate Governance Assessment tool.
The manager and the vehicle should implement a written protocol documenting how to handle conflicts of interest within the vehicle.
Conflicts of interest between the manager and the vehicle may arise in a number of circumstances, such as where:
Conflicts of interest may also arise with third party service providers. For example, the external valuer may make an offer to provide additional property services to a vehicle. This could potentially compromise the independence of its valuations.
When potential conflicts of interest arise, the manager should bring them immediately to the attention of the vehicle and the non-executive officers or investor representatives, and implement the agreed conflict procedure. The manager should always ensure that dealings in related-party transactions are on an arm’s-length terms basis. For example, if the manager (or another vehicle managed by the manager) wants to compete with the vehicle to acquire assets, the manager should disclose this to the vehicle, together with a policy for ensuring fair treatment for all its clients. See section 6 of the Corporate Governance Assessment tool.
The vehicle should set out how all investors will be treated on new issues, redemptions and transfers of equity in the vehicle.
Conflicts of interest can arise whenever investors vary their holdings in a vehicle. The manager should ensure that the rules governing new issues, redemptions and transfers are clearly and transparently set out for all investors. Such rules should be in accordance with guidance provided in the INREV liquidity guidelines and should be fairly and consistently applied. Conflicts of interest can also arise for the manager in providing a service for secondary transfers between investors, and its role in raising new capital, if applicable. At the outset the manager should clearly articulate the role that it provides in respect of secondary transfers, including any fees charged or interaction with third party trading platforms or placement agents.
Guidelines of conduct as a non-executive officer or investor representative
Non-executive officers or investor representatives should ensure that the manager demonstrates that its interests are aligned with investors’ interests.
During the life of the vehicle, the role of the non-executive officer or the investor representative is to protect investors’ interests. One way in which the non-executive officer or investor representative can do this is by ensuring that the manager’s interests are aligned with those of the investors.
Non-executive officers should ensure that the manager has a written protocol documenting how conflicts of interest should be managed.
If conflicts are identified, non-executive officers should ensure that the manager implements the agreed conflict procedure. Non-executive officers may have to make decisions on behalf of the vehicle if the manager is conflicted. If non-executive officers are not satisfied that a conflict has been fairly and properly resolved, they would be expected to refer the matter to investors. Non-executive officers are expected to be actively involved in overseeing transactions between the manager and the vehicle, such as changes in the fee structure, and to be satisfied that the terms of such transactions are at arm’s length and are reported to investors.
Guidelines of conduct as an investor
The vehicle should be run in the interests of investors to deliver anticipated returns.
Investors should advise the vehicle and non-executive officers in a timely manner if they consider that the vehicle is not being run in their best interests.
Investors should disclose conflicts of interests to other participants in the vehicle and act appropriately.
Conflicts of interest between an investor and the vehicle may arise in a number of circumstances, such as where an investor competes with the vehicle to acquire assets or an investor buys assets from, or sells assets to, the vehicle. Investors need to act with integrity, and to disclose appropriate information to the particular vehicle, the manager and other investors, in a timely and proper manner. For example, if an investor competes with the vehicle, or buys an asset from, or sells an asset to, the vehicle, the investor would normally excuse itself from the relevant discussions in the vehicle or from receiving any information. In such circumstances, an investor may have to create ‘Chinese Walls’ so that different individuals or teams of people are able to act for the different parties.
The constitutional terms should set out the obligations of confidentiality assumed by the vehicle and its investors.
The manager will be aware of information relating to the vehicle, some of which may become publicly available, and some of which may be disclosed in order to be transparent. Information which is commercially sensitive to the vehicle, however, is expected to be treated as confidential and not to be disclosed widely. The constitutional terms may contain confidentiality undertakings, so that the vehicle passes on to its investors the duty to keep certain information confidential, and to refrain from acting on it.
The need to maintain confidentiality has to be balanced by the need to ensure transparency; if there is a conflict, the need for transparency should prevail. The constitutional terms should set out the rights of non-investors, such as potential investors and their advisors, to receive information without entering into a confidentiality agreement. Confidentiality provisions should not effectively prohibit investors exercising their rights under the constitutional documents, such as when engaging third party advisors. See section 7 of the Corporate Governance Assessment tool.
Guidelines of conduct as a non-executive officer or investor representative
Non-executive officers and investor representatives should comply with confidentiality provisions in the constitutional documents.
Non-executive officers or investor representatives may be aware of confidential information relating to the vehicle, which is neither publicly available nor known to investors. If non-executive officers or investor representatives have received information relating to the vehicle which is commercially sensitive, they should observe the confidentiality provisions contained in its constitutional terms. If appropriate, non-executive officers should assist the manager in the disclosure of the information to investors.
Guidelines of conduct as an investor
Investors should comply with the confidentiality provisions, particularly when seeking to dispose of their investment, and should not use confidential information for their own benefit.
Investors may be in possession of information which is not publicly available, and which has been communicated to them by the vehicle or the manager and which may be commercially sensitive. Investors intending to disclose potentially confidential information to third parties who are potential investors are expected to seek confidentiality undertakings satisfactory to and in favour of the vehicle from the relevant third parties. Investors may also involve the manager in discussions with these parties, and request that the manager delivers to potential purchasers such information as may reasonably be required.
Control over investments
Investors participating in club deals and joint venturesare usually seeking greater control over the strategy and activities of the vehicle in order to set focused investment strategies and to control the destiny of their investment. Investors are therefore more likely to want greater involvement in the decision-making of the vehicle than would normally be the case for a multi-investor vehicle. In addition to the matters set out in CG10 of the guidelines normally reserved for investors, investors are likely to want to control the other matters set out in CG10 that may be reserved for non-executive officers. In particular, investors are likely to want to have control over the timing of acquisition and disposal of individual property assets, so that their investment behaves more like a direct property investment. Under the AIFMD, however, investment activities should be carried out by the manager, and investors should ensure that their desire to control investments does not conflict with the requirements of the AIFMD.
Non-executive officers
In circumstances where a small number of investors are actively involved in the running of a vehicle, it would be expected that investors who participate in club deals and joint ventures would have the personnel resources to engage fully in the activities of the vehicle, without creating any management inefficiencies, such as delay in ratifying decisions. In these circumstances the role of the non-executive officer might not be relevant.
Role of the manager and fees
In club deals and joint ventures, the role of the manager may be that of asset manager, sourcing the assets and managing the day-to-day leasing and operational activities of the portfolio of properties. Fees may be less than for a multi-investor vehicle, given the reduced needs for vehicle management, as opposed to asset management. In addition, consideration should be given as to whether a performance fee to the manager would be appropriate, since the manager may not fully control the investment strategy, if the vehicle arrangements require approval of individual decisions by investors.
In this section we deal with variations in the application of the corporate governance guidelines to open end and closed end vehicles. In practice there is not a clear division between these two categories as vehicles may have characteristics of both. Nonetheless we set out how the governance for a pure open end vehicle may be expected to vary from a pure closed end vehicle.
Liquidity mechanism for investors
Closed end vehicles would typically have a fixed life, and investors would normally expect to invest at the start of the life of the vehicle, and redeem their investment towards the end of the life, as the vehicle sells its assets and winds down. Investors may have the ability to sell their investment on the secondary market, but would not normally expect to do so.
Open end vehicles, in contrast, typically last for an indefinite period, and provide clear mechanisms for new investors to subscribe for equity, and for existing investors to exit from their equity position. Consequently, the constitutional terms governing subscription, valuation and redemption of equity in the vehicle must be clearly set out for all investors and prospective investors, along with the anticipated liquidity for investors. Such terms are likely to be more developed in open end vehicles than in closed end vehicles.
Valuation guidelines
Given the importance of the mechanism for subscribing for and redeeming equity in an open end vehicle, particular attention should be paid to the valuation and accounting principles applied. These valuation and accounting principles should be clearly set out in the constitutional terms and disclosed to any potential investors, including the frequency of such valuations. The vehicle should also follow INREV’s methodology for calculating and disclosing the INREV NAV. The constitutional terms should describe how the price for equity subscription (bid price) and equity redemption (offer price) are related to the INREV NAV.
Control or influence in decision-making
The constitutional terms will set out the extent of control or influence delegated to non-executive officers and investors in the running of a vehicle. In closed end vehicles, where investors are likely to be committed to the vehicle for its entire life, investors may seek some control or influence over certain decisions, as set out in CG10 of the guidelines. The degree of control or influence offered to investors can be less in open end vehicles, however, based on the assumption that investors should have the opportunity to exit the vehicle if the investment strategy of the vehicle no longer meets their investment objectives. Since the liquidity of open-ended vehicles cannot be guaranteed, it constitutes good governance to also provide for key investor rights in open end vehicles.
No-fault termination clauses
One indication of accountability of the manager is the existence in the constitutional terms of a clause providing for no-fault termination of the manager. A no-fault termination clause is less common in open end vehicles than in closed end vehicles, since investors who no longer wish the manager to run the vehicle, and who would vote for a termination of the manager if such a mechanism were available, may exit the vehicle through redemption. As the liquidity in open end vehicles may not be fully available it constitutes good governance to also provide for no-fault removal provisions in open end vehicles.
Co-investment by the manager
One indication of alignment of interests with investors is the manager having a meaningful co-investment in the vehicle as an incentive for the manager to perform. Co-investment by the manager is likely to be less important to investors in an open end vehicle than in a closed end vehicle, if a proven exit mechanism is available to investors who may be concerned about the commitment of the manager to run the vehicle.
Performance feeterms
Another indication of alignment of interests with investors is a performance fee structure that incentivises the manager to act in a way that is in the interest of the investors. Performance fee structures should be designed to suit the risk profile of the vehicle. Open end vehicles are typically core, not opportunistic, and so it would be expected that the balance of fees to the manager will be more weighted to base fees than for a closed end vehicle. In addition, the bid/offer price mechanism should take account of any accrued but unpaid performance fee.
Conflicts of interest
AIFMD specific requirements: The AIFM that manages an open-ended AIF shall identify, manage and monitor conflicts of interest arising between investors wanting to redeem their investments and investors wishing to maintain their investment in the AIF, and any conflicts between the AIFM’s incentive to invest in illiquid assets and the AIF’s redemption policy.
To what extent should the Board of an AIF monitor the activities and level of compliance of its appointed AIFM?
This scenario may typically occur where an AIF within the scope of the AIFMD appoints an external AIFM as its manager. In this case there are a number of important activities which the Board of the AIF delegates to the manager, but which it must monitor in order to ensure that the AIFM is performing such tasks reasonably and in compliance with legal and regulatory requirements.
Important tasks delegated to the AIFM must include portfolio management and risk management, and will often also include administration and marketing. The AIFM may also, for example, provide support to the Board of the AIF in the performance of its duties. In addition, the AIFM commonly identifies and manages key service provider relationships on behalf of the AIF, such as depositories and auditors, and under the AIFMD has a responsibility to manage the valuation of the AIF’s assets and liabilities on behalf of the AIF to which it has been appointed. Clearly, the Board of the AIF has to be comfortable with the competencies and performance of the AIFM and will normally perform a degree of due diligence on the AIFM pursuant to this goal.
There are two key elements to this due diligence role:
Both initial and ongoing due diligence should be documented.
Initial due diligence
Before appointing an AIFM, the Board of the AIF should perform initial due diligence. The initial due diligence should, among other things, assess the ability of the proposed AIFM to perform the tasks to be delegated to it, and its ability to comply with the requirements of the AIFMD.
One of the key indicators for the Board of the AIF will be authorisation and supervision by the relevant supervisory authorities. Other typical factors which the Board of the AIF may consider may include:
From a practical perspective, the AIFM could provide the Board of the AIF with part or all of its application for authorisation to the supervisory authorities, and/or its handbook describing its organisational structure, policies and procedures, to assist the Board of the AIF in its assessment of the ability of the AIFM to comply with the requirements of the AIFMD.
Ongoing due diligence
The Board of the AIF should perform ongoing due diligence to assess whether the AIFM continues to have the ability to perform the tasks which have been delegated to it and to comply with AIFMD requirements. From an ongoing compliance perspective, the AIFM should provide the Board of the AIF with one or more reports covering:
Typically, each of these reports would be AIF-specific. In each case, the report should also cover remedial action to correct any deficiencies identified in the current or previous reports. The Board of the AIF should receive these reports at a frequency which is appropriate to the activities of the AIF, and at least annually.
In addition, when the AIF is appointing key service providers such as auditors and depositories, or providing representations to them, and when approving reports and accounts of the AIF, they are relying on the output of many of the key functions of the AIFM. Such reliance may be formally constituted in the form of reports and representations from the AIFM to the AIF.
What are the advantages of the Corporate Governance Assessment?
The tool provides a practical way to measure the strength of a vehicle’s governance regime, by quantifying the level of compliance with the INREV Corporate Governance Guidelines. Compliance levels for different vehicles can be compared in a consistent way, and in future this can be set against the market as a whole – once a critical mass of funds have used the tool and agreed that their results can be aggregated for comparison purposes. It will also be possible to link a fund’s level of governance with other relevant INREV data, for example on the fund’s compliance with other Guidelines, or with its investment performance.
Why should a fund manager use the tool?
Managers can show the vehicle’s compliance with industry guidelines to existing and new investors. It forms a base reference for further improving the vehicle terms and reporting of vehicle.
Why should an investor use the tool?
Investors will be able to use the assessments during their due diligence process to facilitate a dialogue with managers about corporate governance and reporting issues. The results will help to compare the governance of existing and potential investments in vehicles.
In which phases of the life cycle of a vehicle should the assessment be used?
The tool is intended to be used right through the vehicle’s life cycle, but especially during the set-up phase and at times when new investors can enter. It will help managers to provide a statement of compliance that can be used in the vehicle’s annual corporate governance report to investors, allowing them to show the vehicle’s level of compliance with industry guidelines. It provides a base reference point for improving the vehicle terms and its reporting framework.
How often should the assessment be updated?
The Corporate Governance Assessment should be updated on an annual basis. If there is a significant restructuring of the vehicle, amendments in the side letters, or changes in the fund documents the assessment should be updated immediately.
How long does it take to fill in the questionnaires?
The time you need to fill in the questionnaire depends on your familiarity with the vehicle documents. Being properly prepared, the questions can be answered easily and additional information can be added easily by using the tool’s comment function. Going through the Corporate Governance Questionnaire is expected to take 15-20 minutes.
Executive summary published in June 2016
The best practices in the Corporate Governance Assessment tool have been revised and published in May 2016.
AIFMD Manager's Guidance published in July 2015
Corporate Governance
Benchmark your vehicle against industry best practice and determine its level of compliance with the INREV Guidelines.
The assessment follows the main features and principles of the INREV Guidelines and allows you to identify the level of compliance which is in line with industry best practices. The three options are not intended to be exhaustive -- managers should be able to assess where on the spectrum their own vehicle's corporate governance sits.
If you have any questions please contact the Professional Standards team under professional.standards@inrev.org or phone +31 (0)20 235 8600.
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