Zombie Funds and the Living Dead, what to do with them?
18 July 2018
‘Zombie funds’ are funds that are nearing or have exceeded the end of their lifecycle, and are left holding assets which are limited by there being no ready market for their disposal.
In addition, many fund administrators will have third-party funds on their books where they provide some form of administration services but in terms of net assets, the fund is bouncing along the bottom. Not a true zombie, but a limited future nonetheless.
These funds, however, still accrue management and service provider fees and tie up investor capital that could be deployed elsewhere in better performing assets whilst they remain stuck in a limbo state.
Reaching a position where every avenue has been explored to give the fund in question a chance to fulfil its objectives as set out in the prospectus of course takes time - be this to raise additional capital or to sell the last remaining assets.
So, what’s a good course of action?
If you are certain that the lifespan of a fund is indeed nearing its end, here are some points to consider:
- Set a deadline along with a firm commitment on timeframes from the promoter.
- Set interim performance measurements for the fund.
- Keep a close eye on the Total Expense Ratio (“TER”) to monitor expenses as a percentage of the gross assets. Bear in mind that if you are delivering gross performance of 5% and your TER is 2%, your investors are paying 40% of their return in fees!
- Control management fees, director fees, administrator fees and any other third-party service provider fees too. Original fees would have been based on certain assumptions. It is reasonable to ask for these to be revisited based on the current circumstances.
- Identify other ancillary costs such as listing, regulatory approvals and anything that adds to the third party costs schedule.
- Consider restructuring the fee basis.
- Consider if you still need a manager or whether this is a cost you could remove.
- Liaise with the regulator early on in the process to obtain guidance and ensure there are no concerns raised with the strategic plans proposed.
- Consider possible consolidation as an alternative to a solvent distribution of assets – look for funds from the same manager or from other fund houses that may have suitably aligned underlying strategies.
Finally, consider whether the board is best placed to administer a solvent realisation and distribution of assets with the risk of an ultimate insolvent position. The use of a third party liquidator, whilst an additional expense, frees up board resources to be focused elsewhere and gives an element of independence and local expertise demonstrating that the directors have made a decision in the best interests of the company and its members.
For more information on how BDO can assist in providing strategic guidance to boards, contact William Callewaert or Steve Desmond, Business Advisory.
This article was originally published in The Guernsey Press' Q2 Business Review.