Property Funds and AFS License Query

[Deltaberry]

Anyone have any experience setting up a property investment fund under say a MIS or MIF structure regulated by ASIC?

Trying to get my head around responsible entity requirements, the AFS licensing, other ASIC compliance issued, the time required to do it, how much does it costs etc.

I'm trying to come up with a structure to pull together our own development sites and farmland, and maybe partner with other holders of big parcels of land too, and then raise say a certain amount to progressively develop it.

 

[coastymike]

Yes have done it for a few developer clients. Many, many complex issues and requirements to be met. Getting it wrong means potential criminal and civil penalties.

Costs to implement between $50k-$100k.

 

[Terry_w]

I was going to say I heard the legals to be around $100k for something like this - I have no experience though.

 

[knightm]

I was going to say I heard the legals to be around $100k for something like this - I have no experience though.

If I was a property lawyer then that would sound like a good return for a few months of part time paperwork!

 

[starter]

It's not really property law, you would need to be an expert on corporate law, funds and AFS licensing amongst others. AFSL in particular, is very technical and not many lawyers have the expertise.

 

[RPI]

I have put together a class action where one of these went wrong. Make sure your seek competent advice and your docs are tight and right.

 

[Deltaberry]

Thanks for the feedback. That sounds a bit more time consuming, documentation onerous and expensive than what I thought. I asked some lawyers at Freehills and K&W Mallesons and people are telling me it'll take 3-4 months, if all goes well, to set it up, which is a bit slow. Is that reflective of everyone's experience here?

What about an alternative structure, whereby my syndicate - which has the leads to source the capital or has sourced the capital - approaches existing property funds and offers them to start a new fund under their AFS license for this particular purpose and then cutting that fund in to the deal on some level. Is that common? And does it take long?

Also someone pointed me to the direction of The Trust Company (an ASX-listed company worth $150m which apparently can provide "shell" funds and give you the Responsible Entity and AFS license). Anyone come across this?

 

[Bigtone]

What about an alternative structure, whereby my syndicate - which has the leads to source the capital or has sourced the capital - approaches existing property funds and offers them to start a new fund under their AFS license for this particular purpose and then cutting that fund in to the deal on some level. Is that common? And does it take long?

I got approached about 5 years ago by these guys to set up a resi property fund http://www.wellcap.com.au/ using their AFS licence and compliance.

I couldn't get the numbers to work (for the investors) to my satisfaction so let it go, might be worth having a chat to them yourself.

 

[RightValue]

Yes I have quite a bit f experience in this field.

I spent a few years providing independent research reports on these things and doing a bit of consultancy (I was considered a bit of an expert and wrote the book on listed and unlisted property trusts) before starting out a small funds management outfit which died an infant death due to the GFC. I was also a Director of an unlisted Mortgage fund .

For the legals talk to McMhaon Clarke Legal - Andrew Shearer-Smith is the man, they used to do heaps of them.


Also ADPIA (Australian Direct Property Investment Assn) can help a bit.

Yes you can use an RE for hire, Trust are one there are others. This is a good way to go in many cases, we used Trust even though myself and my partners had the experience, (I meet the requirements for a Responsible Officer), it was way cheaper, and easier, especially for a start up. If you want to set up your own RE you will need a responsible officer but can outsource the custodian services if you wish, however the compliance cost will be quite a few $$ every year.

You could also trawl the ADPIA membership list and find an RE/fund manager that will partner with you.

Distribution is a major issue as is track record in getting rated by a research house.

The company I work for now, a listed entity, tried to get a syndicate up and running a couple of years ago and failed miserably despite having some heavy hitters on the board.

Advisors are very gun shy of syndicates now. The Mortgage fund of which I was a director was also a victim of the GFC and shy advisors post GFC, with many funds costing investors lost capital or with real liquidity issues. Raising funds proved impossible, we had to wind the fund down (100% payout to all investors).

Good luck.

cheers

RightValue

 

[Deltaberry]

Thanks to both of you. That was very valuable information. This is the first time I've realised there's actually a wealth of pretty corporate-end knowledge here on the forum, which has certainly caught me by surprise.

Bigtone - not sure if you can divulge information, but before I talk to Wellington Cap or similar funds, what sort of cut are they expecting? Just an admin fee from the management fee, or do they want share of profits?

RightValue - does TRU provide you with the AFS license as well? ADPIA seems like a good way to go also if I want to save the hassles, but I'm weary there needs to be an exit plan if we fall out with our partner, so will probably need our own AFSL and have our own RE eventually. Any idea how long some of these funds will take to set a new fund up? 4 weeks? And I presume it's possible to draft the JV agreement in such a way that we retain control/majority ownership of the management company?

When you say research, you're talking about being rated by sell-side research analysts? And distribution as in finding insto/retail base from broking houses like Wilson HTM, EC&L Ballieu etc?

Thanks again for sharing.

 

[RightValue]

These unlisted funds are not sold through brokers.

Investors are sourced via financial planners/advisors and from the general public via expensive marketing campaigns.

For a financial advisor to have your unlisted security on their recommended list you will need to get past their research arm. Usually this is done by providing an independent research report from PIR or Lonsec or both.

You pays your money, around $15-20k and you have no guarantee of a decent report, especially without any track record, it is a real chicken and egg situation.

Residential funds rate very very poorly as most of their return is through capital growth not income. Also the MER (Management Expense Ratio) can be very high due to high management fees.

BEWARE, you will probably (not possibly) spend tens of thousands of dollars and many months to get everything in place and a shiny new PDS and then be unable to raise any money.

I would not expect the set up to take less than 3 months even if you went with an outsourced RE.

I cannot remember if you need an AFSL if you go through an outsourced RE, I suggest you talk to TRU.

cheers,
RightValue

 

[Deltaberry]

Thanks. That does make sense.

The idea behind our business is we probably won't need to market to retail investors per se, because I suspect the capital we are trying to source is already behind us/lined up. But the people involved want to do this under an ASIC-regulated fund for various commercial reasons.

Therefore, what I'm really looking for is a company who already has the platform/AFSL license and can launch a new fund speedily under that license. I suspect the PDS will might be needed for compliance reasons, although I'm not sure if there's a s 708 sophisticated investor exemption for MIS, since we are only angling for investors who can put in a couple of million each.

 

[RightValue]

Interesting, I started typing about going down the sophisticated investor, less than 20 members route, then deleted it in my last post.

If you can line up those ducks then the outsourced RE would be fairly quick and easy. I believe you only need and offering memorandum, not a PDS.

In reality a company structure may work ok or a backdoor listing on the ASX if you have a few wealthy investors lined up already.

Before I spent any money I would want an agreement from them to invest if you met x, y and z criteria or they agreed to refund you some $$ of your expenses.

One way around this is to get them to contribute to the set up cost of the ASIC regulated environment. Money talks and bullsh.t walks.

Too may people are tyre kickers and promise the earth but when push comes to shove they get cold feet and make excuses or are unable to deliver. This includes sophisticated investors etc. I have learned this through bitter experience.

BTW dealing with investors with a Mil or two can be far, far harder than getting money other ways.

Going down the track of doing everything with a regulated fund would help get the track record if you want to expand later.

FWIW I know/knew the Wellington Cap people when they started out, they may well be worthwhile approaching.

 

[Bigtone]

Interesting, I started typing about going down the sophisticated investor, less than 20 members route, then deleted it in my last post.

.

That's where my offer from that mob came from, we had commitment for three separate funds, max $2m, closey held etc and then got approached and got a bit dazzled by making it big straight away, would have been better to just got those three off the ground and then with a position of strength joined them together and done it ourselves or had better negotiation points, two of those three would have had massive returns so far and the other would have boomed early but would be now in the red.

Delt I will PM more details, i have their proposal in my office, the difference for the investors was quite large when the proposed fees were taken into account compared to the closely held we had in mind, i couldn't in good faith put those people that trusted me into that arrangement

 

[Deltaberry]

Thanks to you both. That was helpful information once again.

I suspected a PDS might not be needed, as a competitor who is trying to do the same has released an IM but I haven't seen any PDS and they are going around marketing (slightly different target investors, but similar market).

Unfortunately I suspect these investors want to see that we have the structure in place first, so using their money for a backdoor listing would probably be off limits as is entering in to an agreement of some sort for expenses reimbursement - but it is certainly worth considering.

I completely agree having a fund will generate substantial credibility down the track, which is one reason we've opted for this over a company. And being able to partner with say a smaller fund that already has some credibility in property or, for example, other products such as equities will add to that credibility.

Bigtone - yes please PM me the details I'd love to have a look. And if you guys want to chat further about what I'm doing, or think there's an angle where you'd like to get involved in, feel free to PM me also.