IMPACT ON THE LIV FUND MANAGER’S CAPITAL AND RISK MANAGEMENT NEEDS
From an investor perspective, having the fund manager pay for offer costs, subscription discounts and/or distribution reinvestment plan discounts, provides tangible financial benefits from day one. Fund managers in turn will need to consider their capital planning to pay for these LIV-related costs. To the extent that the manager has excess cash on hand, they can utilise internal resources – alternatively a bank facility could make financial sense in optimising the cost of capital. Fund managers can then deploy their existing cash elsewhere to generate better returns than the borrowing costs.
In addition, fund managers may wish to launch a series of LIVs over time. As such, these fund managers should contemplate their longer term funding plan to address LIV-related costs.
Depending on investment strategies, managers will also have to consider a range of risk management issues, such as liquidity and cash management in the portfolio (e.g. for asset rebalancing and target cash distributions), and FX spot and hedging for foreign currency exposures. The capacity to use leverage in the investment portfolio could also enable fund managers to improve investment returns and distribution yields.
KEEP A CLOSE EYE ON LIVS
We think the ASX-listed LIV space will continue to develop at a rapid pace, as the opportunity it represents to fund managers has been highlighted through the funds under management attracted in 2017.
Industry participants who have an interest will have to keep a close eye on a range of topics, including investor-friendly innovations, capital planning and risk management.