Performance vs prospectus = transparency in German closed-ended real estate funds?

Michael Nadler

Journal of Property Investment & Finance, 2018, vol. 36, issue 2, 158-170

Abstract: Purpose - The purpose of this paper is to close the transparency gap by comparingex anteandex postperformance disclosure, thus providing important conclusions regarding the transparency of this important German market segment. Design/methodology/approach - Closed-ended real estate funds (CEREFs) are one of the biggest segments of unlisted private equity funds in Germany. CEREFs have a central “profitability promise” that is based onex anteforecasts given in the prospectus. Typically, equity is tied to these investments for up to 20-30 years, leaving investors highly insecure whether their expectations will be fulfilled and fund managers actually achieve prospected performancesex post. Findings - The performance variance analysis of all German CEREFs outstanding during the global financial crisis reveals that prospect-performance disclosures as well as prospect-performance variances cause substantial problems in Germany due to overestimation biases of many fund managers. Research limitations/implications - As typical for the recent scholarly debate, also the past disclosure practice in Germany prohibits a long-term performance analysis, unless researchers apply instruments of modern investment analysis like comprehensive financial plans (“Visualisation of Financial Implications)”. Practical implications - The transparency developments in CEREF-reporting of the last decade deliver precise recommendations regarding the internal and external performance variance analysis, risk-profiles and stress tests for the future fund management. Social implications - The introduced methodology would increase transparency in the segment of CEREF and, thus, improve investor protection. Since private households in Germany mainly acquire these funds, this is a contribution to sustainability in private asset management. Originality/value - The paper develops a new methodological framework for performance measurement of unlisted funds. It then assesses for the first time the impact of transparency and trust on fund performances by applying a performance variance analysis.

Keywords: Performance disclosure; Performance variation analysis; Prospectus underwriting; Real estate private equity; Unlisted funds; Visualization of financial implications (VoFis) (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jpifpp:jpif-11-2016-0084

DOI: 10.1108/JPIF-11-2016-0084

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