Wednesday, July 19, 2017

Alphabet Asphyxiation

Alternative investment sponsors are hurting themselves with all their multiple share classes.  There are Class A and Class K, Class C and Class T, Class D and Class P, and Classes S, W, and I.  Oh my!  I am sure there are more share classes, but these are the ones that come to mind.  Sponsors are confusing investors and advisors in an attempt to blur the difference between the price investors pay for their shares and the price that shows up investors' initial statement.  Sponsors have spent millions of dollars creating multiple share classes that try to solve the riddle of what discounted share price is investor-acceptable enough to the initial purchase share price.   

It is time for sponsors to simplify.  I would like to see two share classes:  Class A shares with a 5% commission and a no-load Class I shares.  Sponsors should ditch all other share classes, starting with the malignant Class T shares.  Class T shares penalize investors, advisors, and broker dealers, but allow sponsors to maintain, if not increase their fees.  Class T share investors get a lower distribution because the ongoing "distribution fees" payable to advisors are credited against investor distributions for three or four years, advisors get lower commissions than in an upfront loaded share class, and broker dealers have seen their fees reduced for selling alternatives.  But sponsors get more money because their acquisition fees are based on net investable assets, and because the Class T shares provide more net investable assets, the Sponsors' fees are higher. 

Despite this dichotomy, Class T shares are bringing in the most non-traded REIT capital at funds that are raising any meaningful money.  But there is a glaring consequence to the push for Class T shares - low level equity inflows.  Excluding the Blackstone non-traded REIT, only four non-traded REIT sponsors raised more than $20 million in equity in June, and one of these firms was in a close-out that skewed sales upward.  Only three non-traded REITs raised more than $20 million, and again, one was in a close-out.  Twenty non-traded REITs failed to break the $20 million level, and eighteen of these did not even raise $10 million.  This is bad.  Failure to launch or death by neglect are cliches that have become real points of analysis. 

Advisors, as a group, have never avoided high fee products as long as their compensation was not impacted.  Advisors know their fees have been lowered while sponsors make the same or more, and are looking for other investment options, and twenty-six share classes, or one for every letter in the alphabet will not solve this issue.

1 comment:

Anonymous said...

Very much agree. Multiple share classes are the worst.