Please note that the risk factors listed below are not fully inclusive of all associated real estate investment or private equity risks. For more details regarding risks and tax consequences, investors should consult the relevant private placement memorandum.
Financial and Business Risk/Leverage – Investments in real estate and private equity generally involve a significant degree of financial and/or business risk. Companies or funds may be highly leveraged and may therefore be more sensitive to adverse business or financial developments or economic factors. Such investments may face intense competition, changing business or economic conditions or other developments that may adversely affect their performance. If, for any of these reasons, an investment by a real estate or private equity company is unable to generate sufficient cash flow to meet principal or interest payments on its indebtedness or make regular payments, the value of the company’s investment could be significantly reduced, or even eliminated completely. A leveraged company’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used. Business risks may be more significant in co- investments or companies that are embarking on a value add or opportunistic strategy.
Lack of Liquidity (Illiquidity) – An investment in real estate or private equity is generally illiquid because the investment will not be listed or traded on any exchange. An investor is expected to hold its investment for the entire term, which is typically five years or more. The underlying investments may, at any given time, consist of significant amounts of securities and other financial instruments or obligations that are thinly traded, or for which no market exists.
Insufficient Investment Opportunities – The business of investing in real estate and private equity in which a company invests is fiercely competitive and involves a high degree of uncertainty. A company will rely on its investment professionals and managers to identify attractive investment opportunities. It is possible that a company will never be invested with the targeted volume if enough sufficiently attractive investment opportunities are not identified during its investment period. Even if an attractive investment opportunity is identified, there is no certainty that a company will be permitted to invest in such an opportunity.
Unspecified Investments – Real estate/private equity co-investments may occur over time, where the investor faces the risks of adverse changes in the real estate and private equity markets, i.e. changes in interest rates and other potentially adverse developments in economic conditions. Investors should read the offering documentation of each co-investment and pay particular attention to the risk factors contained therein. Investments in real estate and private equity are not principal-protected, nor guaranteed. Past performance of the company/manager is not a reliable indicator of current or future performance. Future returns are not guaranteed, and a loss of original capital may occur. Investors will be required to meet capital account, forego any future income or gains on investments made prior to such default and, among other things, lose any rights to participate in future investments or be forced to sell their investments at a price much lower than secondary market valuations. Any investor with insufficient funds to meet its commitment obligations may, therefore, incur significant losses.
Foreign Currency Risk – Investors subscribing for Shares in any foreign currency should note that changes in the value of exchange between such currency and the respective home currency may have an adverse effect on the value, price or income of a co-investment.
Long-term Investment Horizon – Real estate and private equity investments typically take longer to realize gains. A co-investment usually requires a commitment period of at least five years. The frequency and size of the capital calls are at the full discretion of the sponsor and must be met within a narrow time period.
No Secondary Market – With regards to co-investments there is no established secondary market and it is unlikely that one will develop. Accordingly, an investor should only make a commitment to a co-investment if she/he is able to commit to the fund for an indefinite period of time.
Clawback Provisions – It might be required that all or part of any prior distributions made to the investor is returned back to the sponsor in order to meet the obligations toward the underlying co-investment deals. Accordingly, any amounts distributed to investors (by way of payment of dividends, distributions or redemptions proceeds) may be recalled.
Tax Reporting – The sponsor will endeavor to make available all tax related information, in order to assist investors to meet any relevant tax filing obligations. However, the sponsor might be unable to provide all information required by investors to allow them to meet their tax filing obligations. While the sponsor will endeavor to structure its investments in a tax efficient manner, there can be no guarantee that they will succeed in doing so. This could result in the returns of investors, directly or indirectly invested, being impacted by any such tax impact.
Tax Risks – Tax laws, including laws relating to disclosure of investors to tax authorities, are subject to change. The tax risks outlined in the sponsor documentation should be read carefully by each prospective investor. Prospective investors are urged to consult their own tax advisers with respect to their particular tax solutions and the consequences of a co-investment, including potential legislative or administrative changes.
Investments in Real Estate – The real estate industry is cyclical in nature, and a deterioration of real estate fundamentals generally will have an adverse effect on the performance of the co-investments. The value of real estate and real estate-related securities and other investments can fluctuate for various reasons. Real estate values can be seriously affected by interest rate fluctuations, changes in general and local economic conditions, bank liquidity, increases in borrowing rates, the unavailability of mortgage funds (which may render the sale or refinancing of properties difficult or impracticable), changes in environmental and zoning laws, overbuilding and increased competition, changes in supply and demand fundamentals, increases in property taxes, casualty, or similar events. Certain significant expenditures associated with real estate (such as mortgage payments (to the extent leveraged), real estate taxes and maintenance costs) have no relationship with, and thus do not diminish in proportion to, a reduction in income from the property. Reductions in value or cash flow could impair the co-investment’s ability to make distributions to the investors, adversely impact its investment policy and reduce overall returns on investments.
Complexity of Real Estate Private Equity as Asset Class – Private Equity and real estate investments are complex investments and may carry a high degree of risk. Such risks can arise from extensive use of complex structures, high-risk strategies, derivatives and debt instruments. Furthermore, the minimum investment periods can be long. Real estate and private equity investments are intended only for investors who understand and can accept the associated risks. Real estate and private equity investments may include the following additional risks: (i) loss of all or a substantial portion of the investor’s investment due to the use of leverage, derivatives or high-risk strategies by investment managers; (ii) investment managers may have incentives to make investments that are riskier or more speculative due to performance-based compensation; (iii) lack of liquidity as there may be no secondary market and none is expected to develop; (iv) volatility of returns; (v) restrictions on transfer; (vi) potential lack of diversification that may result in higher risk due to concentration; (vii) high fees and expenses that may offset gains; (viii) little or no requirement to provide periodic pricing or detailed valuation information to investors; (ix) complex tax structures and delays in distributing important tax information to investors, and (x) fewer regulatory requirements than registered funds.
Club Deal/co-investment Risks – Club Deals/co-investments will typically expose investors to risks associated with the sponsor of the Club Deal/co-investment or other control groups that are co-investing, which could have a negative impact on the value of such investments. For example, it is possible that the lead investor may have economic or business interests or goals (including financial constraints), which are inconsistent with or in conflict with those of the investors, or may be in a position to take or block an action in a manner adverse to the investors’ interests or investment objectives. In addition, in pursuing any Club Deal/co-investment, generally there will be little opportunity to negotiate the terms of the Club Deal/co-investment or direct the affairs of a portfolio company. In particular, it may not be possible to determine the timing or terms of the disposition of the investment, but rather will be required to rely on the lead investor to make such determinations, which may or may not be in the best interest of the investors. Furthermore, by virtue of its relationship with other investors in a particular portfolio company, it may be deemed, directly or indirectly, to be part of a control group and thus be exposed to potential liabilities of a controlling person with respect to the portfolio company, including liabilities for, environmental damages and violations of, other governmental regulations.
Reliance on Sponsor Management – While each Club Deal/co-investment will be actively monitored, it is primarily the responsibility of the sponsor to operate the investment company on a day-to-day basis, and it will generally not be possible to exert significant influence on the investment.
Co-investments – Co-investments made by an investor are subject to the risk that he/she will not have sole control of the assets, and that the realization of the investment may take longer than the realization of an investment under the sole control of the investor. This is because co-investors in the investment will generally agree to an exit procedure requiring notification to the other co-investors, and possibly giving them first refusal or a right to initiate a buy-sell procedure (i.e., one party specifying the terms upon which it is prepared to purchase the other party’s or parties’ participation(s) in the investment, and the non-initiating party or parties having the option of either buying the initiating party’s participation or selling their participation in the investment on the specified terms).
Investment in Developing or Emerging Countries – Co-investment opportunities may be presented in countries classified as developing or emerging countries, where the political and social situation is not always stable. These investments bear considerable risks. In relation to each other and in terms of macro-economic indicators, these countries may be doing more, or less well. Nationalisation, expropriation, taxation, exchange rate controls, political changes, social unrest or unfavorable diplomatic developments may impact negatively on the economy of a country and the portfolio’s investment in that country. Investment is thus only suitable to investors that are fully aware and capable of supporting risks related to such investment .
No Diligence of Co-investment Opportunities – Before any Investor participates in a sponsor co-investment on the Club Estate Boutique, they should consult with their own advisors (including, but not limited to, legal, financial and tax advisors) and request and obtain any additional information they may need with respect to considering the relevant co-investment opportunity. Club Estate makes no guarantee or statement that any co-investment opportunity will be profitable, or that an investor will not lose all or substantially all of its investment in any such co-investment opportunity. No investor is obligated to participate in any co-investment opportunity.
These risk factors are not fully inclusive of all associated risks. For more details regarding risks and tax consequences, investors should refer to the applicable documentation of each single co-investment. Prospective investors should consult with their own professional tax advisors, with specific reference to their own situations, with respect to the potential tax consequences of an investment in those opportunities.