Frequently Asked Questions

Transcription

1 Frequently Asked Questions FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION. The Fund is a newly operational, continuously offered, closed-end management Investment Company that is operated as an interval fund. Shares of the Fund will not be listed on any securities exchange, are not redeemable and not appropriate for investors requiring liquidity. You may receive little or no return on your investment or you may lose money by investing in the Fund.

2 PREDEX Questions &Answers Contents Investment Strategy and Execution... 2 What is PREDEX?... 2 What is the Fund s strategy?... 3 What is Core?... 3 What is the NFI-ODCE Index?... 4 How are underlying funds targeted?... 5 What does Managed Beta mean?... 5 Key Terms and Procedures... 6 Valuation how is daily NAV calculated?... 6 What are the management fees?... 6 Liquidity how does quarterly liquidity work?... 7 Distributions how do quarterly cash distributions work?... 7 Minimum investment how does the stated minimum of $1,000,000 work?... 7 Tax Considerations... 8 Income pass-through from underlying funds how does this work?... 8 Capital gains vs. ordinary income... 8 Unrelated Business Taxable Income... 8 Other... 9 What is the governance structure of PREDEX?... 9 What are the qualifications of the manager? Who are the other service providers? Page 1 of 13

3 Investment Strategy and Execution What is PREDEX? PREDEX is a newly organized interval fund (ticker symbol: PRDEX) which is a type of mutual fund that shares features with both open-end mutual funds and closed-end mutual funds. An interval fund is legally classified as a closed-end mutual fund but has several distinguishing characteristics. Continuously offered in a manner similar to open-ended mutual funds. This differs from traditional closed-end mutual funds that offer shares to investors only once. Direct redemption with an option each quarter to sell shares directly to the Fund at Net Asset Value (NAV). Daily pricing at Net Asset Value after the close of each trading day similar to open-end mutual funds. The main difference and potential advantage of an interval fund over an open-end mutual fund is the ability to invest freely in less liquid institutional assets. Open-end mutual funds are limited to a maximum allocation of 15% in illiquid investments. An interval fund allows its investors to get exposure to the private institutional investments that require large capital commitments and long holding periods. The key characteristics of PREDEX as an interval fund when compared to both open-end and closed-end mutual funds: Access to private institutional real estate investments Daily pricing at NAV Shares are continuously offered Quarterly redemptions during the life of the Fund Redemptions at NAV Liquidity only provided through quarterly repurchase offers for no less than 5% of the Fund s shares at net asset value. There is no guarantee that an investor will be able to sell all shares in a repurchase offer. Page 2 of 13

4 What is the Fund s strategy? PREDEX invests in privately offered, perpetual-life institutional real estate funds that invest directly in core real estate. PREDEX refers to these funds as "institutional" because, due to their unregistered status and high investment minimums, they are marketed and sold to institutional investors. Most of the targeted institutional private funds are included in the National Council of Real Estate Investment Fiduciaries Open End Diversified Core Equity Index (the "NFI-ODCE Index" or "ODCE Index"). What is Core? Core is a term used to describe real estate (both individual properties and funds) likely to produce high income and low volatility returns with the following characteristics: High quality, well-maintained assets with competitive physical characteristics Properties located in large, dynamic markets with strong economic drivers Property types generally consist of office, retail, industrial and apartments Multi-tenant properties which are well-leased to credit tenants Assets are capitalized with limited leverage A significant portion of return (say 75%), is derived from current income, with the balance resulting from appreciation. There is no assurance that the fund will achieve its investment objective. No amount of diversification or correlation can ensure profits or prevent loss. Page 3 of 13

5 What is the NFI-ODCE Index? The NCREIF Fund Index - Open-End Diversified Core Equity was established in 1978 to reflect the performance of U.S. core real estate, primarily office, retail, industrial and apartments by tracking open-end, private funds managed by institutional sponsors. It is a sub-index of the larger NCREIF Property Index (NPI). The ODCE Index is a proxy for the income producing commercial and multi-family real estate market. The Index annualized total return is +8.75% gross and +7.68% net for the 38.5 years from inception through June 30, Private institutional funds included in the NFI-ODCE Index by NCREIF operate under a strict set of criteria. The fund must be operated for institutional investors and available to U.S. Defined Benefit Plans. An ODCE fund must employ a diversified core investment strategy, primarily investing in private equity real estate, as follows: Real Estate: at least 80% of the market value of its net assets must be invested in real estate [no more than 20% in cash or cash equivalents] Investments: at least 80% of the market value of its real estate must be invested in private equity real estate properties [e.g. no more than 20% of such assets may be invested in real estate debt instruments] Domain: at least 95% of the market value of real estate must be invested in US markets Property Types: at least 80% of the market value of its real estate must be invested in office, industrial, apartment and retail property types Life Cycle: at least 80% of market value of real estate must be invested in operating properties [e.g. no more than 20% invested in (pre)development/redevelopment or initial leasing/lease-up] Leverage: no more than 40% leverage Diversification: no more than 65% of market value of real estate may be invested in one property type or one geographic region The fund must also comply with the NCREIF Real Estate Information Standards, including annual audits, quarterly valuations and time-weighted returns. Further, the fund must submit information in accordance with the NCREIF Fund Data Collection and Reporting Manual (timely, accurate and industry compliant data is required). The referenced index is shown for general market comparison and is not meant to represent the Fund. The performance of the index is not illustrative of the Fund s performance. Investors cannot directly invest in an index; unmanaged index returns do not reflect any fees, expenses or sales charges. The PREDEX Fund is a new fund with a limited history. For Fund performance information current to the most recent month-end, please call Past performance is no assurance of future results. Page 4 of 13

6 How are underlying funds targeted? The Adviser will primarily invest in the private institutional funds contained in the ODCE Index. PREDEX may invest in certain other private core real estate funds that it believes may provide similar returns, but are not included in the ODCE Index solely because they do not meet either the leverage, life cycle, diversification or reporting requirements. The PREDEX investment criteria for each other fund is the same as the ODCE Index except for: Life Cycle: 75% of market value of real estate must be invested in operating properties Leverage: may be as high as 50% Diversification: no requirement; real estate investments in a fund may be in only one property type or region PREDEX will invest in the non-odce funds only to the extent that the weighted average of its total portfolio meets the investment criteria for the ODCE Index. The Adviser believes investing in the non-odce funds may enhance the diversification and riskadjusted return of the PREDEX investment portfolio. What does Managed Beta mean? PREDEX cannot be a pure index fund replicating the NFI-ODCE Index. To do so it would have to own all of the member funds weighted by their NAVs. This is not possible due to their uneven timing of capital calls and quarterly liquidity. Generally, decisions made in the construction of the PREDEX portfolio will emphasize risk control methods rather than return enhancement. Our goal is to be as close to a beta fund as possible and represent the characteristics of the ODCE Index. Beta is defined as a measure of a fund s sensitivity to market movements. (Morningstar) Page 5 of 13

7 Key Terms and Procedures Valuation how is daily NAV calculated? At the end of each business day the Fund s administrator prepares financial statements to determine the daily NAV for PREDEX. Daily accruals are recorded for all income and expenses. This includes the potential income returns PREDEX will receive from the institutional private funds which may be very stable and predictable. The fair value of each institutional private fund will be updated each day by the fund s valuation committee. Each fund s valuation will be based upon all relevant information including: most recent reported value or transaction price (typically as of the last day of each calendar quarter; some funds report daily or monthly) price changes for similar funds that report a daily NAV performance of relevant market indices any interim information provided by the fund s sponsor other independent 3rd party information pertaining to the income and appreciation returns for core real estate since the fund s last valuation date The underlying fund valuation processes adhere to strict, industry-standard procedures employing independent third-party appraisers and, generally, the services of an expert valuation oversight advisor. What are the management fees? PREDEX Capital Management will charge an asset management fee of 55 basis points. The total annual fund expenses including the management fee are estimated to be 1.00% and subject to a 1.20% limitation. The underlying ODCE funds have a fixed fee starting at an average of 103 basis points with multiple breakpoints usually starting at $10 million. As Fund assets grow, PREDEX will qualify for additional breakpoints. The result may be that a significant portion of the PCM management fee may eventually be offset by the resulting savings. Page 6 of 13

8 Liquidity how does quarterly liquidity work? PREDEX is a closed-end interval fund and, as such, will offer to repurchase at Net Asset Value at least 5% and no more than 25% of its total outstanding shares once each quarter. All of an investor s tendered shares will be repurchased if the combined total shares tendered by all investors are less than the Repurchase Offer Amount. Shareholders will be notified in writing about each quarterly repurchase offer, how they may request that PREDEX repurchase their shares and the "Repurchase Request Deadline," which is the date the repurchase offer ends, generally 30 days after notification. If shareholders tender for repurchase more than the Repurchase Offer Amount, PREDEX will repurchase the shares on a pro rata basis. Any tendered shares not purchased would then have priority at the next quarterly repurchase offer. Distributions how do quarterly cash distributions work? PREDEX intends to make a dividend distribution each quarter of the net investment income after payment of Fund operating expenses. PREDEX's final distribution each year will include any remaining investment income undistributed during the year, as well as all net capital gain realized during the year. Unless the registered owner of shares elects to receive cash, all dividends will be automatically reinvested in additional shares of PREDEX. Note that the quarterly dividend that PREDEX receives from an underlying institutional private fund is based upon that fund s stated definition of net operating income or distributable cash. An underlying fund s Board will always maintain discretion over the ultimate payout amount; they may factor in other non-operating amounts such as contributions, redemptions and net proceeds from property dispositions. Minimum investment how does the stated minimum of $1,000,000 work? The minimum amount may be waived at the Adviser s discretion. This will typically occur to accommodate a wealth manager or investment consultant utilizing PREDEX with its clients, and can aggregate at least $1,000,000 of client demand. Shares of the Fund will not be listed on any securities exchange, are not redeemable and may not be appropriate for investors requiring liquidity. Page 7 of 13

9 Tax Considerations Income pass-through from underlying funds how does this work? PREDEX is not a REIT. PREDEX intends to elect to be treated and to qualify each year for taxation as a regulated investment company under Subchapter M of the Code. If PREDEX so qualifies and satisfies certain distribution requirements, PREDEX (but not its shareholders) will not be subject to federal income tax. The determination of the character for U.S. federal income tax purposes of any distribution from PREDEX (i.e. ordinary income, capital gains or return of capital) will be made as of the end of PREDEX's taxable year. Generally, no later than 60 days after the close of the year, PREDEX will provide shareholders with a 1099 (not a K-1) designating the amount of any capital gain distributions and any other distributions. A corporation that owns PREDEX shares generally will not be entitled to the dividends received deduction with respect to all of the dividends it receives from PREDEX. Capital gains vs. ordinary income Distributions of taxable net investment income and the excess of net short-term capital gain over net long-term capital loss are taxable to shareholders as ordinary income. Distributions of net capital gain generally are taxable to shareholders as long-term capital gain, regardless of the length of time the shares of PREDEX have been held by such shareholders. Unrelated Business Taxable Income PREDEX will act as a blocker of UBTI for its investors since it will be a corporation taxed as a regulated investment company (RIC). PREDEX's distribution policy may, under certain circumstances, have certain adverse consequences to the Fund and its shareholders because it may result in a payment that is a return of capital, rather than a distribution. Page 8 of 13

10 Other What is the governance structure of PREDEX? A Board of Trustees has overall responsibility to manage and control the business affairs of the Fund, including the complete and exclusive authority to oversee and establish policies regarding the management, conduct and operation of the Fund s business. The Board consists of four individuals, three of whom are independent (not "interested persons" as defined under the 1940 Act). William Chadwick serves as the Chairman of the Board. He is also a co-founder of PREDEX Capital Management. Mr. Chadwick has been in the institutional investment management business approximately 40 years having first been employed by Paul Hastings in LA as a lawyer and head of the Tax Department. The independent trustees include: Ms. Carol Broad; formerly a Director of Private Real Estate at Russell Investments, where she ran Russell s discretionary multi-manager private real estate business. Prior to that she was a Principal and Director of Research with Institutional Property Consultants where she led real estate asset class research, manager selection and due diligence processes. Mr. Addison Tad Piper; Director and former CEO of Piper Jaffray, an investment bank and asset management firm; Chairman of the Board of St. Olaf College. Dr. Kerry Vandell; Professor Real Estate Finance & Director, Center for Real Estate UC- Irvine. Former Department Chair of Real Estate, University of Wisconsin. PREDEX Capital Management serves as the Fund s investment adviser under contract and the general supervision of the Board of Trustees. Page 9 of 13

11 What are the qualifications of the manager? Grayson Sanders is the Chief Investment Officer & Co-Portfolio Manager and has a career spanning 43 years in real estate investment management including multiple property types in locations throughout North America plus Europe and Asia. He founded Mission Realty Advisors in 2011 which then joined forces with Chadwick, Saylor & Co. in 2013 to form PREDEX Capital Management. Mr. Sanders served as President of CNL Fund Advisors Company in Orlando from 2005 to 2009, where he created and managed a global REIT mutual fund. He served from 2000 to 2004 as a Managing Director with AIG Global Real Estate Investment Corp. in New York, where he managed product development for several international, opportunistic real estate funds for large institutional investors, investing in Europe, Asia and Mexico. From 1991 to 1996 Mr. Sanders served as Director of Real Estate for Ameritech Pension Trust in Chicago, where he managed the $1.5B real estate portfolio within the $13B defined benefit plan. Subsequently he was Executive Managing Director for CB Richard Ellis Investors where he was involved in product development and placement with institutional investors. In 1972, upon graduation from Stanford Business School, Mr. Sanders co-founded a real estate investment and consulting firm, The Landsing Corporation, which sponsored several public nontraded REITs and private partnerships. It grew to employ over 200 professionals and managed 120 properties in the Western U.S. Mr. Sanders previously served on the Boards of both the Pension Real Estate Association (PREA) and the National Association of Real Estate Investment Trusts (NAREIT) where he was Co- Chairman of its Institutional Investor Committee. Mr. Sanders currently serves as an independent director of Griffin-American Healthcare REIT III. He was Lecturer at Stanford Business School where he taught a course entitled, Essentials of Real Estate Investment and Development. His article entitled, An Updated Look at Asset Allocation: Private and Public Real Estate in a Multi-Asset Class Portfolio appeared in the Winter 1998 edition of the Real Estate Finance Journal. He has been a frequent speaker at trade association events and other forums over his entire career. Mr. Sanders received a BA from the University of Virginia and an MBA from the Stanford Graduate School of Business where he was later President of the Alumni Association. Michael Achterberg serves as Chief Operating Officer & Co-Portfolio Manager and has 27 years of experience in the fund management industry. He has extensive experience in fund management including due diligence, the allocation of capital and general supervision for multimanager funds. Page 10 of 13

12 Previously, Mr. Achterberg served as Chief Financial Officer for more than two years at CITIC Securities International Partners ("CSIP") which conducted China focused investment banking and private equity from offices in Los Angeles, New York, Hong Kong and Beijing. CSIP was formed as a strategic alliance with CITIC Securities Co., Ltd., China's largest securities firm, and Evercore Partners, a leading U.S.-based investment bank. Michael managed the valuations and investor reporting for the Hong Kong private equity advisor. He also was the FINOP for the U.S. brokerdealer which provided comprehensive advisory services relating to M&A and corporate finance for inbound and outbound transactions involving China. Prior to that Mr. Achterberg was a partner for fifteen years at Strome Investment Management. The adviser's principal products were funds-of-funds and a global macro multi-manager strategy trading a wide variety of financial instruments including futures, swaps, currency options and forward contracts, repurchase agreements, various forms of debt obligations and private placements. As Chief Financial Officer he managed the operations of their private funds and was involved in the due diligence and allocation of capital to other managers. At Strome he was also the FINOP for an affiliated broker-dealer operating a hedge fund hotel that provided office space, complete fund administration and operational support to other advisers and their clients. Until 1994 he was an Audit Manager for Coopers & Lybrand working exclusively in the investment industry with advisers and funds. While there he served on the national quality review program for the Investment Company practice. Sharon Linnik is a Partner and has 27 years of investment experience in a capacity of executive leadership, business development and client service. Ms. Linnik served as Executive Vice President, Business Development for Bailard, Inc. in Foster City, CA. The firm was founded in 1969 and managed $2 billion in assets for high net worth and institutional investors. Bailard offered global, multi-asset portfolio strategies which included alternative assets (real estate, hedge funds, emerging life sciences, technology exchange fund). As a product manufacturer, the firm managed mutual funds and private equity funds with a commitment to quantitative disciplines and institutional best practices. For the first 10 years of her career, Ms. Linnik worked with the nation s 15 largest institutional investors offering a global asset allocation service and investment management. She collaborated in the development and implementation of strategic and tactical asset allocation for a global, multiasset portfolio strategy and assisted in the development of investment policies for smaller institutional investors. The following 17 years were devoted to alternative investments, particularly an open-end, enhanced core private equity real estate offering. Ms. Linnik has extensive experience in business development and client service for institutional investors (corporations, foundations, endowments, public plans), financial intermediaries (pension consultants and RIA firms with open architecture), family offices and fund-of-funds nationally. Ms. Linnik has participated in all aspects of new product development and launch, including market Page 11 of 13

13 assessment, portfolio strategy, legal, compliance, channel distribution and PR. She trained and managed internal and external wholesaling teams. Ms. Linnik participated on the executive leadership team for 5 years and reported to the Board of Directors for the private equity REIT and the firm s Corporate Holdings Board for 17 years. Ms. Linnik has been actively involved in the financial services industry. She served on the Board of Directors for the Western Pension & Benefits Conference and started the Silicon Valley Chapter. Ms. Linnik has served on program committees and as moderator or roundtable host for Institutional Real Estate, Inc. (IREI) and the National Association of Real Estate Investment Managers (NAREIM) and as a member of the Pension Real Estate Association (PREA). Brad Childs is a Partner and his career spans 43 years in commercial banking, mortgage banking, commercial real estate, private equity, and venture capital. Mr. Childs has been a Minnesota licensed commercial real estate broker, and over a 22-year time span represented many private and institutional clients in the purchase, sale, leasing, and redevelopment of multiple commercial real estate properties. Mr. Childs is currently a minority partner in Mission Realty Advisors, and in that capacity helped chart and implement the strategic course for the firm. He has been a senior executive and partowner of multiple real estate companies, including service as President and CEO of Landvest Homes, Inc. (a residential construction firm), President of First Edina Mortgage (the mortgage banking affiliate of a national-scale residential brokerage firm, Edina Realty, now a Berkshire Hathaway affiliate), and Senior Vice President and Chief Investment Officer of United Properties, a Minneapolis-based investment builder and owner of office, industrial, and apartment properties. In the latter capacity he managed a $200 million owned asset portfolio, directing leasing, financing, and sale activities. Mr. Childs has been an active venture investor in multiple businesses, including 16 years as Executive Director of MicroBiologics, Inc., a successful and growing life sciences business which was sold to a private equity firm in 2008, for which company he made high-impact contributions in international sales, corporate finance, and general governance. Mr. Childs served as Midwest Regional Partner for the Landsing Corporation in multiple roles, including specific real estate acquisitions and asset management, in the 1980 s. Mr. Childs holds a BA in Economics from Lawrence University, and an MBA from Stanford Graduate School of Business. Page 12 of 13

14 Who are the other service providers? Legal Thompson Hine LLP Compliance Northern Lights Compliance Services, LLC Auditor RSM US LLP Custodian The Bank of New York Mellon Administrator Gemini Fund Services, LLC Distributor Northern Lights Distributors, LLC The Fund will not invest in real estate directly but will concentrate its investments in other funds that invest principally in real estate and real estate related industry securities ( Underlying Investment Vehicles ). Portfolio returns will be significantly impacted by the performance of the real estate market. In general, real estate values can be affected by a variety of factors: supply and demand for properties, the economic health of the country or of different regions, and the strength of specific industries that rent properties. PREDEX's distribution policy may, under certain circumstances, have certain adverse consequences to the Fund and its shareholders because it may result in a payment that is a return of capital, rather than a distribution. Fund shareholders will bear two layers of fees and expenses: asset-based fees and expenses at the PREDEX level, and asset-based fees, incentive allocations or fees and expenses at the Underlying Investment Vehicle level. PREDEX's performance depends in large part upon the performance of the Underlying Investment Vehicle managers and their selected strategies. The Fund is non-diversified and its performance may be more sensitive to any single economic, business, political or regulatory occurrence because PREDEX may invest more than 5% of its total assets in the securities of one or more issuers. Quarterly repurchases by PREDEX of its shares typically will be funded from available cash or sales of portfolio securities. Payment for repurchased shares may require PREDEX to liquidate portfolio holdings earlier than the Adviser otherwise would liquidate such holdings, potentially resulting in losses. The use of leverage (borrowing money to purchase properties or securities) will cause an Underlying Investment Vehicle to incur additional expenses and significantly magnify losses in the event of underperformance of the assets purchased with borrowed money. Investors should carefully consider the investment objectives, risks, charges and expenses of the PREDEX Fund. This and other important information about the Fund is contained in the prospectus, which can be obtained by calling The prospectus should be read carefully before investing. The PREDEX Fund is distributed by Northern Lights Distributors, LLC, Member FINRA/SIPC. PREDEX Capital Management, LLC is not affiliated with Northern Lights Distributors, LLC NLD-10/14/2016 PD-RIA-BR-FAQ-OCT16 Page 13 of 13