Introduction

In the world of investment management, particularly within the realm of real estate and private equity, the concept of Net Asset Value (NAV) is crucial for assessing the value of an investment fund. However, as markets evolve and investment strategies become more complex, the need for a more nuanced approach to NAV has emerged. This is where Adjusted NAV comes into play, providing a more accurate reflection of a fund's value and primarily pertains to open-ended funds, where investor transactions are executed at the prevailing NAV prices.

INREV guidelines

For example, INREV (Home | INREV European Investors in Non-Listed Real Estate) is the European Association for Investors in Non-Listed Real Estate Vehicles. INREV goal is to improve transparency, professionalism and best practice across the sector, making the asset class more accessible and attractive to investors. INREV has established guidelines to standardize the calculation and reporting of Adjusted NAV to reflect the true economic value of the fund's assets. These guidelines aim to enhance transparency and consistency in the reporting of real estate funds, allowing investors to make more informed decisions.

Following is a table with the main differences between IFRS and INREV reporting:

Adjustments to convert IFRS NAV to INREV/Adjusted NAV:

Fund managers have the discretion to choose the specific adjustments to be implemented. These adjustments must be documented in the "Determination of the Net Asset Value" section of the prospectus, which details the calculation method and the valuation of assets and liabilities. Furthermore, these adjustments cannot deviate from this pre-established methodology.

Fair treatment of investors

The implementation of Adjusted NAV, this is the Trading NAV, is crucial for ensuring the fair treatment of all investors, regardless of when they joined the fund, providing a more equitable framework. Without this mechanism, significant disparities can arise between the experiences of initial investors and those who join later.

Consider the scenario where initial investors enter an open-ended fund at a set price. As the fund acquires assets, various factors such as transaction costs, deferred tax liabilities and expected credit losses can negatively impact the NAV. This NAV, IFRS, is then used to determine the subscription price for new investors. Consequently, new investors may benefit from a lower entry price, while the initial investors face a diminished NAV that reflects these adverse adjustments.

The situation becomes even more pronounced during the disposal of assets. When the fund sells its holdings, the above elements are often reversed, leading to an increase in NAV. This reversal can result in new investors enjoying a higher gain from the same assets, while the initial investors, who bore the brunt of the adverse adjustments, receive a lower gain. This inequity raises serious questions about the fairness of the investment process and the treatment of different investor cohorts.

Financial Statements

All companies in Cyprus must prepare their financial statements in accordance with IFRS, ensuring that they provide a true and fair view of the company's financial position.

Fund managers have the flexibility to present the Adjusted NAV disclosures either as part of the audited financial statements or as a separate document. This allows for clarity and transparency in reporting.

If a single set of financial statements is prepared, the statement of financial position will present the Adjusted NAV, along with the necessary adjustments to arrive at the IFRS NAV. Disclosures are also required with the extent of any specific guidelines used to determine the Adjusted NAV, details of the adjustments made to reconcile the IFRS NAV to the Adjusted NAV, description of the judgements and estimates used.

Conclusion

In conclusion, implementing the Adjusted NAV mechanism will foster trust and confidence within the funds industry as investors can be assured that their interests are being prioritized. This advancement will not only improve the overall quality of reporting and valuation but also make local Alternative Investment Funds (AIFs) more accessible and attractive to investors.

Fund managers and promoters have the opportunity to adopt this concept and integrate these principles into the funds’ offering documents, which are subject to regulatory approval. This strategic approach positions Cyprus as a competitive and attractive jurisdiction for foreign fund managers, while simultaneously establishing a robust framework that aligns with international standards. Ultimately, this will cultivate a more favorable investment environment, encouraging foreign fund managers to consider Cyprus as a viable and comparable jurisdiction for their fund structures.

By embracing these changes, the Cypriot funds industry can enhance its reputation, attract a broader range of investors, and contribute to the growth and sustainability of the financial sector in the region. This is not only a matter of ethical responsibility but also a critical factor in attracting and retaining investors and foreign fund managers in an increasingly competitive market.