Illiquidity Risk in Non-Listed Funds: Evidence from REIT Fund Exits and Redemption Suspensions

Abstract

Managerial incentives are skewed in non-listed funds under finite horizons. Compensation structures are only indirectly related to shareholder wealth maximization when share prices are unobservable. Liquidity options for investors are limited in the absence of an exchange listing. Using a hand-collected database for public non-listed REITs, an empirical sequence considers the impact of management compensation contracts on equity fundraising and success in capital deployment. Evidence is provided that high asset management fees and high acquisition fees diminish managerial success at generating revenue from invested capital. Successful revenue flows are deterministic factor in the level of distributions paid and the likelihood of achieving a fund exit. Closing the gate on share redemption plans is synchronized with the slowdown in new equity flows. Retail investors are insensitive to maligned compensation structures that heighten illiquidity risk, even when observable in the prospectus.