Industry News
Kylinprime Investment Fund: Mitigating inherent investment risks

With an envisioned ROI of 4-6% per annum, Kylinprime Investment Fund provides globally-minded investors with feasible, relatively low risk investment opportunities in the areas of real estate, land development and infrastructure projects while also qualifying investors to the Cypriot Investment Scheme. The fund applies rigorous risk management systems and processes in accordance with the stringent EU regulatory framework in order to protect investors’ interests.


With that being said, as with all investments risks still exist. Below, Chairman of Kylinprime Investment Fund Mr Nicolas Theocharides outlines the specific risks facing our fund and how these are mitigated through applying detailed risk management thereby ensuring investor safety.


  1. Sector Risk

Certain business sectors or property types carry different performance characteristics and risk patterns. For example, rental growth from retail property will be largely driven by retail spending, retailer margins and the wider economy. These sector orientated risks can be mitigated through forward-looking projections and research in order to model the expected demand for certain sectors (as well as locations). The supply of property would also need to be modelled in order to capture a view on the investment going forward. This can be used to analyse sector risk and other risks too.


Mitigating Sector Risk

When it comes to reducing sector risk, diversification across sectors is the name of the game. Our portfolio management team has the ability to invest across sector types and analyse each sector to make sure they are taking on sector risks that they are comfortable with. At a high level, historic performance data can help in terms of analysing the inherent volatility of different sectors. Scenario analysis of how the investment would look under good and bad cycles would be a sound risk analytical tool at the asset level.


  1. Liquidity Risk

Besides various business sectors, the Fund may also invest in real estate, land development or infrastructure projects which tend to be extremely illiquid in nature. Realizing such investments or closing out positions in such investments at the valuation determined at the exit point may not be possible. An exit of a Fund will be dependent on market conditions and there is a risk that the market for the underlying investments may not support an opportunistic sale of the assets for some time.


Mitigating Liquidity Risk

In terms of risk mitigation and illiquidity, many institutional and private investors will concentrate on well located, prime Grade A assets which, although they may have a lower yield and lower cash flow from the asset, all things being equal would provide more liquidity in the event of a sale.


There are also many marketing strategies and broad exit strategies to reduce liquidity risk, which may include:

  • Buying a portfolio and selling individual assets (wholesale to retail).
  • An aggregation strategy of buying assets where the portfolio can ultimately be listed via an initial public offering (IPO).
  • A 'buy, fix, sell' strategy.


Of course, these strategies are driven by prospective returns, IRRs and equity multiples but, in part, that is only possible if the assets are effectively 'realised' or sold, otherwise the performance is unrealised and therefore subject to a valuation margin. While this risk is more widely known as exit risk and is often analysed by sophisticated institutional investors, it could also form part of the wider liquidity risk that has been highlighted above.


At the asset class level there might be an expected return from real estate that is raised to reflect the illiquidity premium. This premium may be in the range 1% to 4% depending on the location and quality of the portfolio. This technique can also be applied to asset-level analysis where each asset is assessed against the required return in order to compensate the investor for the illiquidity of the asset (and also other risk metrics like covenant strength).


  1. Construction risk

Where a Fund enters into a construction agreement with a building contractor to construct and develop a property, the costs of the construction project can vary due to a range of factors including changes being required to be made to the scope and design of the project, increases in the costs of building materials, increases in taxes and other regulatory charges, changes in laws, regulations or government policies, unforeseen expenditure arising from defects in existing buildings on the property which are required to be rectified as part of the development project or unforeseen delays in the construction project.


Mitigating Construction Risk

Risk mitigation methods available to the investor take many forms from undertaking a thorough structural survey on acquisition to agreeing a lease where the tenant takes on the construction risk through to hiring a good contractor with a strong track record of finishing projects on time and on budget.


More information on Kylinprime Investment Fund is available here.


The material provided herein is only for marketing purposes and should not be construed as investment, legal, tax or other advice or a recommendation to purchase or sell any investment. You should not rely on any of the content in making an investment or other decision but should obtain relevant and specific professional advice and read the terms and conditions contained in the relevant offering memorandum carefully before any investment decision is made.