In-house switch to woo investors

Debt-burdened DNZ Property Fund is likely to bring its management functions in-house as part of plans to raise capital and seek an NZX listing.

The fund and its near $750 million of property assets are currently managed by DNZ Management Ltd, a company ultimately owned by directors Paul Duffy and Alastair Hasell.

The contract is regarded in property circles as a generous one, generating millions of dollars for Duffy and Hasell, and a potential impediment to enticing investors into stumping up the $150m the fund is said to be looking for to reduce $372m of debt.

Bringing management in-house is seen as a way of overcoming such objections but it is not clear how the change could be achieved.

DNZ Management also manages properties outside the fund, including properties owned by the personal interests of Duffy and Hasell.

This raises a range of possibilities including the fund acquiring DNZ Management, in which case its staff would become employees of the fund, generating fee income where they managed properties not belonging to the fund.

Another possibility would be for the fund to buy back the management contract and set up its own in-house management arm, probably employing some existing DNZ management staff.

But whatever method is adopted, it is unlikely to be cheap.

The management contract was renewed last year for 10 years, and may be renewed at DNZ Management's discretion for a further 10 years, meaning it could have 19 more years to run. So Hasell and Duffy are well-placed to negotiate favourable settlement terms.

DNZ Management's accounts show the company is highly profitable.

In the year to March 31, it had total revenue of $18.9m, of which $10.2m came from the fund. From this it produced a net profit of $7.8m and paid its owners dividends of $4m (2008 $12.5m).

By comparison, the fund made a profit before tax and capital losses of just $6.5m in the year to March and paid dividends of $6.7m.

Of key interest to investors would be how much Duffy and Hasell could get for relinquishing such a productive cash cow.

To find a comparable situation, investors would need to look across the Tasman, where two funds managed by Macquarie Bank have bought back their management contracts and others are likely to follow suit.

Although the amounts varied, a rough rule of thumb has emerged of 10 times base and performance fees, although the high prices paid have been controversial.

If that formula was applied here, it could see the fund paying DNZ Management about $40m.