02/25/2009

Principal Fund Mulls Offerings to Raise Cash

Principal Global is exploring the possibility of selling properties in order to honor redemption requests from investors in its open-end fund.

The advisor is talking to brokers across the country about listing $1 billion to $2 billion of its holdings. Principal evidently is in the early stages of discussions, and still hasn't awarded any listings.

Principal, the asset-management arm of insurer Principal Financial, has acquired properties since 1982 via Principal U.S. Property Account, which had 149 investments valued at $6.9 billion at yearend. The portfolio has large concentrations of office (41%), multi-family (21%), retail (20%) and industrial (16%) properties. Principal also operates closed-ends funds, which are not affected by plans for the open-end vehicle.

The fund posted an 11% decline in the fourth quarter, as property values sagged. In September it delayed the repayment of redemption requests, saying they would be honored on a pro-rata basis as cash became available. Late last year, Principal laid off acquisitions staffers and closed its Chicago office, signaling that it doesn't intend to be an active buyer in the near term.

Many operators of open-end funds are being forced to consider property sales in the face of heightened redemption requests. Investors squeezed by losses on a variety of investments have stepped up requests for refunds.

Dispositions can be a costly way to raise cash, given the plunge in property values. For example, the open-end Lion Properties Fund, operated by ING Clarion Partners, recently sold three underperforming office properties for 45% less than it paid for them in 2005 and 2006. The buzz is that the hefty discount raised alarms for remaining investors in the vehicle, prompting ING Clarion to reconsider further dispositions.

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