The market for retail alternative investments is in the midst of a dramatic secular shift. High commission non-traded REITs and BDCs were a core revenue source for many smaller broker-dealers. However sales have collapsed. Lightstone recently laid off most of its sales staff and closed its non-traded REITs. Lightstone will likely be launching Reg D and Reg A+ offerings. Inland has struggled to raise capital for its REIT although it continues to dominate the 1031 Exchange space, and is in the process of launching a private closed end fund. FS Investments and Griffin Capital have both diversified their product suites away from traditional retail alternative investments, into newer product structures designed to achieve the similar objectives.
Non-traded REITs and BDCs peaked right before the ARCP accounting scandal which ultimately led to the collapse of the Nick Schorsch empire. This led to many broker-dealers suspending sales from anything affiliated with then largest non-traded product Sponsor. Finra 15-02, which increased the transparency on client statements, made it harder for advisors to get away with charging the traditional 10% sales load. The looming fiduciary standard, which required broker-dealers to act in the best interest of clients, also led many broker-dealers to suspend or slow down the sales of high commission products.
Nonetheless, investor demand for high income products and alternative investments isn’t going away. Some non-traded REITs and BDCs are altering their fee structures to be appropriate for fiduciaries. Interval funds can package investment strategies that satisfy investor need for income and/or exposure to an illiquidity premium. The interval fund structure offer a less extreme lockup than most non-traded REITs and BDCs, and may be an option for investors who want just a bit of illiquidity. Further, interval funds have lower minimum investments than most other retail alts. Its unlikely that commissions from interval funds will replace the broker-dealer revenue lost from BDCs and REITs, but interval funds will be used by advisors to meet important asset allocation goals. Many interval funds are selling more in the RIA channel than in the broker dealer channel
Enter the Interval Fund
Asset managers see interval funds as a key growth area<. The dominant “traditional” non-traded REIT and BDC Sponsors have entered the interval fund space, and de-emphasized traditional retail alt products. Griffin Capital launched its Institutional Access Real Estate Fund in 2014, and its Credit Fund in 2017. FS Investments(formerly Franklin Square) launched the Energy Total Return Fund in 2017. FS Diversified Credit Fund, pending effectiveness was initially registered in 2016. Publicly traded sponsors such as Colony Northstar, and Medley Management have both noted the importance of interval funds going forward. Since the beginning of 2016, registrations of new interval funds have exceeded registrations of non-traded REITs and non-traded BDCs. This chart illustrates the shifting product landscape for retail alternative investments:
For information on interval funds in the launch process, see Public Listings Update.