Interval funds may seem like a new concept, but they were originally created as a result of a SEC recommendations in its landmark 1992 study : “Protecting Investors: A Half Century of Investment Company Regulation.” This study concluded that the rigid delineation between “open end” funds, providing daily liquidity, and “closed end funds” , which do not offer daily liquidity, limited the ability of sponsors to offer innovative investment products to investors:
The Division has concluded it would be appropriate to provide the opportunity for investment companies to chart new territory between the two extremes of the open-end and closed-end forms, consistent with investor protection. >
As a result of this recommendation, the Rule 23c-3 under the 1940 Act, known as interval fund rule was adopted in 1993. Under the interval fund rule, closed end interval funds are required to offer to repurchase between 5% and 25% of shares at NAV at predetermined intervals(quarterly, semi-annually, or annually). The Fund is required to provide advanced notice to shareholders between 21 and 42 days in advance of repurchase offer . Interval Funds also file N-23c-3 with the SEC within 3 days of sending shareholder notification of a tender offer.
Interval funds are a type of continuously offered closed-end fund. Other closed end funds may have repurchases programs adopted in the board’s discretion. However, interval funds can only eliminate their repurchase plans with shareholder approval.
As noted in The Investment Lawyer:
As adopted, Rule 23c-3 requires interval funds to offer shareholders periodic repurchase offers where shares of the fund are repurchased at the then-current NAV. This feature of interval funds provides shareholders a certain amount of guaranteed liquidity and also avoids having fund shares being sold at a discount to NAV. At the same time, Rule 23c-3 provides fund sponsors with increased flexibility to pursue investment strategies involving less liquid investments since shareholder redemptions are limited to periodic intervals set by the fund’s board taking into consideration the recommendation of the fund sponsor.
The interval fund space never really took off in the 1990s. The funds that did launch tended to be focused in venture capital, participation loans, and municipal bonds. In 2015 asset managers started to rediscover the structure, and the number of interval funds nearly doubled by the beginning of 2017. Leveraged loan and institutional real estate strategies have proven especially popular.