The structure of the interval fund sector is changing as it expands. Here are three key interval fund market themes to watch out for.

Giants Walk the Earth

At the end of 2022 there were 16 interval funds with net assets greater than $1 billion. Five years ago, there were only six funds with $1 billion in assets. With major firms such as Fidelity, Franklin Tempelton, and First Trust launching funds within the past year, its likely there will be many more large interval funds by the end of 2023. It usually takes a few years to reach critical mass, but it’s possible the new entrants will be able to raise assets faster.

The interval fund sector will be increasingly dominated by large asset management firms.  Some of these giants will enter the sector by launching new funds. Others will enter the space through M&A. 

M&A Activity Will Reshape Industry

Over the past few years there has been a whole slew of mergers in the alternative investments space. These mergers often take several years to have an industry impact.

In some cases, an investment manager that has traditionally focused on mutual funds has acquired a firm with an established alternative assets business. Franklin Tempelton’s acquisition of Benefit Street in 2019 fits this archetype. Franklin BSP Private Credit Fund was declared effective in October 2022. It will likely benefit from Franklin’s mutual fund distribution network as it starts to raise assets.

In other cases, a firm with an established institutional investments business will acquire an alternative asset manager with a well-developed retail distribution network. Apollo’s acquisition of Griffin in 2022, and Goldman Sachs’ acquisition of Resource Real Estate are two examples.

Any small or medium sized asset management firm with a successful interval fund strategy is a prime merger target. Acquisitive new entrants will have a major impact on the interval fund sector in 2023.

Interval Fund/REIT Hybrids

Product development teams at fund sponsors continue to find more ways to deliver alternative asset exposure to a broad audience by using the interval fund as a vehicle. Sometimes that means transcending traditional categories.

Most people think that REITs and interval funds as separate categories, but they can overlap. REITs are a product of tax law. Interval funds are a product of securities law.

Two funds that launched in 2022 are interval fund/REIT hybrids. In February 2022, Fundrise merged several private REITS into a newly formed interval fund/REIT hybrid with over $400 million in net assets. PIMCO launched the PIMCO Flexible Real Estate Income Fund in in November 2022. PIMCO has a well established distribution network, and already has several sizable interval funds, so the new fund will likely raise significant assets. Other real estate focused fund sponsors with existing funds and distribution networks may be interested in following in the footsteps of Fundrise and/or PIMCO.

This report on interval fund market themes is an excerpt from a report available to Premium Members. Not yet a Premium Member? Click here to learn more, or email jacob@intervalfundtracker.com with questions.