Intermittent partial liquidity through regular repurchases is the defining feature of interval funds.
Under the a regulation known as 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.
As more retail investors add alternative investments to their portfolios, more financial advisors are coming to learn the structural advantages of interval funds. Many financial advisors and allocators are unwilling to tolerate long term lockups common in private placement funds. Long term lockups might be completely unsuitable for smaller retail investors. With an interval fund, a retail investor can gain exposure to portfolio diversifying investments, without completely sacrificing liquidity.
Yet partial liquidity is not a complete panacea. If too many investors seek to exit at the same time, then the fund manager will prorate redemptions. When a fund prorates its tender offers, an investor can only exit part of their position with each repurchase.
During times of market turmoil, a lot of interval funds will have to prorate their repurchases. In some cases, this actually has an advantage from an investor psychology standpoint. During the 2008 financial crisis, most interval funds recovered early losses, so investors that held on through the volatility did much better than those that exited. Yet proper cash flow planning is key. Financial advisors need to make sure their clients understand the subtleties of interval fund liquidity.
For this article, we reviewed the most recent disclosure on completed repurchase offers for all active interval funds with at least one year of operating history. The vast majority of interval funds reported that they were repurchasing all shares tendered by shareholders. However there is wide variation between different interval funds, and some have needed to prorate repurchases.
Interval Fund Liquidity
Most interval funds report detailed information including both the number of shares tendered and the number of shares actually repurchased. However roughly 22% of funds reported only the number of shares actually repurchased, without providing any details on the number of shares submitted for repurchase, or if there had been proration. Overall, 68% of interval funds disclosed that they had repurchased all tendered shares in the most recent period. In contrast, just under 10% reported that they needed to prorate redemptions because the number of requests received exceeded the size of their repurchase offer.
Interval Funds Prorating Repurchase Requests
This table shows interval funds that have reported prorating their most recent repurchases:
|Fund||Category||Percent of tendered shares repurchased|
|Bluerock Total Income Plus Real Estate Fund||Real Estate||55%|
|Versus Cap Multi-Manager Real Estate Income Fund||Real Estate||41%|
|Apollo Diversified Credit Fund||Credit||41%|
|CIM Real Assets & Credit Fund||Credit||Not specified.|
|RiverNorth Capital and Income Fund||Credit||11%|
|BlackRock Enhanced Government Fund||Credit||7%|
RiverNorth Capital and Income Fund(RSF), and BlackRock Enhanced Government Fund EGF are both traded on public exchanges, so investors can sell their shares at a slight discount on the open market.
For the other interval funds with prorated redemptions, there is no active secondary market. Bluerock Total Income Plus Real Estate Fund, Versus Capital Multi-Manager Real Estate Income Fund, Apollo Diversified Credit Fund are all still actively raising capital and making new investments. The Wildermuth Fund has approved a plan of liquidation, and consequently it suspended repurchases. Investors will receive distributions as it completes the sale of its portfolio.
In most cases, if an investor has no immediate need for liquidity, will be best off exiting slowly over several quarters. However, if an investor has an immediate need for liquidity, they still have options. Alternative Liquidity Capital will purchase shares in a variety of alternative investment funds. Investors that need to quickly liquidate their shares in any hard to exit funds should contact [email protected] for details on how they can sell their shares.