Why aren’t there more publicly traded interval funds?

Most publicly traded interval funds do not trade on an exchange. Many people in the industry speak of interval funds as if they are always non-traded. However it is possible for an interval fund to be publicly traded. Currently, of the ~40 active or and recently launched interval funds, the Blackrock Enhanced Government Fund (EGF) is the only one that is publicly traded. Or put differently, of the >500 publicly traded closed end funds, EGF is the only one that is structured as an interval fund. It offers to repurchase 5-25% of its shares annually, and charges a repurchase fee of 2%. Since it is an interval fund, the repurchase plan can be suspended only with shareholder approval.

Relative Value Fund Launches

The Relative Value Fund, an interval fund seeking to raise $100 million went effective on May 1, 2017

The Fund will use a multi-manager approach, investing variety of alternative investment strategies, in pursuit of an absolute return objective.

According to the registration statement:

Comparing The New Credit Funds

With a whole slew of credit interval funds hitting the market this year, its time to compare the basic structures and fee arrangements.  The chart below consists of funds that have been declared effective within the past year, all from familiar sponsors.  Within the broader category of credit, there are a lot of substrategies, but its no coincidence, that all of the Sponsors for these funds have marketed BDCs to retail investors in the past.

The Interval Fund Rule: Charting New Territory

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. 

Visualizing The Secular Shift in Retail Alternative Investments

As non-traded REITs and BDCs have shrunk, registrations of new interval funds have grown rapidly. Launches of interval funds have overtaken non-traded REITS and BDCs  (Source: SEC Filings)

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.

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