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.
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.
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.
What we’ve been reading lately:
Interval Fund Mechanics: Using Lock up to limit risks (FactRight)
Stone Ridge Reinsurance Assets hit $5.5 billion (Seeking Alpha)
Interval Funds Are Having Their Moment (Barrons)
Interval Funds Are Proving a Hit With Advisors（Financial Advisor IQ)
New Investment Vehicle (Inside Indiana Business)
NT REIT and BDC Sponsors Launching Interval Funds (Interval Fund Tracker)
Non-traded REIT and BDC sponsors are entering the interval fund space en masse. This was a key trend in 2016 and it is continuing in 2017. Here is a partial list of Non-traded REIT and BDC Sponsors with interval funds in various stages of launch.