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Tender Offer and Interval Fund Registrations Continue to Outpace Non-Traded REITs and BDCs

Tender offer and interval funds have become the structure of choice for alternative asset managers. Nonetheless, a small group of REITs and BDCS continues to raise capital and play an important role in investor’s portfolios.



(Note: this chart includes only new funds registering shares for the first time, and excludes follow-on offerings. Additionally, funds that offer multiple share classes via a master feeder structure are treated as a single fund)






Fundraising in NT REITs and BDCs has mainly consisted of a small group of legacy funds, rather than newly launched funds. Non-Traded REIT fundraising has been dominated by Blackstone, which as over 50% market share. Many legacy non-traded REITs and BDCs have also continued to raise capital through follow on offerings. Yet new fund’s have been few and far between. In contrast, more and more asset managers are launching tender offer and interval funds. As more financial advisers and asset allocators get comfortable with these structures, the trend is likely to continue.

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Interval Fund Repurchase Offers

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). Frequency of repurchase offers varies depending on the liquidity of the underlying assets, and target investor base. The SEC requires funds to provide  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. (see Rule N-23c-3 under the 1940 act)

In practice, most interval funds conduct a repurchase offer quarterly. Here is what the data says:

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Growing Interval Funds , total Interval Fund Assets

Interval Fund Market: 2017Q4 Update

 

A robust pipeline of new interval fund registrations indicates continued growth is likely throughout 2018.   Total interval fund assets now exceed $23.8 billion. Total net assets for the sector grew 56% over the most recent 12 month period, to $19.9 billion. Although newly launched funds are gaining momentum, the sector is highly concentrated in the top 10 funds.

New Fund Registrations

Fund Name Registration Date Strategy
OFI Carlyle Global Private Credit Fund 12/15/2017 Credit
Tortoise Tax-Advantaged Essential Assets Interval Fund, Inc. 12/15/2017 Credit
PIMCO Flexible Municipal Income Fund 11/30/2017 Credit
Destra International & Event Driven Credit Fund 11/15/2017 Credit
Sierra Real Estate Fund 11/13/2017 Real Estate
Broadstone Real Estate Access Fund, Inc. 10/13/2017 Real Estate

Initial registration statements are a leading indicator of industry growth. Funds filing initial registration statements in late 2017 will usually begin raising capital by late 2018.

Six interval funds filed initial registration statements with the SEC in 2017Q4, compared to nine funds in 2016Q4. PIMCO registered the Flexible Municipal Income Fund, its second interval fund.   PIMCO Flexible Credit Income Fund, launched in February 2017 and had net assets of $141.7 million as of September 30.  Medley Management registered Sierra Real Estate Fund, its third interval fund. Medley Management’s Sierra Total return fund launched in July 2017. The Sierra Opportunity Fund is still pending effectiveness with the SEC.  Four managers without any offerings currently structured as interval funds registered new funds in 2017Q4.  Notable additions to the lineup include Carlyle and Broadstone,

There are currently 23 interval funds pending registration with the SEC.  Credit strategies are by far the most popular among new entrants:

As in the prior quarter, creation of new interval funds has outpaced the creation of non-traded REITs and BDCs. Nonetheless, the new non-traded REIT entrants in 2017Q4 include several larger asset managers: Nuveen Global cities REIT,  Starwood Real Estate Income Trust, and Rodin Income Trust.

 

Blackstone dominated 2017 non-traded REIT sales, with approximately one-third of market share by sales. Meanwhile, Blackstone also registered an interval fund earlier in 2017.

New Funds Declared Effective

Fund Name Effective Date Investment Strategy Maximum Offering Proceeds
Angel Oak Strategic Credit Fund 12/1/2017 Credit $250,000,000
Pathway Capital Opportunity Fund 10/30/2017 Other $773,393,896
FS Credit Income Fund 10/3/2017 Credit $2,000,000,000

The SEC declared effective 3 interval fund registrations statements in 2017Q4.  These new funds bring over $3 billion in new shares for sale into the market. Note that Pathway Capital Opportunity Fund is formerly known as Pathway Energy Infrastructure Fund, restructured from a closed end fund focused on energy infrastructure.

Growth in Total Interval Fund Assets

The recent growth in the interval fund sector reflects increased investor demand for yield products and acceptance of the structure.  Total interval fund net assets equaled $19.9  billion, up approximately 56%, from $12.7 billion just 12 months ago.  Most interval funds use relatively moderate leverage or maintain net cash positions.  Total gross interval fund assets totaled $23.8 billion as of the most recent filings.

PIMCO Interval Fund

Where PIMCO Sees Attractive Opportunities

PIMCO recently launched the Flexible Credit Income Fund(PFLEX). The fund has a a flexible mandate to capitalize on a variety of credit market opportunities. On the fund’s website, PIMCO describes the opportunities it is expecting to find:

Q: Where do you see attractive opportunities for the Flexible Credit Income Fund today and in the future?
A: While we believe valuations on many traditional credit sectors (investment grade, high yield and bank loans) are relatively fair at current levels, we are seeing several robust opportunities today.
First, despite strong performance in U.S. real estate markets since the financial crisis, we continue to find value in both public and private mortgage debt, especially on the residential side. These opportunities include traditional legacy non-agency mortgage-backed securities (MBS), legacy loans that Fannie Mae and Freddie Mac continue to dispose, and opportunities to purchase newer origination non-agency mortgage loans directly. (We see many loans being made at significantly high interest rates given the regulatory burden associated with making non-traditional loans.)

Griffin Capital : How Interval Funds Operate

How Interval Funds Operate

A key defining feature of an interval fund is that they are regulated under the 1940 Act.  This provides critical protections for investors.  DLA Piper released a handbook discussing the 1940 Act and related statues and regulations that apply to and otherwise bear on the interval fund operations. The information covers the key regulatory framework for 40 Act Funds, as well as the impact of recent regulatory changes.
According to DLA Piper:

 ….an interval fund can be a suitable vehicle in which to run “alternative” strategies – i.e., strategies that are designed to produce returns that are not highly correlated to the broader stock and bond markets. Interval funds also mesh well with certain noteworthy regulatory initiatives – for example, FINRA’s new customer statement rule (RN 15-02), and the Department of Labor’s fiduciary rule and accompanying BIC exemption – making them attractive vehicles for use by independent broker dealers and other financial advisors that must operate within the complex regulatory environment.

Additionally, Griffin Capital, which operates the Institutional Access Credit Fund, and the Institutional Access Real Estate Fund…

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