Interval Funds vs. Tender Offer Funds

For most investors, the differences between interval funds and tender offer funds are so subtle as to be negligible. However, for those interested in closely monitoring both the liquidity of their portfolios and the value-maximizing capabilities of alternative investments, these distinctions are important.

Interval funds and tender offer funds are both SEC-registered investment companies that continuously offer shares, don’t trade on a secondary market, and limit the repurchase of shares to certain thresholds and intervals throughout the year.

The term “tender offer” refers simply to a company’s filed statement letting shareholders know they’re willing to redeem shares for cash. Many types of companies issue tender offers, including both interval funds and tender offer funds. Just as with the term “closed-end fund,” the nomenclature is largely arbitrary.

The key difference: interval funds have more flexibility in the process of selling shares, while tender offer funds have more flexibility in the process of buying them back.

INTERVAL FUNDS HAVE MORE FLEXIBILITY IN SHARE OFFERING

Both interval funds and tender offer funds sell their shares continuously. This means that investors can buy shares directly from the fund at any time during the year, and more shares can be created as the fund’s asset pool grows. However, once a tender offer fund has gone “effective” – that is, it has begun selling its shares – its ability to modify the shares it offers decreases considerably. In order to offer a new share class or modify an existing one, a tender offer fund must file a POS 8-C form and wait for its approval with the SEC. This process takes time, and it can lead to missed opportunities.

Interval funds, on the other hand, are able to make quickly changes to their operational structure and share offerings after they begin selling shares and buying securities by filing a 486BPOS form. This “post-effective amendment” automatically goes into effect and doesn’t require a lengthy review from the SEC. This allows interval funds to be more nimble in addressing economic opportunities and tailoring their offerings to potential new investor pools.

TENDER OFFER FUNDS HAVE MORE FLEXIBILITY IN SHARE REDEMPTION

Interval funds are more restricted than tender offer funds in how they buy back their shares from investors. The process of redeeming interval fund shares for cash is governed by Section 23c-3 of the Investment Company Act of 1940. This section requires interval funds to adopt a fundamental policy governing exactly what dates they will offer repurchases and the interval between repurchases – which can be three, six, or twelve months. The section also requires that interval funds offer to repurchase between 5% and 25% of total outstanding shares

The share redemption process for tender offer funds is governed by Rule 13e-4 of the Exchange Act of 1933. This key difference gives tender offer funds more flexibility in how frequently and to what threshold of total shares they can offer redemptions, in exchange for a more bureaucratically onerous filing process.

This cues up the key distinction between interval funds and tender offer funds: tender offer funds can choose to offer share redemptions at any time and for any number of shares. These decisions are made at the discretion of the fund’s board, which must vote on the details of every tender offer the fund makes.

Once a tender offer fund board has decided to issue a redemption offer, they must file a Schedule TO form with the SEC and provide notice of the offer to shareholders. Schedule TO is where the time-consuming nature of tender offer funds arises – the form must include:

· A summary term sheet, with certain fundamental information about the fund

· The full terms of the tender offer, including, among other things, the amount to be repurchased, how long shareholders have to accept the offer, any fees they’ll charge, and how and when redeemed cash will be paid

· Disclosure of relevant transactions or significant events in the past two years

· The purpose of the tender offer

· The source and amount of the cash to be paid out to shareholders

· A list of all the fund’s advisors and solicitors

· Audited financial statements for the last two fiscal years, unaudited statements for the most recent quarter, and certain other specific financial data

Because this process can be arduous, most tender offer funds offer regular redemptions every three, six, or twelve months to streamline filing.

Photo by Kelly Sikkema

TENDER OFFER FUNDS HAVE NO LIQUIDITY REQUIREMENTS

Though the periodic repurchase structure of both interval funds and tender offer funds makes them ideal for holding illiquid assets, interval funds still have some baseline liquidity requirements. Though, for most of the year, neither fund type has any restriction on the percentage of assets that can be bound up in illiquid investments, interval funds must provide a small amount of liquidity during redemption periods. This amounts to the percent of total assets that could be redeemed – if the fund offers redemption of up to 10% of shares, it must hold 10% of its assets in liquid investments during repurchase periods.

Tender offer funds, on the other hand, have no such requirement. Rule 13e-4 only requires them to redeem shares “promptly,” which means some tender offer funds will only fully cash out shares after several months of unwinding their holdings to meet the requested repurchase amount. This can be ideal for highly illiquid investments like hedge fund shares, which can require several time-consuming steps to redeem for cash once a redemption has been requested.

Both interval funds and tender offer funds offer a streamlined and accessible path to liquidity premium exposure and alternative asset investment. Depending on whether potential investors value flexibility in how quickly funds can modify offerings or a greater buffer in the process of redeeming shares, either fund may be a more suitable structure to fit their needs.