Interval Funds

Aug 20. 13:21

White Paper Summary: Foreside's Product Spotlight on Interval and Tender Offer Funds

Product Spotlight: Interval and Tender Offer Funds

Non-traditional closed-end interval and tender offer funds share aspects of private funds and open-end funds, providing a broader investor base with access to alternative and illiquid investment strategies.

Interval and tender offer funds are closed-end registered investment companies that continuously offer shares at net asset value ("NAV") to an unlimited number of investors. They aren't traded on secondary markets; investors seeking liquidity redeem their shares at NAV to the funds themselves. Interval funds repurchase shares at set intervals, while tender offer funds repurchase shares at their discretion.

Typically both types of funds are registered under both the Investment Company Act of 1940, as amended (the "40 Act") and the Securities Act of 1933, as amended (the "Securities Act").

White Paper Summary: Foreside's Product Spotlight on Interval and Tender Offer Funds


Interval Fund Redemptions: Rule 23c-3

Rule 23c-3 lays out the framework for interval fund repurchase offers.

· Frequency: 3, 6, or 12 months, with discretionary repurchases no more than once every 2 years.

· Amount: 5% to 25% of outstanding shares.

· Pricing Date: The date that determines the NAV at repurchase, no later than 14 days after the repurchase request deadline.

· Repurchase Request Deadline: The date at which shareholders must submit requests to participate in repurchase events. Interval funds must notify shareholders of a repurchase event 21 to 42 days prior to this deadline.

· Repurchase Fees: No more than 2% of repurchase proceeds.

Interval funds must calculate NAV at least weekly, and daily for the 5 business days leading up to a repurchase request deadline. The difference in NAV from the purchase date to the repurchase date, less fees, determines an interval fund shareholder's realized gains or losses.


Tender Offer Fund Redemptions: Rule 13e-4

Rule 13e-4 gives tender offer funds much more flexibility on their repurchase terms, though it can limit liquidity for shareholders.

Tender offer funds commence a tender offer (repurchase offer) by delivering an Offer to Purchase to shareholders, which discloses what is being offered and why, the expiration date, approximate repurchase price, and any other stipulations. They then complete Schedule TO and file all documents related to the repurchase offer with the SEC.


Interval Funds vs. Tender Offer Funds

White Paper Summary: Foreside's Product Spotlight on Interval and Tender Offer Funds

White Paper Summary: Foreside's Product Spotlight on Interval and Tender Offer Funds


Launching Tender Offer and Interval Funds

Launching either of these funds is fairly unique relative to more common fund structures, and the fund service providers (such as the custodian, administrator and transfer agent) also play unique roles.

White Paper Summary: Foreside's Product Spotlight on Interval and Tender Offer Funds


· Interval and tender offer funds are formed as a Statutory or Business Trust with a declaration of trust and corporate bylaws.

· Managed by a Board of Trustees, the majority of whom must be independent from the fund or its investment adviser.

· Unlike open-end funds like mutual funds and ETFs, which can operate within a series trust, each interval or tender offer fund must file its own registration statement as a new legal entity with seed capital of at least $100,000.

· Interval and tender offer funds must wait for the SEC's declaration of effectiveness to operate, usually 90 to 120 days after filing their registration statement.


Fund Service Providers

· Adviser: Interval and tender offer funds hire the investment adviser (typically the asset manager that launches the fund), registered as an investment adviser under the Investment Advisers Act of 1940, to provide portfolio management and other advisory services to the Fund. The investment advisory agreement sets out compensation for the adviser, annual approval requirements after the initial two years of fund operations, termination requirements, and other rules under Section 15(c) of the Investment Company Act.

· Principal Underwriter: These are distributors who must be registered as broker-dealers with the SEC and be members of FINRA. Section 15(c) also lays out rules for the principal underwriting agreement.

· Legal Counsel: Interval and tender offer funds hire legal counsel for support on a range of legal, compliance, and operational areas. While the same firm may provide counsel to both the adviser and the fund, these services are offered independently and are governed by separate agreements.

· Administrator: The administrator is responsible for back-office operations of interval and tender offer funds, including fund accounting, preparing financial statements, determining NAV, and handling SEC filings. The administrators work closely with each fund's advisor and auditor to ensure compliant valuation.

· Transfer Agent: Transfer agents maintain shareholder records pertaining to ownership and transactions, and also handle the transfer of currency (whether through investments, dividend disbursements, or share repurchases).

· Custodian: Custodians are typically banks that hold a fund's securities and assets in a compliant manner.

· Auditor: Interval and tender offer funds must retain an independent registered public accounting firm in accordance with Section 32 of the Investment Company Act.


Key Benefits

· Offer retail investors access to alternative and illiquid investment strategies.

· Lighter liquidity requirements allow managers to hold a larger share of higher-yield illiquid assets for longer.


Key Challenges

· Distributing to retail investors invites more regulatory scrutiny, and more reporting, than private fund managers may be accustomed to.

· Most financial intermediaries (brokerage platforms) aren't set up to distribute interval and tender offer funds because they're not designed to support the trade settlement features of share redemptions.


Investor Perspective

Interval and tender offer funds offer retail investors access to a range of strategies previously restricted to private equity firms, accredited investors, and other financial institutions - such as structured credit, real estate, infrastructure, and other alternative and illiquid assets.

Investors should familiarize themselves with the differences inherent in interval and tender offer funds – particularly the fact that they can't redeem shares daily, whether to the funds themselves or on exchanges. However, for investors seeking low volatility and strong yields over the long term, interval and tender offer funds can provide attractive exposure to previously inaccessible private market strategies.


Source

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