A “closed-end fund”?
While an interval fund is technically a “closed-end fund” under the Investment Company Act of 1940, the term “closed-end” is in some ways a misnomer with respect to interval funds. Interval funds are continuously offered, and most interval funds in the market offer daily purchases (although there are some funds that offer their shares for purchase on a less frequent basis, like monthly or quarterly).
Unique liquidity feature
A unique aspect of interval funds is their liquidity feature. Under Rule 23c-3 of the 1940 Act, interval funds are required to make repurchase offers to their shareholders at set intervals. Under the rule, those intervals can be quarterly, semi-annually or annually. The overwhelming majority of interval funds make quarterly repurchase offers. Interval funds are required to offer to repurchase between 5% and 25% of the fund’s total common stock outstanding during each repurchase offer. The offer amount is determined by the board of the fund, and most interval funds in the market make offers to repurchase 5% of their common stock each quarter. During the period between the repurchase request deadline and the repurchase payment date, interval funds are required to hold liquid assets in an amount equal to the total value of the outstanding stock being offered for repurchase. When thinking through an investment strategy for an interval fund, accounting for this liquidity requirement is crucial.
Advantages for both fund sponsors and investors
For fund sponsors, the interval fund structure provides the advantage of employing alternative and more illiquid investment strategies in a publicly offered investment vehicle that allows access to a wider investor base. These strategies have historically been reserved for private fund structures. For investors, an interval fund grants access to private investments that may otherwise have been inaccessible due to investor suitability requirements of private funds. Additionally, interval funds typically allow for that access at significantly lower investment minimums.
Steps to take before launching an interval fund
As far as pre-launch timing goes, a 180-day target is reasonable and is mostly centered on the SEC registration process. Prior to filing the initial registration statement, the fund sponsor should take steps to ensure that its investment strategy is feasible for an interval fund structure from a 1940 Act compliance standpoint, a fund operational standpoint and a marketing standpoint. Fund sponsors will also want to think through seeding options. It’s important that a new fund has a good amount of capital at launch to ensure that there is enough of a runway for the fund to build a track record to attract assets.
Interval funds may struggle if they are not nimble enough to meet the liquidity requirements of the interval structure while still generating attractive returns or income, or if they do not allot enough internal resources to provide for the 1-3 years post-launch for the fund to reach scale.
The panel also included Nick Darsch, Senior VP at Ultimus Fund Solutions, and Kimberly Flynn, Managing Director at XA Investments