Non-traditional closed-end interval and tender offer funds (collectively, closed-end funds) constitute an important segment of the investment industry. Closed-end funds’ regulatory and investment features straddle between private funds (e.g., private equity and hedge funds) and open-end funds (e.g., mutual funds and exchange-traded products). Their unique structure allows asset managers to deliver alternative and illiquid investment strategies to a broad investor base.
Interval and tender offer funds are closed-end registered investment companies that can continuously offer shares at net asset value (NAV) to an unlimited number of investors. Closed-end funds are not exchange listed and can provide investors liquidity through repurchases of their shares at NAV. For interval funds, repurchases are set at a predetermined frequency (every 3, 6, or 12 months); tender offer funds can conduct repurchases at their discretion.
Most often they are registered under both the Investment Company Act of 1940, as amended (Investment Company Act) and the Securities Act of 1933, as amended (Securities Act). However, some closed-end funds are not registered under the Securities Act and may raise capital through private placement transactions pursuant to Regulation D.
Closed-end funds differ from both traditional closed-end funds (traditional CEFs) that are publicly traded and open-end funds, e.g., mutual funds and exchange-traded products (ETPs). Traditional CEFs issue shares in an initial public offering. Thereafter, they do not continuously offer shares, and they publicly list the shares for trading on a stock exchange, requiring registration of those shares under the Securities Exchange Act of 1934, as amended (Exchange Act). While closed-end funds offer periodic liquidity through share repurchases, open-end funds are the most liquid investment company type that continuously offer shares. Open-end funds conduct daily repurchases for investor liquidity, with ETPs providing intraday investor liquidity.
Closed-end funds allow asset managers to efficiently manage investor redemptions with predetermined liquidity windows and therefore are better suited to hold illiquid or alternative investments that may have longer holding periods. In this respect, closed-end funds parallel private funds. However, private funds rely on exemptions from the Securities Act and Investment Company Act that restrict their investor base.
For example, section 3(c)(1) of the Investment Company Act exempts a fund from registration, but it requires investors to be “accredited investors” and caps the number of investors at 100. Section 3(c)(7) of the Investment Company Act is also available as an exemption from registration, but investors must be “qualified purchasers” (i.e., a person with at least $5 million in investments).
Closed-end funds are a blend in structure between private funds and open-end funds, and thus have attracted a range of asset managers seeking to access the unique investment wrapper. Private fund managers may have existing investment vehicles or portfolios that hold illiquid securities and are not conducive to the liquidity needed for an open-end fund. Additionally, offering restrictions under Section 3(c)(1) or Section 3(c)(7) may motivate private fund managers to investigate the suitability of the closed-end fund structure for reaching a broader and more retailbased investor.
On the other hand, open-end fund managers may wish to deploy a more illiquid investment portfolio or have greater portfolio control in meeting predetermined redemptions. In particular, closed-end funds are not subject to liquidity restrictions under Rule 22e-4 of the Investment Company Act. Under Rule 22e-4, open-end funds must adhere to their liquidity risk management program whereby, among other requirements, illiquid holdings (i.e., securities that cannot be sold in 7 days or less without significant devaluation) are constrained to 15% of net assets.
Closed-end funds are also being received better in the dealer and financial intermediary community and thus gaining recognition among investors. Closed-end funds are an attractive investment vehicle for investors that are comfortable with the more limited liquidity structure and are seeking portfolio diversification through access to private and alternative strategies. In most cases, closed-end funds’ investment minimums and investor eligibility standards are lower compared to private funds with similar strategies.
Download our white paper
Considering launching a closed-end fund interval or tender offer fund? Download our white paper for more information to help you choose the right path between interval funds versus tender offer funds.
Thiswhite paper distills closed-end funds’ regulatory framework and operational considerations for existing and prospective closed-end fund asset managers. We will guide you through their regulatory intricacies, offering comparisons between interval funds and tender offer funds along the way. Later we will connect their structure with an examination of how closed-end funds should be approached from a distribution perspective.
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How we help
Since 2005, we have been helping asset management firms achieve compliant distribution of their products, through the use of our broker-dealers. Interval funds require a broker-dealer to provide statutory distributor/legal underwriting, DTCC/NSCC fund sponsorship, and registered rep licensing to promote the fund.
ACA Foresidecan support your interval fund launch and will work with your compliance, marketing, and sales teams to review fund marketing material, engage in dealer/selling agreements, establish NSCC/AIP connectivity, license your business development staff, and consult with you to design an effective distribution strategy for your product. We can also work with the administrator or law firm of your choice, or provide introductions as needed.
Contact ustoday to find out how we can help your firm launch a new fund or convert an existing fund.
