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, and this fund is still pending effectiveness with the SEC.

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.

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Three Types of Interval Fund Conversions

Three funds in the process of converting to interval fund provide examples of three different fund conversion archetypes.  Griffin Capital is using its recently launched interval fund to acquire its BDC.  VII Peaks is directly converting its BDC to a new interval fund.  Pathway Energy Infrastructure Management is converting an unlisted closed end fund.

Griffin Capital: Merger Transaction

Griffin Capital is using another interval fund that it Sponsors to acquire its BDC. Factright covered this transaction in detail:

Once this transaction is complete, the investors in the BDC will hold Class F Shares in the Griffin Institutional Access Credit Fund, an interval fund.  Investment in an interval fund is subject to structural differences as compared to a BDC. Additionally, while both funds have similar investment objectives, Griffin Credit has a broad credit focused investment mandate, of which the BDC’s lower middle market directly originated loans are just one sleeve.

Shareholders in Griffin’s BDC approved this transaction earlier this month.

VII Peaks: BDC to Interval Fund Conversion

VII Peaks converts its BDC to interval fund

Shareholders in VII Peaks Co-Optivist Income BDC II voted to approve conversion of the BDC to an interval fund on December 28, 2016.

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The Next Evolution in Credit Products

The latest issue of Private Debt Investor includes an excellent article on interval funds in the broader context of credit products for investors.   The article cites data from Interval Fund Tracker, and includes interviews with several interval fund managers. It notes that interval funds are able to provide enhanced  yield while providing quarterly liquidity.   Additionally, the article discusses the role of credit interval funds in asset allocation.

According to Brook Taube at Medley Management(manager of Sierra Total Return Fund):

Access to private credit can help satisfy investors’ demand for yield. The fact that the [interval] fund offers liquidity on a quarterly basis makes it an attractive structure for retail investors.

According to Michael Reisner, co-chairman and co-chief executive at CION(manager of the Cion Ares Diversified Credit Fund):

If you look at BDCs as sector-specific products – eg, US mid-market – credit interval funds like ours are more diversified and a core holding, and should be the next evolution in credit products.

According to Marc Yaklofsky, senior vice-president and spokesman at FS Investments(manager of the FS Total Return Fund):

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Versus Capital Launches Another Interval Fund

The Versus Capital’s new real assets interval fund was declared effective by the SEC on August 17, 2017. Versus Capital Real Assets Fund, LLC is seeking to raise $450 million in a continuous offering. Minimum initial investment is $10 million(RIAs can aggregate accounts to get to the minimum). The fund will have one share class. and the management fee will be 1.50% of net assets.

Versus Capital is familiar with the interval fund space. It also manages Versus Capital Multi-Manager Real Estate Income Fund LLC, an investment company with $1.7 billion in assets. See Active Interval Funds for more information on this fund.

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The Investment Company Act of 1940: 77 Years Later

On this day in 1940, President Roosevelt signed the Investment Company Act of 1940.  Previously, both houses of congress had approved the ’40 Act unanimously. The ’40 Act, is the primary source of regulations for the multi-trillion dollar investment industry. The ’40 act defined and regulated investment companies, and provides investors with protections against conflicts of interest, misappropriation of funds, excessive fees, and undisclosed risks.

As he signed the bill, President Roosevelt declared:

We have come a long way since the bleak days of 1929…. I have great hopes that the act which I have signed today will enable the investment trust industry to fulfill its basic purpose as a vehicle to diversify the small investors risk.

What is a ’40 Act Fund?

The investment companies that the 1940 Act protections apply to are known as 1940 Act Funds, or ’40 Act Funds Broadly speaking, there are three types of  ’40 Act Funds: Closed End Funds, Open End Funds, and Unit Investment Trusts. Open end funds and closed end funds are the most common type of

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Interval Fund Service Providers

Interval funds rely on a variety of third party fund service providers in order to operate.  An administrator oversees the operational performance ensuring it complies with regulatory requirements. An independent accounting firm performs annual audits and certifies the fund’s financial statements. The interval fund transfer agent keeps ownership records, and handles transaction processing. A CSV file with information on service providers for all active interval funds is available at the bottom of this post.

Interval Fund Transfer Agent Market Share

Several users of this site have asked about interval fund transfer agents. DST Systems leads the market, and currently serves as transfer agent for 26% of active interval funds.  See this whitepaper that DST Systems recently produced on exploring new product structures. UMB Services serves as transfer agent for 21% of interval funds. UMB Services recently wrote about its turnkey interval fund solutions in HedgeWeek.

The following chart summarizes interval fund transfer agent market share, as of August 2017:

 

Interval Fund Transfer Agents

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Pathway Energy Infrastructure Converts to Interval Fund

On July 26, 2017, Pathway Energy Infrastructure’s board of directors approved the Company’s plan to convert to an interval fund. The change of this fundamental policy will be submitted to shareholders for a vote in a forthcoming proxy. The Company is also making adjustements to its investment strategy to focus on broader infrastructure opportunities. The new Company name will be “Pathway Capital Opportunity Fund.” Shareholders will need to vote on the change in an investment strategy as well. Details on the new structure and strategy are included in a draft registration statement

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Blackstone Prepares For Interval Fund Launch

TweetBlackstone/GSO registered a new interval fund on June 30. The Blackstone/GSO Floating Rate Enhanced Income Fund intends to follow a familiar credit strategy, focused

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RBC Subsidiary Launches Reinsurance Fund

TweetThe SEC declared the registration statement effective for The City National Rochdale Select Strategies Fund(CNRLX ) on June 22, 2017. CNRLX is seeking to

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