Interval Funds

What are Interval Funds?

An interval fund is a closed-end fund that is not listed on an exchange that periodically offers to repurchase a limited percentage of outstanding shares. Interval funds provide investors with access to less liquid investment strategies in an attempt to enhance risk-adjusted returns and can be used as an alternative source of return and/or income.

Interval Funds Explained

  • An interval fund is a closed-end registered fund that offers its shares at net asset value (NAV), usually on a continuous basis.
  • The shares are offered to an unlimited number of investors but are not traded on secondary markets.
  • Interval Funds may trade daily at NAV using a ticker symbol.
  • Interval funds periodically offer to repurchase a limited percentage of outstanding shares.
  • The liquidity characteristics allow managers greater flexibility to invest in less liquid securities, including private markets across venture, equity, credit or real estate.
  • These investments may come with lower fees and less complicated tax structures.
  • Investors typically gain access to niche or difficult to access strategies and may enhance risk-adjusted returns or generate alternative sources of return and/or income.

Regulation and Liquidity

Interval Funds and the Investment Company Act of 1940 (the “1940 Act”)

Private investments across real estate, credit, equity, or infrastructure are typically locked-in, illiquid investments with time horizons of 7 to 10 years. The secondaries marketplace provides investors with an exit option allowing the sale of a fund prior to the end of its holding period. Over the past several years, the secondary market has evolved significantly, providing LP investors with opportunities to actively rebalance portfolios across sectors, investment horizons, GP, liquidity, or capital call schedules.

Primary Market (Key Characteristics)

The 1940 Act is an act of Congress that regulates investment companies engaged in the business of investing, owning or trading securities. This includes investment vehicles such as mutual funds, ETFs, closed end funds (interval funds) and unit investment trusts.

One of the primary purposes of the 1940 Act is to protect investors by ensuring proper disclosure of investment objectives and risks associated with owning the underlying securities held by the investment vehicles.

Historically, investment vehicles that focus on public markets such as equities and bonds are 1940 Act registered while investment vehicles that focus on private market strategies such as direct lending, real estate, venture capital or private equity are generally not 1940 Act registered.

A key differentiator amongst investment vehicles is the liquidity offered by the fund. ETFs are the most liquid offering intra-day liquidity, followed by mutual funds offering daily liquidity. Interval funds are mandated by regulation to offer periodic liquidity for a pre-specified amount. Tender offer funds provide liquidity on a discretionary basis and for a discretionary amount. Both LPs and LLC typically offer no liquidity and often require lock up periods averaging 7 years or longer.

Secondaries Market (Key Characteristics)

A Secondaries fund invests across multiple GP funds across strategies or sectors, often gaining exposure to dozens of portfolio companies

Fund purchases interest from existing LP investor, allowing initial LP to exit, creating liquidity for an illiquid investment

Transaction price between fund and existing LP often occurs at a discount to NAV, providing immediate IRR gain and downside protection for fund

Shortens payback period, with exposure to more mature portfolio companies

Mitigates blind pool risk, minimizes J-curve exposure

Assume the obligation to provide funding for future capital calls but also gain the right to receive future distributions

Figure 1. Liquidity and Regulation Comparison, May 2024.

Key Characteristics of Interval Funds

Within private market strategies, interval funds may offer accredited investors access to strategies with lower minimums (typically $10,000 to $25,000) versus existing funds which typically require accreditation and very high minimums (often reaching $5mm).

Interval funds also provide enhanced liquidity for private market strategies. All funds offer periodic repurchases, most are quarterly while others offer semi-annual or annual repurchases. A typical repurchase will redeem a minimum of 5% of the fund. If redemption requests are oversubscribed, the fund will process the redemptions on a pro-rata basis ensuring that all investors are provided with some level of liquidity. Board may vote to adjust repurchase level if oversubscribed.

Illiquid securities are restricted to 15% in traditional funds, versus no max limit in private funds, whereas interval funds are generally range bound between 75%-95%. Interval funds are required to maintain ‘liquid assets’ equal to the amount of repurchase offered at each interval period.

Figure 2. Key Characteristics and Comparison

Growth of Interval Funds

Interval funds are designed to provide investors with access to less liquid or illiquid investments.

Interval funds sit at the intersection of private and public markets providing access to private markets strategies while also offering enhanced liquidity features via pre-specified, periodic repurchases.

With the tremendous growth in private market assets, interval funds may grow in tandem.

Since managers can specifically plan for redemptions and cash outflows, they can buy and hold illiquid assets without fear that an investor will withdraw capital unexpectedly and require a forced or unexpected asset sale.

For private market equity strategies, investors benefit by avoiding any J-curve exposure while potentially gaining exposure to a shorter duration asset.

The total number of interval funds is over 90, up from near 50, five years ago.

For 2024, the expected growth rate is forecast to be above 40% with more than 40 funds currently registering with the SEC.

Credit strategies have dominated the type of interval funds, but the interval funds in registration with the SEC and more balanced across private equity, real assets, and credit.

Figure 3. Interval Funds: Number of Funds Available

Figure 4. Interval Funds: Assets Under Management ($Bil)

Figure 5. Interval Funds by Strategy

Axxes Capital - Dispersion of Manager Returns
Source: Pitchbook, Custom Benchmark, Secondaries, Vintage 2000-2023, returns by IRR, 2023 Q2
Important Disclosure Information

This document (together with any related materials or links, the “Materials”) does not constitute an offer to sell, or a solicitation of an offer to buy, any security or instrument, or a solicitation of interest in any Axxes vehicle, account or strategy. If any such offer is made, it will only be by means of an offering memorandum or prospectus, which would contain material information including certain risks of investing including, but not limited to, loss of all or a significant portion of the investment due to leveraging, short-selling, or other speculative practices, lack of liquidity and volatility of returns. Nothing herein constitutes investment advice or recommendations and should not be relied upon as a basis for making an investment decision.

Past performance does not predict future returns. There can be no assurance that any Axxes fund or investment will achieve its objectives or avoid substantial losses. Any investment involves a high degree of risk and you may not get back the amount originally invested. This material is not to be reproduced or distributed to any other persons (other than professional advisors of the persons receiving this material) and is intended solely for the use of the persons to whom it has been delivered. Alternative investments often are speculative, typically have higher fees than traditional investments, often include a high degree of risk and are appropriate only for eligible, long-term investors who are willing to forgo liquidity and put capital at risk for an indefinite period of time. They may be highly illiquid and can engage in leverage and other speculative practices that may increase volatility and risk of loss.

Recent Market Events Risk. Local, regional, or global events such as war (e.g., Russia/Ukraine), acts of terrorism, public health issues like pandemics or epidemics (e.g., COVID-19), recessions, or other economic, political and global macro factors and events could lead to a substantial economic downturn or recession in the U.S. and global economies and have a significant impact on a fund and its investments. The recovery from such downturns is uncertain and may last for an extended period of time or result in significant volatility, and many of the risks discussed herein associated with an investment in a fund may be increased.

Opinions. Opinions expressed reflect the current opinions of Axxes Capital as of April 2024 and are based on Axxes’ opinions of the current market environment, which is subject to change. Certain information contained in the materials discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Further, opinions expressed herein may differ from the opinions expressed by a Dealer and/or other businesses / affiliates of a Dealer. This is not a “research report” as defined by FINRA Rule 2241 or a “debt research report” as defined by FINRA Rule 2242 and was not prepared by the Research Departments of a Dealer or its affiliates.

Third Party Information. Certain information contained in this material has been obtained from sources outside of Axxes, which in certain cases have not been updated through the date hereof. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and none of Blackstone, its funds, nor any of their affiliates takes any responsibility for, and has not independently verified, any such information.

Trends. There can be no assurances that any of the trends described herein will continue or will not reverse. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of, future events or results.

The information in this document has been prepared without taking into account individual objectives, financial situations or needs. It should not be relied upon as a substitute for financial or other specialist advice.