Product innovation in the registered fund space has allowed individual investors access to private market investments (private equity, private credit, real assets, and certain hedge fund strategies) that were once only available to institutions and ultra-high net worth families. One advantage that registered funds provide over traditional structures is greater liquidity through share redemption programs. However, the level of liquidity varies by the specific structure. Redemption options range from daily for alternative strategy mutual funds to quarterly or annual for closed-end interval funds, tender offer funds, non-traded real estate investment trusts (REITs) and business development companies (BDCs). Investors should fully understand the nuances of the redemption options offered by a fund prior to investing.
Liquidity options range in frequency and amount
Interval funds provide limited liquidity through share repurchase (tender) programs offered periodically: every three, six, or twelve months. The frequency of redemptions is determined by the board, and shareholders will be notified of upcoming repurchase offers. The price that shareholders will receive will be based on the per share net asset value (NAV) determined as of a specific date. Interval funds are permitted to deduct a redemption fee not to exceed 2% of proceeds, so this is something to look out for in a fund prospectus. Redemptions are limited to a certain percentage of shares outstanding, generally between 5% and 25%, and an investor may not be able to redeem shares if a fund has already redeemed the maximum amount allowed per period.
Tender offer funds are similar to interval funds in that they can provide periodic liquidity through share repurchase plans. However, the primary difference is that tender offer funds are not required to establish the amount and frequency of share redemptions in advance. The timing and amount are at the discretion of the board. Tender offer funds tend to own a greater percentage of private investments than interval funds, so this flexible redemption option allows a fund to manage these assets without being required to liquidate holdings to meet redemption requests.
Traditional non-traded REITs and BDCs that have a finite lifecycle and a liquidity event at termination tend to offer quarterly share redemption plans at up to 5% of the number of shares outstanding. Many non-traded REITs have a contingent deferred sales charge on redemptions occurring prior to the expiration at a pre-specified time period, generally between one and four years.
The newer open-end NAV REITs offer share redemptions on a more frequent basis, often daily, monthly, or quarterly. The amount of shares redeemed is still capped, typically at 5%. Shares are redeemed at the most current NAV and are subject to short-term trading discounts if they are held for less than a certain period of time. However, with traditional, NAV REITs, and BDCs, it is important to remember that redemption options are not required and can be suspended or terminated as needed at the discretion of the board. Keep in mind that investors may not be able to redeem shares if the maximum annual limit has already been redeemed. It is also important to remember that many of the underlying investments within these registered funds are meant to be long-term holdings, so clients should view them as such. As noted, registered funds do have limitations, but the access they provide to once inaccessible private markets can be valuable tools to help individual investors achieve long-term goals and objectives.
Registered funds provide enhanced liquidity compared with traditional structures
| Alternative Strategy Mutual Funds | Interval Funds | Tender Offer Funds | Non-traded REITs and BDCs | Private Market Funds | |
| Liquidity from Fund | Share redemptions | Tender offers | Tender offers | Share redemptions | Limited; generally listing or sale of assets |
| Share Redemption Option Required
*Note: subject to suspension or termination by the board as needed |
Yes | Yes | No | Yes | No |
| Typical Frequency | Daily | Three-, Six-, or Twelve-months | Determined by the board | Daily, Monthly, or Quarterly | Not applicable |
| Typical cap on % of assets | No limit | 5% to 25% | 5% to 25% | 5% to 25% | Not applicable |
IMPORTANT INFORMATION
This material is provided for informational purposes only and is not intended as, and may not be relied on in any manner as legal, tax or investment advice, a recommendation, or as an offer to sell, a solicitation of an offer to purchase or a recommendation of any interest in any fund or security offered by Institutional Capital Network, Inc. or its affiliates (together “iCapital Network”). Past performance is not indicative of future results. Alternative investments are complex, speculative investment vehicles and are not suitable for all investors. An investment in an alternative investment entails a high degree of risk and no assurance can be given that any alternative investment fund’s investment objectives will be achieved or that investors will receive a return of their capital. The information contained herein is subject to change and is also incomplete. This industry information and its importance is an opinion only and should not be relied upon as the only important information available. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed, and iCapital Network assumes no liability for the information provided.
Products offered by iCapital Network are typically private placements that are sold only to qualified clients of iCapital Network through transactions that are exempt from registration under the Securities Act of 1933 pursuant to Rule 506(b) of Regulation D promulgated thereunder (“Private Placements”). An investment in any product issued pursuant to a Private Placement, such as the funds described, entails a high degree of risk and no assurance can be given that any alternative investment fund’s investment objectives will be achieved or that investors will receive a return of their capital. Further, such investments are not subject to the same levels of regulatory scrutiny as publicly listed investments, and as a result, investors may have access to significantly less information than they can access with respect to publicly listed investments. Prospective investors should also note that investments in the products described involve long lock-ups and do not provide investors with liquidity.
Securities may be offered through iCapital Securities, LLC, a registered broker dealer, member of FINRA and SIPC and subsidiary of Institutional Capital Network, Inc. (d/b/a iCapital Network). These registrations and memberships in no way imply that the SEC, FINRA or SIPC have endorsed the entities, products or services discussed herein. iCapital and iCapital Network are registered trademarks of Institutional Capital Network, Inc. Additional information is available upon request.
© 2021 Institutional Capital Network, Inc. All Rights Reserved.
