Interval Funds

And one of the opportunities that I saw when I was working at Nuveen as the head of product development for closed-ended funds was to do more in the way of different alternative asset classes because closed-end funds are well-suited for less liquid investment strategies in a way that's very different than a mutual fund or ETF. And so the unique showcasing of these types of alternatives is what we set out to do. And we work in a partnership model with independent investment firms, and that was by design. We felt like there were a lot of boutique, private fund managers that were less familiar with the registered fund market. And so we serve as a connection point for those alternative investment managers.
EMS:Great. Thanks, Kim. So that's a nice segue into the topic of interval funds. So I wanted to ask you about your outlook for the space.
KF:We think that the interval fund market is really poised to go grow quite rapidly in the coming years. It's baseball season right now, and so I think it's appropriate to say we're really in the second inning, so there's a lot more growth that we anticipate in this market. The reason I say that it's early is while there are over 100 funds in the space, many of those funds don't have a three-year track record just yet. And there's really just a handful of interval funds that are north of a billion dollars.

And so it's really only been in the last six months that this marketplace has started to reach a much broader audience of investors, and there's still a lot of education to be done. Back to the mission of our firm, which is to make alternatives better understood by average investors, better accessible, these product structures like interval funds, they do that job, but it is very different than the liquid mutual funds or liquid ETFs that investors are much more familiar with.
EMS:Great. And Kim, more specifically, what are some opportunities you see in this space and why?
KF:Well, what we've observed in the last six to 12 months is some success stories. And success stories in a new emerging type of market like the interval fund market is really important because it's going to attract new asset managers to the space. One of the areas, in particular, where we're seeing a lot of new fund filings, so these are young funds that have just begun capital raising, is the private equity and venture capital space. We started tracking those separately because the category has just exploded in terms of not just new funds that have formed, but we talk with a lot of potential fund sponsors who might be six months or nine months out from filing something with the SEC.

So this is a trend that we're going to see continue. And I think that one of the things that the SEC has done is the SEC wants investors, a broader range of investors to have access to these types of investments. Private equity doesn't fit into a mutual fund, and so the best fit is a closed-ended fund structure like this. And so we're seeing a lot of product innovation in that category.

The other thing that we think is really interesting is, I think, more niche strategies in the interval fund marketplace. We saw a lot of private credit funds. Naturally with credit, because there's yield, there's a reason to buy into the fund very early, but some of the funds that we're seeing come to market are more total return oriented as opposed to having a natural yield. And so I think that the asset managers that we're seeing enter the space with total return driven funds are doing so on the back of an established relationship with investors in the private fund market.

And they're able to have institutions and family offices, who know them well in that private fund space, be early investors in an interval fund now. And that's really important. As you're thinking about launching a new interval fund, it's critical to have investors that know you, that trust you because a registered fund is something different than a private fund, but sometimes there's overlap in the strategies that are being used for a given manager. We're seeing a lot of those private fund strategies being just copied in this interval fund structure.
Elana Margulies-Snyderman:
Kim, on the other hand, there are challenges that come with interval funds and what you're doing. So I'd welcome your thoughts on some of the hurdles.

I think the headwinds that we face in the interval funds space are similar to other challenges that product folks face in more traditional products. But I think the difference is that the headwinds here, the market volatility, the concerns about inflation will be headwinds and may slow down the product development cycle by a few months. But the overarching trend, meaning this goes to more of a macro discussion about the decline of defined benefit plans, and with the decline in defined benefit plans, retirees need better investment options. And they have to get that through their retirement account, through self-directed strategies and ultimately through registered funds, because many investors don't meet the minimums to invest in alternatives in the private fund space.

So I think that while some of these near-term headwinds will slow things down, the overarching trend is positive. We're seeing some differentiated product that real asset strategies, for example, that are going to benefit from inflation, those will have a nice tailwind behind them as they go to market. So I do expect to see more infrastructure, more real assets, more farmland, more real asset type strategies that will benefit from what we're seeing in the headlines today.
EMS:Great, Kim, and I'd be remiss if we failed to discuss ESG, given it's an extremely hot topic. So I wanted to ask you what your firm is doing to embrace it, both at a macro level and through the investments.
KF:Absolutely. So we are partnered now with three different firms developing sustainable investment products. Some of them are impact-oriented investments, and it's a trend that we think is going to pick up. Right now, the interval fund market has very few funds positioned as either ESG, sustainable or impact, but we do think that's a growth area. Just given the trends that we observe outside of the US in terms of alternative investment, there have been a lot more allocations to sustainable or impact investments.

And so those type of less liquid strategies, once again, while suited to the interval fund wrapper, I think we're going to see a lot more of that. We're obviously advocates for sustainable products. The reason for that is that they often are unique or differentiated products. We don't like to develop clones or something that already exists in the marketplace. And so that's really a growth area. And one of the things that I say about sustainable products is that you don't have to believe in climate change. You don't have to believe in the benefit of impact investing because the investment dollars are headed in terms of this direction.

And so the managers that we partner with, they have investment VCs that stand up regardless of your view on sustainability. And that's what I think is really exciting because the potential for enhanced returns coming from investment, for example, in agriculture technology, in wastewater systems, things of that nature, those will benefit society, but there's also a monetary return. And we're seeing a lot of investment in those arenas, and that investment is going to drive a lot of the economic activity. So it's exciting to see that trend play out, and I think it's timely and it's very, very early in the interval fund space. We'll see a lot more.
EMS:Kim, I know you touched on this earlier in our conversation today about making private investments more accessible for every investor. So I thought we could address, or you could address, some of the challenges to make this happen.
KF:I think that the biggest issues that private fund sponsors face when they look at potentially making their strategy more accessible are issues pertaining to valuation, valuation of assets that are periodically valued, say monthly or quarterly and not typically daily. One of the other hurdles typically is performance fees because a lot of these alternative investment managers, particularly managers who are more total return oriented, they're going to have a performance fee tied to the success that they have in terms of total return. And so those are challenges when you're trying to structure a fund that complies with the 40 Act.

I think one of the other challenges besides valuation and performance fees is making sure that advisors and investors are thinking about liquidity in a way that makes sense for these types of products. And so we encourage our clients to do a lot in the way of education because, for example, you may have a portfolio that's largely invested in mutual funds or ETFs, and a portion of that overall portfolio could be reserved for less liquid things, but it wouldn't be a first source of liquidity for a client. And so to be thoughtful about those issues is some of the things that we grapple with when we're looking at structuring private fund investments in these registered wrappers.
EMS:Great, Kim, we've covered a lot of ground today, so I wanted to see if you have any final thoughts you would like to share with us.
KF:I think that I'll leave you with the thought that alternatives really drive higher total return potential over time, and endowments and institutions have long benefited from these illiquid alternatives. And so it's great that we're seeing product innovation benefit all retirees by making these alternatives more available, but it also underscores the importance that the financial planner, the advisor, the tax planner, the role they play advising individual investors is really important when we're talking about entering into some of these new market opportunities that have higher return, but also higher risk to evaluate and consider.
EMS:Kim, I wanted to thank you so much for sharing your perspective with our listeners today. And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics and join us for our next EisnerAmper podcast when we get down to business.

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^{It should be noted that all investment involves risk. An investment in illiquid investments involves risks, including loss of principal. Investors considering an allocation to alternatives should evaluate the associated risks, including greater complexity and higher fees relative to traditional investments. Investors should carefully weigh the diversification benefits, expected returns and volatility of alternatives relative to traditional investments. Investments in alternatives involve risks, including loss of principal. Closed-end funds (“CEFs”) are designed for long-term investors who can accept the special risks associated with such investments. Interval and tender offer CEFs are not intended to be used as trading vehicles. An investment in an interval or tender offer CEF is not suitable for investors who need access to the money they invest. Unlike open-end mutual funds, which generally permit redemptions on a daily basis, CEF shares may not be redeemable or sellable at the time or in the amount an investor desires.}

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