What is an interval fund? How is an interval fund different from other investment vehicles? Flat Rock Global CIO Shiloh Bates explains interval funds and why he thinks interval funds are growing in popularity.
Hi. I’m Shiloh Bates and I’m the CIO of Flat Rock Global.
Today I want to talk to you guys about interval funds and why we think they’re growing in popularity.
To purchase an interval fund is the same, simple funding mechanism as a U.S. mutual fund. It’s point and click; there is no paperwork. Now there is a daily share price, or NAV, net asset value, and that’s calculated by a third party. That’s the price at which investors can purchase shares of the fund. Now if investors want to sell shares, there’s a process by which they can tender those shares to the fund. And the fund agrees to a repurchase of at least 5% of shares per quarter, or 20% per year.
Now, practically speaking, an investor who wants to tender shares should get back much more than the contractual minimum. That’s because it’s very unlikely that all investors would tender at the same time.
The interval fund structure enables the fund to invest in illiquid assets that have a return premium associated with them. The premium is then passed along to the fund’s investors as dividends over time.
Interval funds make less-liquid asset classes typically reserved for institutional investors available to retail investors without the accredited or qualified investor limitations.
There are four primary reasons we believe interval funds will increasingly take share from private funds or closed-end funds. First, when you decide to invest in an interval fund, you can do it on that business day. You fund it to a portfolio where there’s already assets earning you return. There’s no concept of capital calls. There’s no setting aside cash, waiting for the capital calls to come in. You’re just fully invested on day one. Second, interval funds are SEC-registered and governed by the 1940 Act. And there’s a lot of regulation that goes along with that. For example, you’ll get annual reports, prospectuses, portfolio holdings, and caps on fund leverage, to name a few. But basically it’s the same regulation as a U.S. mutual fund. Third, in the interval fund structure, there’s no concept of trading above or below NAV. And that’s important because, for example, many closed-end funds, including BDCs, perpetually trade below NAV. In closed-end structures, changes in the fund’s discount in premium only adds to the overall share volatility. In the interval fund structure, it’s just not a concept. Fourth, for financial reporting, an investor in an interval fund receives a 1099. There’s no K1. And that’s going to make financial reporting much simpler.
So those are a few of the reasons we’re excited about interval funds. If you have any questions, feel free to reach out.
