Terry Gallagher | UMB

Interval funds and tender-offer funds are popular investment vehicles for managers seeking to bring formerly private-only strategies to the registered closed-end fund marketplace. Although both types can be offered to either retail or accredited investors, the main thrust for most interested managers is retail investors and their advisors.

In a retail context, interval funds are generally preferred to tender-offer funds due to daily purchase availability. However, daily purchases mean striking daily NAVs—which may not be possible for some underlying asset types, leaving tender-offer funds as the feasible option.

Drawing from our experience working with managers on new product launches, we highlight similarities and differences among interval funds and tender-offer funds – alongside tax considerations and a broader context among mutual funds and private funds.

Interval funds versus tender-offer funds

Structurally, interval funds and tender-offer funds work the same way. Here we outline what sets them apart—and what can also make them challenging for managers.

Purchase and repurchase timing

•  An interval fund typically offers purchases daily, while tender offer funds offer purchases on a monthly or quarterly basis.

•  Both offer repurchases, but interval funds are defined in their offering documents with specific timing and the amount they will take, while tender offer funds have more flexibility in the amount tendered and the timing of those tenders.

•  Interval funds must have liquid assets in the amount of the tender during the term of the repurchase event.

Investor appropriateness

•  Either could be offered to retail or accredited investors; what really drives the decision between the two is the type of investments being offered inside of the vehicle and whether there will be a performance fee.

•  If the underlying investment is only available to accredited investors, then the fund itself would only be available to accredited investors.

•  Only accredited investors can invest in a fund with a performance fee. Retail funds can only have what’s called a fulcrum fee, which is a fee that goes up and down depending on the fund’s performance.

•  Retail funds can have an income-only performance fee.

Other considerations

Practically speaking, managers sometimes hope to offer an interval fund structure but run into a roadblock because the industry still primarily requires interval funds to be valued daily. At least weekly valuations are required, except during the open repurchase period which must be daily.

Some investments, such as private equity, are challenging to value daily. Our team works through these considerations regularly with asset managers seeking closed-end interval or tender offer fund services.

Converting  private funds into an interval fund can also add a few extra regulatory requirements, including financial reporting changes for the private fund. Timing of the conversion must be managed closely with all parties.

Tax considerations: 1099s versus K-1s

Like valuation timing, tax considerations can also throw a monkey wrench into managers’ structural plans. Many investors far prefer receiving a 1099 to a K-1; that’s a definite part of the appeal of this product category. But to issue 1099s, a fund must qualify under the Regulated Investment Company (RIC) requirements of the IRS Code. To meet qualification requirements, the fund may require the use of either domestic or off-shore blockers.

Many managers may have a fund that issues 1099s but then need to go the K-1 route because of their underlying investment strategy, which may not qualify under rules for tax diversification and “good income” tests.

Interval and tender-offer funds versus mutual funds versus private funds

Some readers may be most familiar with registered mutual funds and some with private funds. To help position both interval and tender-offer funds, the following table describes them alongside information about both, better-known categories.

This table isn’t comprehensive but points toward many of the key factors that can trip managers up in their fund-formation plans. For a deeper dive into formation topics, see our reports on unlisted closed-end funds and product conversions.

Key Factors for Fund Formation