Blue Chip’s COO Explains The Benefits Of Interval And Tender Offer Funds, The Differences Between Them, Characteristics Of Suitable Clients And How To Choose
Ask an automotive or home improvement enthusiast to show you their toolkit and they won’t bring a box filled with tools to you – they’ll bring you to a room filled with tools – likely a small building or garage filled with thousands of specialized implements for distinct tasks.
Advisors develop the same broad toolkit over time, and due to recent uncertain markets, the toolkit expanded at an increased rate this year as advisors sought more advanced and tailored ways to provide returns, stability and risk management for clients.
Two investment tools receiving increased attention and recognition in the current financial climate are interval funds and tender offer funds.
According to WSR Wealth Exemplar Award winner iCapital, interval and tender offer funds are closed-ended, continuously offered funds that frequently price at net asset value, are not listed on an exchange and are regulated by the SEC. “This structure combines flexible underlying investment options with the investor protections of SEC registration, such as transparency through frequent public filings, an independent board and audited financial statements.”
Farmington Hills, Michigan-based Blue Chip Partners, with over $1 billion in assets under management and serving over 700 client relationships, advises clients on a broad range of investment vehicles, including interval and tender offer funds. The firm was named one of the Top 50 Fastest-Growing Financial Advisor Firms in 2022 by SmartAsset.
Blue Chip’s Chief Operating Officer, Erin Goss, has significant experience advising high net worth and ultra-high net worth clients on alternative investments. We asked her about the pros and cons of interval and tender offer funds, how advisors can choose the right ones, and which clients are best suited for them.
WSR: What are the primary similarities and differences between interval and tender offer funds? Where are these funds most prevalent today?
Goss: Unlike traditional mutual funds, both interval and tender offer funds do not have to meet redemptions daily, which allows for increased exposure to illiquid assets. Alternative investments, like physical real estate, can trade infrequently, which introduces uncertainty around the availability of cash to meet investor redemptions. Asset/liability mismatch risk makes the traditional mutual fund structure less desirable for many alternative investment strategies.
In addition, both provide increased access to alternative investment strategies typically available to institutional investors due to features such as low investment minimums and 1099 tax reporting.
A notable difference between interval and tender offer funds relates to investor liquidity. Interval funds must adopt a fundamental redemption policy that cannot be changed without shareholder approval. Interval funds must redeem 5%-25% of outstanding shares on each repurchase date, which typically occur every three, six or 12 months. If requests exceed the approved repurchase amount, however, redemption requests will typically be prorated.
Conversely, tender offer funds have significant discretion in determining liquidity offered, although they may choose to operate like their interval fund brethren.
The majority of interval and tender offer funds provide exposure to private equity, real estate, credit and hedge fund strategies.
WSR: What are the primary pros and cons an advisor must consider when deciding to put interval or tender offer funds in a client’s portfolio, and how does the advisor choose the right funds?
Goss: The pros of both interval and tender offer funds include accessibility to investment strategies that allow for portfolio diversification. As covered previously, both fund types support holding more illiquid assets relative to traditional mutual funds, which may be associated with higher return potential. For example, given the low interest rate environment that has existed until recently, less liquid credit and real estate strategies were popular given attractive income yields.
The cons of both structures include incremental complexity for the advisor to manage with their clients. Both interval funds and tender offer funds do not offer daily liquidity, so sizing these allocations appropriately is important. In addition, implementation nuances exist, such as needing to submit purchase and redemption requests by deadlines, as well as the potential for added paperwork.
Identifying best-in-class interval and tender offer funds requires both investment and operational due diligence. Advisors must ensure investment firms are experienced in managing assets that are expected to be present in each fund. This is especially true if illiquid or niche assets are held and if leverage is utilized. Operationally, the advisor should understand a fund’s valuation policy, as well as its redemption history.
WSR: What types of clients are tender offer or interval funds best suited for, and which clients should advisors steer away?
Goss: Interval and tender offer funds are best suited for investors who are comfortable decreasing the level of daily liquidity available in their portfolios, but who are interested in gaining access to a wider array of investment opportunities.
Managers of interval and tender offer funds strive to honor redemption requests fully up to approved amounts in the spirit of providing a positive investor experience. As discussed previously, though, if aggregate requests to redeem by investors on a given date exceed the allowance approved by a fund’s board, an investor may not receive their full redemption as expected.
Investors who would not be pleased in this situation, despite an advisor’s best efforts to set expectations appropriately, would not be a good fit for alternative fund structures.
Relative to traditional mutual funds and exchange traded funds, fees associated with interval funds and tender offer funds are typically higher and have more moving parts. This is due to the nature of the investments typically found in these structures, and the active management needed to manage them. Fees are only one factor that should be considered when selecting an investment, but very fee-sensitive investors may not be interested in considering these further.
Julius Buchanan, Managing Editor at Wealth Solutions Report, can be reached at firstname.lastname@example.org