As we work with fund managers on launches of new products, we continue to see strong interest in semi-liquid credit and other non-exchange traded closed-end interval and tender offer funds. Some managers have had remarkable success in this area, as retail investors and their advisors have brought new inflows into an area they perceive as complementary to traditional retail portfolio strategies.
Unfortunately for managers, the timeframes required to enter the market and begin raising capital are longer now than even a couple years ago, this includes entity formation, auditor review and regulatory approval.
Longer review periods
Managers entering the registered, semi-liquid unlisted closed-end fund space are often met with a longer regulatory review process than they initially expected. The complexity of these products typically means more interactions with the Securities and Exchange Commission (SEC) to ensure all necessary disclosures are made as compared to traditional mutual funds. New funds that are anticipating a reorganization from a private fund also have additional audit requirements.
Here are suggestions drawn from our experience.
- As much as possible, adopt existing fund disclosures.
- Discuss required registered-fund filings with your private fund auditor.
- Determine as early as possible any necessary exemptive relief such as co-investing or multiple share classes.
- With respect to conversions, carefully review anticipated timing to ease the exchange of private fund investors into the registered fund.
- Stay nimble—know in advance that you’ll need to adjust to changing requirements and requests.
- Start as early as possible and keep all stakeholders informed throughout the SEC process, including expected timelines and potential delays. This can help in managing expectations and keeping investors engaged.
Finally, take care as you gather an advisory team to ensure its members understand the specifics of semi-liquid credit funds and can help guide you through the maze of requirements more efficiently.
Sluggish capital-raising for semi-liquid credit funds
Simultaneously, raising capital for these funds has proven to be slower than most managers had hoped, with investment platform acceptance taking longer than expected and often requiring the registered fund to show real assets and not just anticipated interest. Ultimately distribution concerns will play out one way or another, but there are practical steps managers can take in any market environment.
For an overview of distribution for strategies, see our Distribution Services colleague James Curry’s blog, Seven questions to help build distribution strategies for interval and tender-offer funds.
Our distribution team is experienced in helping managers think through target markets, platform considerations (including fees), marketing strategies and more. It’s critical to think through which markets are best to begin with. You may, for example, have your sights on a mass-affluent retail market … but that may not be where to start getting traction.
Finally, if you have in mind to convert from a private to a semi-liquid closed-end fund when an appropriate asset size is reached, be sure to weigh benefits and potential delays.
Launching a semi-liquid closed-end fund can be challenging. However, advanced preparation, smart strategies, and a keen understanding of both regulatory and investor landscapes can significantly ease the path to market.
The continuing strong interest in these funds suggests that the rewards can be well worth the obstacles encountered along the way.
UMB Fund Services is a national leader with decades of experience in registered and alternative investment fund servicing. Visit our website to learn how UMB Fund Services can support your firm, or contact us to be connected with a fund services team member