Unlisted closed-end funds (CEFs) glided into their “Golden Age” in 2023, as investors supported their continued growth and wider distribution, according to new research from UMB Fund Services in partnership with FUSE Research Network. Private equity and multi-alternative styles dominated tender-offer funds. Diversified real estate, loan/structured credit and multi-strategy credit/income topped the style chart among interval funds.

The research indicates no deceleration in the number of unlisted CEFs, with 162 funds available as of mid-2023 – compared to 127 funds in 2020.

Key findings from the 2023 analysis of interval funds and tender-offer funds

Unlisted CEFs offer a way for investors to access a broad set of alternative investment strategies to enhance their risk-adjusted returns with low correlation to traditional asset classes, while still retaining a satisfactory level of liquidity and simplicity. Investors choose these funds today with the same goals, but now they enjoy the added benefit of a larger number of funds to choose from and longer track records with which fund performance can be evaluated.

In that context, the 2023 analysis found that:

  • Investors kept faith in these vehicles after underwhelming performance in 2022. Unlisted CEFs are proving their staying power as alternative products in volatile market environments, earning the confidence of investors and their advisors. Investors and potential new fund sponsors sitting on dry powder are taking greater notice.
  • Private equity ($25.2 billion AUM) dominated overall unlisted CEF assets, skewed by a preference by tender-offer managers ($23.7 billion AUM), while diversified real state ($20.1 billion AUM) was favored by interval funds ($18 billion AUM). Closely following in overall AUM were loan/structured credit funds ($19.8 billion AUM) where, once again, interval fund managers prefer to invest ($18.7 billion AUM). Tender-offer funds are significantly drawn to multi-alternative strategy funds ($11.6 billion AUM), whereas interval funds lean toward multi-strategy/credit Income ($13.3 billion AUM).
  • Interval funds continue to dominate the largest unlisted CEFs. Of the top 10 largest funds as of the second quarter of 0223, eight are interval funds and two are tender-offer funds. The top 10 are varied by category: Diversified real estate, multi-strategy credit/income, loan/structured credit each boast two funds while equity long/short, private equity, multi-alternative and other real estate each have one fund.
  • Not only are unlisted CEFs growing in assets, but they are also attracting more investors, appealing to a wider audience in 2023. Advisors in both the independent RIA and wirehouse channels have embraced these products, which is helping to drive their growth.
  • Going back to 2014, when interval funds were truly entering the scene, until the second quarter of 2023, shows a more impressive CAGR of 34.5% for interval funds, compared to a more moderate 7.5% CAGR for tender-offer funds. Unlisted CEFs are on a solid upward growth trend and should continue that trajectory over the next few years, even if they experience more moderate growth rates.

CEF unlisted 2Q23 ex 4

CEF unlisted 2Q23 ex 9

Comments from UMB experts

Accompanying the research, UMB’s interval and tender-offer fund administration experts answer the questions we receive most often on the topic of valuation. It’s a major topic for regulators, funds, boards, auditors and investment managers. Questions covered include:

  • What valuation frequency is required for interval vs. tender-offer funds?
  • Who is responsible for determining fair value?
  • What does Rule 2a-5 require of boards and investment managers?
  • What is the role of third-party valuation specialists?
  • How do traditional pricing vendors fit into current trends?
  • How do annual valuation reviews and fund audits factor in?
  • What is a fund administrator’s role in valuation?
  • What is the fund sponsor’s role in valuation?
  • Who writes the valuation policy?

Access a copy of the report, Unlisted Closed-End Funds: Growth and Opportunities for New Entrants.

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