First, though, a little more background. Since March and April, the pace of new-product introduction has definitely slowed. Based on my conversations with sponsors, There are three main reasons for the slowdown, as I discussed recently with Blue Vault managing partner Stacy Chitty on the Inside the V(ALT) podcast‡.
- First was the need to adapt to working differently, including remotely—though I think most fund sponsors got a handle on that pretty quickly.
- Second is that regulators have also been affected by COVID-19; the submittal and response process has simply been slower.
- Third is fund sponsors stepping back a bit to take stock of the economy and, in particular, what types of products are going to appeal to investors. Some products—retail and commercial business, for example—that sponsors were considering a year ago may no longer fit.
You might think the combination of those factors could lead to fund sponsors pressing the pause button on new investment product development. What is actually occurring, by my observation, is an intensifying creativity in how to navigate the current regulatory process and in the nature and structure of products themselves. Here are some specific themes I’ve observed:
- Starting small. It’s becoming less and less common to launch, for example, a REIT product with 40-50,000 investors. Today’s new products are more often smaller pools of capital deployed in a narrower, boutique-type approach. These products may max out at 5-10,000 investors.
- Starting as private placements—with an eye to conversion later. I’m seeing more private placements offered with specific attention to future potential to convert the structure to an interval fund. Sponsors indicate they like the opportunity to test things out with a relatively small group of (relatively high-dollar) investors rather than diving right into the deep end with a more expensive, more ambitious offering designed to attract a wider range of investors, including those who might make a $25-$50,000 investment versus a $1 million investment.That’s not to say interval funds aren’t a hot topic. It’s just that fund sponsors are getting more strategic about stepping into them. For a quick read on some strategic considerations, see our recent post comparing and contrasting interval and tender-offer funds.
- Wider range of investment themes. Behind the scenes, there are many creative structures coming together around themes such as carbon reduction, other environmental issues, cryptocurrency, cell towers and many more. We have come a long way from the focus on apartments and business strip malls just a decade ago. Especially as managers focus on smaller offerings, they are seeking areas where investors will be both excited and comfortable investing.
- Doing more upfront homework. In the past, sponsors would frequently use the approval process itself as a context for hammering out details of the offering. Because approvals have slowed down, they are instead doing a lot of upfront homework to get it right the first time. That means looking ahead through the entire product lifecycle, including a redemption function and commission schedule. It means stepping back and looking at an investment product with an eye to make sure it will work throughout the lifecycle for the sponsor, the distribution agent, the transfer agent and any other key partners.
While most investment vehicles have some unique points about them, product sponsors are generally avoiding structures so “out there” that they add risk to the offering process. It’s encouraging that even within those risk constraints—let alone the constraints of working and planning in a Covid economy—creativity is flourishing behind the scenes.
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.