Tender-offer and interval funds, nuances that trip up investment managers

At present, one of the big focus areas for investment managers is the closed-end space—and, specifically, unlisted funds seeking to offer uncorrelated returns through commercial credit, direct lending and other non-traditional investments.

In many cases, the managers forming these tender-offer and interval funds are adapting an existing strategy from a partnership to a fund structure. In this article, I discuss a few key considerations for investment managers exploring fund formation.

Interval funds versus tender-offer funds

Structurally, interval funds and tender-offer funds work the same way. Here are highlights on what sets them apart—and can make them similarly 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 that they will take, while tender offers have more flexibility in the amount tendered and the timing of those tenders.

Investor appropriateness

• Either could be offered to retail or accredited investors, but what really drives the decision between the two is the type of investments being offered inside of the vehicle and whether there’s going to be a performance fee.
• Basically, if the underlying investment itself would only be available to accredited investors, then the fund itself would only be available to accredited investors.
• Also, only accredited investors can invest in a fund that has 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 performance of the fund.

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 on a daily basis. Some investments, such as a registered private equity fund, simply can’t be valued daily. Our team works through these considerations regularly with asset managers seeking closed-end interval or tender offer fund services.

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 requirements of the IRS Code.

Many managers come to us wanting to issue 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 also our white papers on unlisted closed-end funds and product conversions.

Learn more about UMB Fund Services and how we can support your firm’s registered and alternative investment fund servicing needs,, or contact us to be connected with a fund services team member.