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What's the Alternative? | Episode 9 | Interval Funds: The Good, The Bad & The Ugly featuring Kimberly Flynn
8 Plays6 months ago
Welcome to Banrion Capital Management’s What’s the Alternative Podcast! Join host Shana Orczyk Sissel, the “Queen of Alternatives” Founder & CEO of Banrion Capital Management, as she interviews leaders in the alternative investment space. Learn more about their firms, their passions and about the many different ways investors can use alternative investments to add value in their investment portfolios.
In this episode Shana sits down with Kimberly Flynn, President of XA Investments to discuss everything you need to know about interval funds and their close cousin; tender offer funds.
As president of XA Investments, Kimberly, is a partner in the firm and responsible for all product and business development activities. Kim is responsible for the firm's proprietary fund platform and consulting practice.
Kim was a member of the founding leadership team for XAI, helping launch the firm in 2016 as Managing Director where she built XAI’s proprietary closed-end fund platform. In 2020, Ms. Flynn introduced the firm’s consulting practice to assist clients with developing US and UK registered closed-end funds.
Kim has more than 20 years of experience in investment product strategy, design and development. Prior to joining XAI, she led Nuveen Investment’s Global Structured Products Group which was responsible for the listed closed-end fund business. Her experience includes roles in registered fund product development for both traditional and alternative investment strategies.
Kim has developed an expertise in closed-end fund product development and is a frequent contributor to media and industry events on topics including interval funds, alternative investments and London-listed investment companies. Kim has earned the CFA designation and is a member of the CFA Institute and CFA Society Chicago. She is also Series 7, 63 and 24 licensed.
Learn More About XA Investments: XA Investments
Connect with Kim on LinkedIn: Kimberly Flynn
Learn More About Banrion: Banrion Capital Management
Connect with Banrion on 𝕏: @Banrion_Capital
Connect with Shana on LinkedIn: Shana Orczyk Sissel
Connect with Shana on 𝕏: @shanas621
If you are an advisor wanting to check out our platform, we want to hear your feedback!
Important Disclosures:
The opinions expressed on the “What’s the Alternative Podcast” are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security.
It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results.
The guests featured on this program are participants on Banrion Capital Management’s platform. As such Banrion may receive payment for their participation as a platform partner.
Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.</
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Transcript
Introduction to Alternative Investments
00:00:02
Speaker
Welcome to Bonnie and Capital Management's What's the Alternative podcast. Joining host Sheena Orsik-Sicil, the queen of alternatives and founder, CEO of Bonnie and Capital Management as she interviews leaders in the alternative investment space. Learn more about their firms, their passions, and about the many different ways investors can use alternative investments to add value in their investment portfolio.
Interval Funds Explained
00:00:30
Speaker
Hello everybody and welcome to another episode of What's the Alternative? I'm very excited today because I have Kim Flynn joining us. She is the president of XA Investments and the reason I have Kim joining us is because
00:00:47
Speaker
There is a particular topic that I'm very passionate about that I don't think enough people understand the way that they should and that is interval funds and just closed end product in general because there's lots of different types of closed end product in this alternative space and they're not all the same and they all have risks that I don't think people are enough aware of.
00:01:08
Speaker
They're very beneficial in many ways, but in many ways, they have risks that I think need to be talked about upfront so that we can get a real understanding of the benefits of these products and the potential ways that your clients might misunderstand them. So I'd like to have Kim. Welcome. It's nice to have you here today. Thank you very much. And I hear you just got promoted, so congratulations. Thank you. I appreciate that.
00:01:38
Speaker
So let's just start a little bit talking about your background and kind of where you got
Kim Flynn's Background and XA Investments
00:01:42
Speaker
to where you are today. And then we'll dive right into the topic of interval funds. Sure. So our business is Chicago based and I've spent the last 25 years doing product strategy and that's both traditional products and alternative products. And I spent 12 years at Nuveen Investments learning the ropes from a number of great mentors.
00:02:05
Speaker
and specifically headed up closed-end fund product development for Nuveen. Nuveen is one of the market leaders in listed closed-end funds, which are cousins to interval funds. They're both 40-act products. We'll get into more of that.
00:02:20
Speaker
But I helped found the firm here at XA Investments in 2016. And we have a consulting practice where we advise asset managers on what they can do to get to market. And we also have research and education on interval funds, which is a fast growing part of the marketplace.
Growth and Opportunities in Interval Funds
00:02:39
Speaker
So Kim, one of the reasons why I really wanted to have you on the podcast is because interval funds are booming. We're seeing more and more of that. Bonrion just added Pender Capital onto our platform, which is a real estate interval fund. There's plenty of opportunities here. And what I like the most about interval funds is that they provide for the average investor the ability to access
00:03:02
Speaker
um less liquid markets which they've never been able to access before so we're seeing them with venture capital and real estate and private debt and lots of things that just aren't daily liquid. I have a lovey relationship with it because you see these great opportunities again to this less liquid stuff but then you see people launch products that are hedge funds basically in an interval fund wrapper that really don't need to be in an interval fund because they have
00:03:27
Speaker
daily liquidity and they're trading in public equities. And I feel like in many ways it's just a way to charge higher fees and limit the liquidity of a product without having really a good reason to do so. So, you know, there's a love-hate relationship here, but I am seeing more and more really interesting interval funds come to product. So let's talk about the basics of interval funds. Like what are they, how are they different from other types of closed-end products like tender offer funds and closed-end funds? And why are they starting to really
00:03:56
Speaker
like explode on the market right now.
00:03:59
Speaker
Absolutely. I think that a lot of alternative investment managers want to diversify their client base, diversify their revenue base. And the growth is happening in the retail part of the market. The institutional part of the market is shrinking. We no longer have pension funds to rely upon for retirement. We have to save for our own retirement. And that responsibility being shifted to the individual, we also need the type of institutional investment opportunities
00:04:29
Speaker
that pensions and endowments have long been invested in. So some of the things that you referenced like real estate or venture capital, those are areas where potentially you're going to have higher returns over time. You may or may not have higher risk if you're investing in something like venture capital.
00:04:47
Speaker
you're missing out a lot of the growth opportunity in the marketplace if you don't simply have access.
Comparing Fund Types: Interval vs. Tender Offer
00:04:53
Speaker
So interval funds, to your question, interval speaks to the period of liquidity or the window of liquidity that's available for investors in one of these products. These are SEC registered 1940 Act products
00:05:11
Speaker
similar to a mutual fund in certain ways. An interval fund is similar to a mutual fund in the sense that it's always being sold, it's continuously offered, but it's also shares some features of a listed closed-end fund and people often will throw around interval funds and
00:05:33
Speaker
they may actually be referring to a tender offer fund, which is a sister fund structure. Interval funds and tender funds are very, very similar in terms of how they operate. Most of them are continuously offered and have quarterly liquidity for shareholders. So you can think of them as being very similar. So when a fund sponsor launches one of these products that you may see them go down an interval road or a tender offer road, the marketplace as a whole
00:06:02
Speaker
is referred to as the non listed closed end fund marketplace. And so you also asked how do you think about what fits inside of an interval fund. It's typically things that would otherwise be packaged up or wrapped as a private fund.
00:06:19
Speaker
So things that don't have liquidity or to the extent you might see a hedge fund strategy, maybe it's one that's using derivatives or leverage to a degree that it wouldn't fit into a mutual fund. There is a big spectrum in terms of the type of assets. There's also a big spectrum now in terms of the quality of the managers between very high quality experienced alternative managers
00:06:45
Speaker
and lower quality inexperienced fund managers. The market has grown significantly over the last couple years. There's now 220 funds. Awesome. So you touched on tender offer versus interval funds.
Performance Fees and Investor Implications
00:06:58
Speaker
The type of person that can invest in those funds is different, correct? Tender offer still has an accredited investor hurdle.
00:07:05
Speaker
Am I wrong? Often times they do. And the suitability restrictions that are imposed either have to do with the strategy or have to do with whether or not there are performance fees. So a lot of the fund to funds, fund to private funds are structured as tender offer funds because it gives them a little bit more flexibility because they're allocating to illiquid private funds. And many of those underlying private funds themselves
00:07:34
Speaker
charge a performance fee and so therefore the SEC then imposes an accreditation standard on the funds and suitability is largely driven by whether or not there are performance fees either at the fund level or at the underlying asset level.
00:07:52
Speaker
Okay, so can both have performance fees or is that specific to tender offer? Do interval funds also have performance fees? Yes, you can have an interval. It's more of the exception than the rule. And so you can have an interval fund that charges a performance fee and then there would be suitability in post. The requirement for an interval fund is that they have a daily nav
00:08:21
Speaker
or a weekly nav. So once you go beyond that, you're talking about maybe tender funds now, some of them are daily nav. But if you don't have a daily nav or a weekly nav, you move into the tender fund camp. So if you're investing in a fund, the strategies of fund of private funds, and you're only getting pricing information from those underlying private funds on a quarterly basis, it explains why you see a lot of monthly or quarterly nav tender offer funds.
00:08:52
Speaker
Perfect. That's great. I think that's really important for our audience to understand because tender offer funds and
Liquidity Management in Funds
00:08:58
Speaker
interval funds are so close in their structures and sort of the rules associated with them. And as you pointed out, a lot of tender offer funds are kind of marketed as interval funds when they're not technically. So understanding that nuance is really important. Now, one of the really interesting thing with interval funds
00:09:14
Speaker
is this liquidity aspect to it. And there are SEC general guidelines of liquidity, like minimums that have to be met. But then the funds can impose on top of that their own liquidity constraints, correct me if I'm wrong, because I've definitely seen that. And can you walk us through what the regulatory rule is for an interval fund in liquidity, and then maybe some common ways that funds add additional levels of liquidity limitations as well.
00:09:42
Speaker
Yeah, you're absolutely right. I don't think most people are aware of, it's a really important aspect of interval funds, understanding the liquidity piece. The interval fund is hardwired to, if you set quarterly interval for liquidity, let's say at 5%, which is very common, you could in fact set that quarterly liquidity amount to 10%.
00:10:07
Speaker
It's not often done. Most people are quarterly for 5%. But when you set that limit in your prospectus, you are obligated to provide that liquidity each quarter. So you decide up front as the fund sponsor, and then you have to fulfill that liquidity.
00:10:25
Speaker
at the period that you've set the liquidity. There are some interval funds. There are exceptions where they offer semi-annual liquidity, not quarterly. But whatever rule you choose to live by, you have to live by it. And then given the demand for liquidity, let's say you find yourself
00:10:43
Speaker
in a moment where your alternative strategy is out of favor and you have a lot of people demanding liquidity from the fund and so the demand for liquidity might be greater than 5% any quarter and the fund can basically decide up to a 2%
00:11:02
Speaker
allocation, they can buy back 7% of the funds that asset value in the form of quarterly repurchases. They have that flexibility, that ability to do so. And so to the extent we've seen it more so in the last six months in the real estate category, that is the third largest segment of the interval fund market. And we've seen more demand for liquidity. And so some of those funds
00:11:29
Speaker
to meet that liquidity have been increasing their quarterly repurchases from 5% to 7%. Now, they typically don't go over that. With a tender fund, liquidity typically is at the discretion of the fund board. And so some investors, some advisors don't really love that, that the fund sponsor has the ability to change or stop providing liquidity.
00:11:56
Speaker
Obviously, it's a problem if you were to cease providing liquidity, and so you would only do it in a moment in time where you felt like you needed to do it to protect investors. But it is an important distinction between the interval fund and the tender fund, because you could find yourself in 2009, where after, let's say, four back-to-back quarters where you're
00:12:19
Speaker
you're hitting your cap, where in a tender fund, the board may say, well, we're gonna stop doing quarterly repurchases. And so it is a distinct difference between the tender fund and the interval fund. The interval fund cannot choose to do that. They have to go on providing the liquidity that they outlined in their prospectus.
00:12:40
Speaker
And I think I really want to focus on it's 5% of NAV. So that means that your client could hypothetically redeem 100% of what they put in, assuming that no other redemptions come out and it's not 5% of the NAV of the fund. That's right. A lot of funds to simplify it will add a layer to that. At least I've seen this where they'll make it so that like you could never
00:13:07
Speaker
redeem 100% of your amount just to make it easy for them and and and to be able to handle redemptions of all different clients or they want some sort of you know
00:13:20
Speaker
not formal notice, but they'll be able to accommodate you if you provide some notice to them. When I worked at Fidelity, we used to have exemptive relief on some mutual funds where we were greater than 40% of the assets of the fund. And they were fine providing us liquidity as long as we gave them like plenty of notice that, hey, we're gonna redeem a big chunk of money so that they could plan accordingly. And I think that is an important thing to talk about because that is something that can be done, correct?
00:13:50
Speaker
Yeah, I think that some of the interval funds, particularly the larger funds, who have visibility into the investors, particularly if they're working with large RAs or family offices, and they'll ask, for example,
Investment Structures and Client Needs
00:14:09
Speaker
to the extent that they're approaching their 5% limit of NAV for the quarter, they'll manage it more like a quasi-private fund where they'll say, can you wait a quarter to get out in terms of liquidity? And so some of the firms are being more sophisticated in terms of how they're managing both the ins and the outs. And so it serves them better, for example,
00:14:33
Speaker
If you like, I like to give the example of variant, which they have an interval fund. It's a shop out of Portland, Oregon. They're very proactive on the front end telling RA's. They're an RA only fund. They're not in the wires. They'll tell people don't come into our fund
00:14:52
Speaker
unless you have at least a three-year minimum time horizon. Then I understand that they're also in consistent communications with their investors as to when they want to exit so that they can then manage people, their demand for liquidity. Ultimately, that's a conversation with your best clients in terms of the ins and the outs. I think the concern is that
00:15:20
Speaker
They're going to try to get you out in an orderly fashion. And some firms are better at liquidity management than others. And you want to diligence that aspect of an interval fund before you go into the fund and help
00:15:35
Speaker
have a good understanding of where they're getting liquidity and how they're managing it, because there are different release valves, if you will, to be able to address different client needs for liquidity. Sometimes it's just the ongoing sale process, right? They're just very, the strategy's in favor, they're able to bring in new capital, and that way you can meet the redemption requests of the people who do need to exit.
00:16:02
Speaker
So there is a wide variety of practices, but I think it is an element that people should be questioning on the front. And then I know it's something that you do before you would platform an interval fund. Yeah. And that's one of the reasons why I want to have you on the podcast because we are bringing on more interval funds. And I love them because in this case, we have Pender, we have another VC interval fund that's coming on.
00:16:28
Speaker
And I love them because you get access to these markets you couldn't access before.
00:16:36
Speaker
I can't emphasize enough how much I want advisors to sit down and talk about this liquidity stuff with their clients before they pull the trigger on an interval fund so that everybody understands what's involved here. And there's no misunderstanding of like, oh, I can get my money out if I really, really needed to. You might, hypothetically, you could, but you should never count on it.
00:17:00
Speaker
And that's just a really important conversation because again, you mentioned it's quarterly, sometimes semi-annually. It's definitely not monthly. It's definitely not daily. So there's some like lockup involved no matter what. And then how much you can get out can change. So you should kind of always go into them thinking that you're never going to get 100% of your money out.
00:17:23
Speaker
Even if you wanted to I think that's a general frame of mind you could should set your client up with that expectation because Hypothetically you could in some cases be able to get 100% but you should never count on it So that's just an expectation that should be set right away
00:17:40
Speaker
That's right, because the moment you want liquidity, it might be when everybody else wants liquidity as well. And so these funds are subject to proration. And I think that people understand that, but then the question is, if you ask, well, when am I going to get 100% of my money out? And that's the uncertainty that people don't like, right? If you want out of the fund, you may be waiting multiple quarters. And then I think that that's the element that can be frustrating to some of the advisors.
00:18:08
Speaker
you do have to treat it differently than the rest of your 40 act product holdings. So that way you're not, the expectation is appropriate from the get-go because if you're waiting on an exit and you're waiting multiple quarters, then you just don't want that to be, you know,
00:18:32
Speaker
a source of an issue that you could have tackled on the front end with your end investor. And so I think highlighting this liquidity issue is really central before making a purchasing decision.
00:18:44
Speaker
I always tell advisors that the number one thing they should start to talk to clients about when they're dealing outside of the daily liquid market is liquidity budgeting and what the client is absolutely comfortable not having access to in an emergency and making sure that you're aligning this
00:19:04
Speaker
any investment you make that's not daily liquid with what they're comfortable with. Regardless of whether or not you think they might be able to get the liquidity they need in a pinch, I like to always say that sometimes if it's a client that is accredited or qualified,
00:19:21
Speaker
It may make sense to go into the private vehicle where there's a healthy secondary market, which may not and often is not the case in this interval tender fund. There's not like a secondary, whereas in a private equity fund, if you need to get out in a pinch, there's typically a healthy secondary market you can sell your interest in. But that's not the case with these products. And so you got to think about those things.
00:19:46
Speaker
and align those things and think about the structure of the product you're going into as a result.
00:19:52
Speaker
Yes, I agree with you. Today, there is not that secondary market. I know some technology firms that are working on it because as this interval fund market grows, I think that is a gap. And frankly, it's an opportunity for the firms that can address the gap because there are going to be a lot of investors. You name it, strategies go in and out of favor and people's demand for liquidity will change. And so that's why some of the firms
00:20:20
Speaker
that have built marketplaces for private fund liquidity are now turning their attention to these types of registered funds as well.
00:20:28
Speaker
Yeah, and you mentioned this before, but like how they get the liquidity matters too. For example, earlier today on CNBC, one of the portfolio managers for the ARC Venture Innovation Interval Fund was on and he was talking about they have a portfolio which is, you know, a percent of it is in private, illiquid,
00:20:51
Speaker
securities but they also have a percent of that fund in public liquid securities and their liquidity is coming from that and they were very clear about that. Like we keep these publicly traded daily liquid names in the portfolio to meet liquidity demands because we know our other stuff is illiquid. So understanding that is really important because it also allows you to know how much of a like how what kind of tools they have
00:21:18
Speaker
to meet liquidity requests, should they increase in any way? And having pockets in there that are more liquid than others is one of the ways funds do that. But what are some other ways that, you know, you've seen fund managers kind of have like a liquidity sleeve in there?
00:21:34
Speaker
Well you want to make sure that the assets are fully deployed. And so we don't want to see cash drag. That's always the fear when you particularly when you have private equity or venture capital. So you want to see them equities the cash and hopefully it's in something that you know has less risk but still some attractive returns to avoid some of that drag.
00:21:56
Speaker
I think the most creativity that we've seen in the interval and tender fund market is in private credit, partly because with credit, there's the full spectrum of liquidity. To the extent that you have, for example, like a structured credit portfolio, you can invest in things like high yield and senior loans alongside of the less liquid parts of the structured credit marketplace.
00:22:23
Speaker
I would say that the portfolio managers for private credit probably have it easiest because they can avoid cash drag and deploy the assets in something that has a similar sort of profile, but much more liquidity. It is harder with, what are you gonna do in private equity or venture capital to replicate the exposure? We have heard of some really innovative
00:22:53
Speaker
private equity replication strategies, for example. We're not seeing it in practice just yet, but that's one way. Another way, some of the private equity funds, they have deployed capital into co-invest or into secondaries while they're waiting for some of the primary investments. And so you do see staggered portfolios there.
00:23:17
Speaker
The other thing that we're talking about, the invest up ways to facilitate liquidity. I would also talk about the quarterly repurchase process. What a lot of funds are doing is they're using the natural cash flow either for realized investments that they're turning over,
00:23:38
Speaker
talking about private equity, monetizing an investment, that will create cash. In private credit, you have a lot of the securities that are naturally kicking off high levels of cash flow. So looking at a deployed portfolio throughout time, looking at the natural sources of cash flow and how you can use that to address your quarterly liquidity needs. Some sophisticated interval fund managers
00:24:05
Speaker
like Cliffwater, who's the market leader. They talk about liquidity along multiple dimensions, including the ability to use a credit facility. Now, many interval funds will use a credit facility. Some of them are more dynamic in their use, so that way from quarter to quarter, they're not hitting their 5% liquidity limit. I think there's a lot of tools that
00:24:31
Speaker
fund managers and portfolio managers have to address this recurring liquidity function without having to take 20% of the portfolio and sit it in cash.
Valuation Challenges and Solutions
00:24:43
Speaker
And that aspect, I think there's been a lot more thought in the last 12 months
00:24:48
Speaker
than maybe when the interval fund market five, six years ago started rolling out. We did see more cash drag then, but obviously that's an objection. People don't want to see that. So a lot of work has gone into creating liquidity management programs that align with the quarterly schedule for liquidity.
00:25:09
Speaker
And let's talk a little bit about why limitations and liquidity are so important in this market. You know, I started my career in the alternative space working for a hedge fund to fund and we had to deal with gates and things of that nature and everybody freaks out. But these are not bad things, folks.
00:25:28
Speaker
Gates and limitations in liquidity are actually good for investors. And maybe can you talk a little bit about why this is good for investors and actually helps to have an orderly way of which the fund can maintain operations?
00:25:44
Speaker
Yeah, I think from a behavioral economist's perspective, interval funds have an embedded commitment device effectively. And so the decision that you make to enter an interval fund is a decision that will keep you invested for a period of time.
00:26:05
Speaker
And so I think that it's similar, like if you're buying a private credit interval fund for the cashflow that you're generating, you could think of it in a similar way as let's say you're buying a rental property in Florida. You're buying it for the recurring cashflow. And if you buy that rental property, you're probably not gonna be looking to sell it
00:26:33
Speaker
you know next quarter or maybe even next year because you reached research the property you did a lot of diligence on the front end I would say the same thing is true for an interval fund so. Be thoughtful when you're entering a new investment think about your investment horizon up front and think about the goal and so.
00:26:52
Speaker
you know just as you know property prices in Florida are quite high so the value of that rental property the mark to market value is high but you you bought it for the cash flow so you're not going to just up and sell it tomorrow.
00:27:08
Speaker
And or the flip side might be true. If you were to see a downturn in property prices in Florida, would you go to sell it very quickly? You may or may not, depending on what the goal is. But so I think that be mindful that the marks on these portfolios of private assets can move up and down on you and be thoughtful about what your original goal was. And if it's if it's cash flow with a private credit strategy, then
00:27:33
Speaker
you should have a longer investment horizon that sees it through a market cycle. Because timing, trying to time market ups and downs can be tricky for a number of reasons. We've already talked about liquidity, because even if you want out, other people may want out at the same moment. But then there's also, we haven't talked about valuation. With a lot of these private assets, many of the products are not daily NAV, they're monthly value or quarterly value.
00:28:03
Speaker
And so I think there start to be questions on, well, is my portfolio valued appropriately because these are private assets. And just as liquidity management has evolved in terms of how fund sponsors are handling interval funds, I would say that the methodology and the rigor behind the valuation has also changed quite a bit for the better.
00:28:28
Speaker
Yeah, it's interesting. Our mutual friend Phil Block was on the podcast a while back, and we talked about this that, you know, valuation, there's so many different components to it. But when we're talking about things that are less liquid, that aren't being valued all the time, and maybe
00:28:44
Speaker
aren't being marked to market every single day. There's a couple of positives and negatives that come from that, negatives being your pricing could be stale and not reflective of current market environment and current market demand, but also from like a behavioral standpoint, it actually, I think Cliff Asness calls it volatility laundering, which is not wrong. Because you're not pricing it every day, you look like you're experiencing a smoother ride than maybe you really are.
00:29:13
Speaker
for better or worse because of that. So from a behavioral perspective, it can actually be good for clients because they may not be freaking out about this product every day because it looks really smooth because it's not pricing every day. But on the flip side, it might be that the assets aren't being valued on a regular basis and us, there could be things going on right now in the market that aren't being reflected in the underlying prices of the securities that you own.
00:29:39
Speaker
Yes, and that right there can cause people to head to the exit if you think your real estate portfolio is overvalued at present because the prices haven't come down or been brought down.
00:29:54
Speaker
presumably you'd want to exit at a higher price. And so I think that having true valuation methodology and having transparency into your valuation process allows advisors and investors to judge for themselves, you know, do I believe in the veracity of the pricing and a lot of interval fund sponsors for that reason,
00:30:19
Speaker
to make sure their boards and their auditors are comfortable, many firms are looking to third-party valuation experts to help inform what is often an internal process. You don't have to, a fund doesn't have to, you know, hire a third-party valuation expert, but when you're diligent seeing an interval fund, I think it's something important to understand how and in what way are you,
00:30:46
Speaker
changing your valuation on the basis of third-party valuation marks. Because presumably, if a manager does not have a robust process, the valuation is not going to keep up with market movements. And that's what you're trying to get comfort on in the end. And the reality is that the SEC does not
00:31:10
Speaker
demand correctness. What they demand is that funds and fund sponsors follow their valuation policies and procedures. But these valuation policies and procedures are not made public. So you as an investor can't see. So you do have to ask questions as to the process and the robustness of that to get comfortable. Because as this spectrum of alternatives changes,
00:31:35
Speaker
your comfort on infrastructure or private equity might be very different than private credit, where frankly, private credit's a little bit easier because there's really great third-party valuation agents and they can actually provide it on a very cost-effective basis. But bear in mind, these costs of valuation often get passed to the end investor. And so while you might take a lot of comfort in having a third party involved,
00:32:02
Speaker
in pricing your real estate portfolio. Oftentimes it's shareholders who bear the costs. And if you're trying to do a daily or monthly nav, it gets very expensive very quickly to have a third party valuation agent do that.
00:32:16
Speaker
Yeah, that's a perfect example of where you have to understand the fee structure and why you're paying the fees you are. There's no free lunch, right? So if having a third party valuation provider is important to you, understand that the funds that typically use third party valuation providers might have slightly higher fees. And so you're paying for that. So you've got to understand that if you want the cheapest fund, then you've got to take some risk that's associated with that. And I think that's a really important thing to understand.
00:32:46
Speaker
You know, we always talk about that when it comes to anything right you know it costs more to to take on leverage it costs more to short it like these are all things that increase fees. And it doesn't necessarily mean like they're trying to like charging more just to charge you more like they're trying to provide.
00:33:03
Speaker
you know a higher quality service or do something that just costs inherently more to the fund manager to be able to do and everybody wants to you know nobody's going to launch these products if they're not going to be profitable so they're trying to find ways to do that and I think that's really important you know you talked about understanding that like in our due diligence process when we work with tender offer interval funds
00:33:26
Speaker
In our DDQs and our DDRs, you'll actually find the explanation for how they're doing the evaluation and whether or not they use a third-party provider is available so advisors can know this information. That's an important component to our due diligence process.
00:33:42
Speaker
So that's the benefit of working with a firm like Bonnerin is that you get that and you don't have to worry about, did you ask those questions? Although if you are like a podcast like this is reminding you that you should, they don't have to disclose this publicly, but you as an investor can ask the question if they choose not to want to answer it, you don't have to invest. Most investment managers may not disclose certain things publicly, but they're perfectly happy to answer the questions to a potential investor.
00:34:10
Speaker
That's right. And I think the visibility that your platform provides, being able to look at multiple funds and just understand a common set of dimensions like valuation is really important. Every quarter when we put out our detailed research, we'll make industry recommendations. Last quarter, for example, we mentioned that many of the, for example, credit is the largest category, 70 funds out of 220 or credit.
00:34:40
Speaker
It is a struggle, if you're an investor and you're saying, okay, I'm going to buy a private credit fund because I want attractive cash flows, I want a nice high yield. If
Bridging Institutional and Retail Needs
00:34:50
Speaker
you go onto the fund website, many of these private credit funds don't even have dedicated fund websites, and many of them aren't even disclosing in their fact sheets or on their fund websites what their current distribution rate is. In some ways, it's just
00:35:06
Speaker
It's too bad for that fund. I don't know if they don't think advisors aren't interested in that. So there's a lot of areas where this industry has not caught up with some of the best practices in the mutual fund or even the ETF market on the types of disclosures that advisors, they need to see at month end where your AUM levels are and they need to see where your distribution rates are. Because if I'm an income investor, that's really important information.
00:35:36
Speaker
Yeah, I mean, that's one of the things we work with our asset managers on. Because we're in this alt space, you have two types of people bringing these products to market. You have the folks like Arc, who are really experienced ETF and mutual fund distributors. And they're adding these interval products as a way to sort of bolster their lineup just because of the nature of the way they invest. But the vast majority of people that are bringing interval funds in the market
00:36:00
Speaker
alternative managers who have never dealt with the retail investment space and don't actually understand how best to service support and what information is needed. So we actually spend a lot of time with our managers talking about those things and helping them put those things together, whether it be working with our marketing folks to create those one-pagers and things of that nature, to create an advisor-only landing page for exactly those reasons.
00:36:25
Speaker
And then we create our other materials like our storyboards with those important caveats and our due diligence and questionnaires and reports all include all that. So from that standpoint, we really help our asset managers support our advisors. And so I think that that's a really important part of this whole thing is we have
00:36:48
Speaker
Funds and investment companies that had not traditionally worked in this area of the market and not understanding how incredibly different it is from the traditional institutional side. Cause it's so different. It is different and you're right that we actually have done the analysis on that. 70% of funds in the interval and tender fund market
00:37:13
Speaker
are by alternative boutiques or alternative managers.
Distribution and Onboarding Challenges
00:37:18
Speaker
These are firms that don't have existing mutual fund or ETF businesses. The market is just dominated by these. Many of them are very reputable institutional quality managers, but you're right. They don't know the first thing about getting advisors the information they need to make a decision and
00:37:37
Speaker
So some of these industry tips that we that we pass along sound pretty basic, like, you know, have a fund website, put the distribution yield on there. But I think you're bringing a huge service to advisors to be able to call that information and bring it together. Because I would say it's still because the interval fund market is still fairly nascent and evolving. It is hard for and particularly
00:38:03
Speaker
We've got 42 funds in the SEC registration process right now, which means they'll probably launch later this year. If 40 to 50 new funds are onboarding every calendar year, this market is just going to continue to be a growth area and it's overwhelming for advisors now that they have a lot more choice.
00:38:25
Speaker
Yeah, so we, like just in our platform alone and we're newer and we're up and coming, we have two managers that are currently in the SEC process for either tender offer or interval funds. So that are coming later this year, I can't tell you who they are, but I can tell you that we ourselves are seeing that, seeing this opportunity and we're excited about it because they're good partners and they're really interested in this market and they've come to us because they want to
00:38:52
Speaker
you know, launch and be successful. And so they but they also understand they need the help. And so I think that that that's a good thing. And that's why we're here. And that's why xa exists to like, you're there to help for this very reason. Because the people who are coming to market, they're actually the ones that have the greatest expertise, they're the ones I'd want to see coming to market, right?
00:39:15
Speaker
I definitely would. But they just don't understand like the service and support model of the advisor market. And so there's a disconnect there. And we want to see these products be successful because they have real benefits. But we don't want to see what happened in like 07, 08, 09 when a lot of hedge funds brought their hedge fund strategies into mutual fund form and then had no idea how to do distribution.
00:39:38
Speaker
So you had these actually great products that just crashed and burned because they could never get assets because they had no idea how to distribute. And this is an opportunity to kind of revisit that idea of being bringing really interesting good product to market that investors should want to invest in. But like a lot of these firms have no idea how to distribute.
00:40:02
Speaker
Yes, I agree with you that they don't. That's why to me, you do see the likes of firms like PIMCO and Nuveen and BlackRock in the space. I actually welcome that because I actually think that they do a very good job with advisor education and spreading the word. But it's a balance of these traditional firms which do know the market very well. I think that they're going to be the way that we broaden out the
00:40:30
Speaker
Advisor participation because it's still i would say the use of interval funds is still fairly concentrated you know if you if you were a read investor or bdc investor you're probably very familiar with interval funds but there are a lot of advisors where
00:40:45
Speaker
this entire space of alternatives is brand new to you. I think a lot of advisors need a partner like yours because not only are you helping them diligence on the front end, you're educating them on structure and on managers and on asset classes, which is a different type of education. Many advisors don't need that anymore when it comes to traditional mutual funds and ETFs.
00:41:11
Speaker
Well, the other thing that I run into with advisors and maybe you can speak to this is these aren't exactly the easiest things to trade. Right. So, you know, they're registered, they have Q sips, oftentimes they'll have a ticker even if they're not publicly listed.
00:41:27
Speaker
But I had an advisor at a conference come up to me and be like, I still can't trade interval funds for my client because they have a retail fidelity or Schwab account, and they just don't let them. And that is kind of true and kind of not. Most of the big custodians have a process of which you can submit and fill out certain extra paperwork to get their blessing saying that you're a sophisticated investor, that you are able to trade these things, but most people don't realize it. And then there are some that just
00:41:56
Speaker
blatantly don't let you trade it. So, you know, understanding that is important. Can you talk a little bit about, you know, if you are an advisor and there's an NFL fund you like like some of the ways that you can, you know,
00:42:10
Speaker
go to your custodian and talk about these things? Yes. Well, I think fidelity is under a lot of fire right now, given some of their ETF policies. But even in the arena of interval funds, I think that the advisors, they have a voice. They are important to the clearing and custody firms. And fidelity, I think, is actually even more receptive to advisors. If you say, I want to buy this interval fund,
00:42:35
Speaker
And maybe it's one of the ones in the pipeline that, you know, or has just recently launched. That's where the fund sponsors actually do need the help of the advisors themselves, because it does take, you know, call it 25 infidelity and 50 million in Schwab of advisors pulling the product through the system, if you will.
00:42:57
Speaker
It can take upwards of six months for a new fund to get onboarded to Fidelity and Schwab. Fidelity and Schwab have good reasons for it, but a lot of it is that some of it is a manual process for them doing quarterly repurchases. It's not been automated by technology just yet. There is some time cost involved with processing these types of interval funds. Fidelity and Schwab want to satisfy
00:43:25
Speaker
Um, their advisors. Um, and so I think that, you know, you just have to let your, your fidelity rep know or your Schwab rep know that you want the product because it's really the only way to get these products onboarded initially. Now I know that some, um,
00:43:42
Speaker
there are some direct-to-consumer platforms that allow individual investors to access interval funds directly. There's not many of them that do this. The interval fund market is still largely an advisor-sold vehicle. Therefore, you've got to get onto one of the clearing and custody platforms to be able to purchase it. But I think
00:44:08
Speaker
Advisors are important in this process and so don't be surprised if you have an interval fund sponsor, you know, ask you to place a call or an email on their on their behalf because that really is the way things get onboarded these days, you know, mutual fund ETFs it's just sort of a flip of the switch, it's very easy to get onboarded, not so with interval funds and probably appropriately so because we're talking about alternatives but
00:44:33
Speaker
But it is a process to get these things up and onboarded so that every advisor who clears through those firms can buy it. Yeah, I've always said this. I know Fidelity is under all sorts of fire right now for some of the new fee structures that they just announced. But I've always said, I thought Fidelity
00:44:53
Speaker
is the better custodian if you want it, if you're going to be doing work in the alt space. They're just more receptive and they've been doing it for longer. But that is an important caveat. I don't think advisors realize that in order for a lot of these products to get on the platforms, it can't be the manager asking.
00:45:11
Speaker
It's such an odd backwards way because it's not like that with any other type of product, right? The advisors have to request it. So like, for example, with Fidelity, if I have a manager who says I really want to be able to custody it at Fidelity, I have to find an advisor who would want to invest in that manager who will then put in
00:45:32
Speaker
fill out the paperwork and sign it, putting in the request of fidelity because it can't be the manager. It has to be an advisor that used that custodian to even start the process. And I think Schwab is the same. They're newer and they're still figuring out the kinks in the system. But even then, to your point,
00:45:52
Speaker
One of the reasons we exist and one of the reasons why we did our integration with our partner Mammoth is because we found that with most private vehicles, even if they're allowed to custody on the platforms like the pricing's off, and there's still a lot of manual so we actually
00:46:08
Speaker
created an ecosystem to solve for that so that we can take out some of that. And from the operational standpoint, take out some of the friction from the process by actually connecting directly with the administrators themselves. Even if they do custody and fidelity, that's fine. Great. Your client can see it, whatever.
00:46:25
Speaker
But to get the correct pricing and the dividend payments and all that good stuff, you're still looking to have to upload those into the client system, into your reporting system. And if we can just connect you directly to the administrator fee, we can make it so you don't have to do that at all.
00:46:42
Speaker
And that's part of why we created what we created because, you know, everybody thinks, well, custody is at fidelity. So we're custody is at 12. So, you know, this should be, no, no, no. We hear more times than not from advisors that just because they custody, there's still all kinds of issues that are involved in that. And I also think it's important for alternative asset managers to understand that too, just because you custody on those platforms doesn't mean the ease of use is any
00:47:08
Speaker
is better, you still have to think about other ways to partner with folks that can make it easier for advisors because custody is not enough. Advisors stay away from these products because of the operational complexity and friction involved, and if you can't provide them some way to solve for that, they're still not going to do business with you even if you custody on those platforms. I just think that that's such an important caveat.
00:47:33
Speaker
Yeah, absolutely. And it'll be a while before the clearing and custody firms are able to integrate. And so in the meantime, having a platform like yours that it comes at it from the advisor's perspective and is going to make
00:47:49
Speaker
If you're an advisor using multiple types of alternatives, private funds, real estate funds, interval funds, you want all of that to be on the same client statement.
Advisor Differentiation with Interval Funds
00:48:00
Speaker
You want to have ease of use into all those products. And that's where it gets a little bit tricky in terms of the actual advisor's practice. And so we've talked a lot about interval funds, I think, that are daily NAV.
00:48:16
Speaker
lot easier for an advisor to use those products in their practice. But if you're interested in some of the newer or different asset classes, things that are like tender offer products that have suitability restrictions or that are not daily nav, now you're talking about you can't buy it with a ticker. And so it is more akin to buying a private fund. And so, you know,
00:48:41
Speaker
I think that those choices should still be on the table, but that's why having a platform approach is going to be better for a lot of advisors. Yeah, and I think that from the standpoint of an advisor,
00:48:54
Speaker
In this marketplace where there's lots of options that people can look to in terms of who they want to help them with their investments, you really need to think about all the different tools you can have in your toolkit that are going to help you differentiate yourself from your competition. And while some things may be harder,
00:49:15
Speaker
That's actually your differentiation if you can figure out a way to be able to provide those things because now you're offering something that they are not getting from somebody else and somebody else isn't talking to them about. And that is actually how you grow your business, especially with the folks who have wealth.
00:49:31
Speaker
You know, these are important things to them. And as we have, you know, generations of folks that are building wealth that these are things that are now out there in the marketplace that people are very aware of. You know, we talk about all the time, how people want to know how they can invest in pre IPO and, you know, getting IPO shares has always been hard because unless you actually are with one of the, uh, one of the market makers, um, that was involved in bringing it to market, you can't get the IPO.
00:50:00
Speaker
Unless you're Morgan Stanley client and how do we solve for that and that's where specs came in and now there's platforms that you can actually buy into shares like I think invest X is one of them. There's lots of different ways and people are becoming more and more aware because people are trying to make some of these things more accessible.
00:50:20
Speaker
Uh, cause these are the ways you build wealth and these are the types of things that can actually add value in portfolios and align well with your clients passions and goals. But they're not easy. And so, you know, that doesn't mean you should shy away, but you should certainly look for ways in which you can maybe simplify.
00:50:40
Speaker
or take friction out, that's why Monry it exists. XA exists because they wanted to help the asset managers and others like understand the market and provide the educational component of it. And so we have similar aligned goals and hopefully, you know,
00:50:56
Speaker
People can take advantage of this because there's a real opportunity to grow your business and there's certainly interest. People are asking the questions, whether they're asking you is going to depend on whether or not you seem receptive to it or you want them to. But what you don't want is to lose a client because you weren't thinking about these things because it just was too hard and you just didn't want to be bothered.
00:51:18
Speaker
Yeah, client retention is really, I think, one of the number one reasons people are diversifying more into alternatives. And that's not to say too that you can also attract new clients with some of these alternatives. So I think that this is really the realm where advisors are going to differentiate their practice going forward.
00:51:38
Speaker
And to your point, we're actually seeing a lot of new interval fund sponsors go up market to a higher net worth clientele. Initially, these products were built for the lowest common denominator, trying to get daily nav
00:51:57
Speaker
for every product but it's surprising firms like Hamilton Lane and others are building products really that are restricted in sale to qualified clients and they're having success along with a handful of other firms too and so the market is big and it's growing and it's at the point where we're seeing people sort of uh target specific um segments within within the market and right now there's a lot of attention um obviously Blackstone
00:52:24
Speaker
they're diversifying beyond be read and be cred into some of these specialty structures. Now they're not 40 act products, but they too are going after this ultra high net worth client. And so there's gonna be a lot of competition among the largest alternative managers for the next dollar and for people's attention. So there's gonna be a lot more to come in terms of what we see in product innovation.
Future of Interval Funds
00:52:50
Speaker
Yeah, and I think that actually benefits the REA if you think about it because they don't have the broker dealer wire house structure of those are always late for adoption because they take so long and they have such strict criteria to be platformed. The REAs can always have an advantage if they choose to do it.
00:53:08
Speaker
And I hope more and more REAs see that because it's really an opportunity to kind of take share. And we've started to see a little bit of REAs take share from the wire houses, but the wire houses by and large still have the vast majority of mass affluent assets.
00:53:26
Speaker
Yes, and at least in this space, the wires are very heavily allocated to credit, partly because of some of their concerns about liquidity. And so we have yet to see many wire houses. I'd say Morgan Stanley is probably the exception, where they do have private equity, real estate, and a few more asset classes besides private credit. The other firms tend to be a little bit more heavy on private credit.
00:53:54
Speaker
So if you're really, if you're looking for a broad platform, like I said, there's 220 funds and it's a very limited sort of choice set right now within the wires. Yeah.
00:54:06
Speaker
Well, thank you so much, Kim, for your time. It was a pleasure having you. I think this is such an important topic. And I'm really glad that you could join us because I don't think people are talking about it enough. And as we talked about before we went live, I'm excited about interval funds, but I'm also a little scared because my fear is that people get so excited about these products because they're bringing the ability to invest in stuff you couldn't invest in before.
00:54:32
Speaker
that they'll jump in without fully understanding. And if there's one thing I've learned about advisors when we launched Bonrion and start talking about alternatives in a scalable way and helping advisors grow their business with alts, it's that advisors have historically used alts wrong and then gotten burned and then been super hesitant to jump back into the market. And my fear is that will happen with interval funds as part of that. So I'm so happy that you were able to join us and we could have this conversation because I think it's so important and this market is growing fast.
00:55:02
Speaker
And I think the more we can talk about these things, the better off advisors will be to be able to have really good thoughtful conversations with their clients about these products and invest in them for the right reasons with the right expectations.
00:55:15
Speaker
That's right. It's best to talk about it upfront and that way we're all aligned. And if people are investing with a longer time horizon, I think that's a good first start. And frankly, it is an opportunity for the advisor to make sure the investor is ready and sized appropriately. And there's a lot of handholding, I think, early on in terms of the education. But that's an opportunity for the advisor to
00:55:45
Speaker
fortify the relationship that they have with the client. So I think that your advice is appropriate given the risk involved here with interval funds. So thank you very much for having me. Thank you.
00:56:01
Speaker
All right, everybody. That is it for this episode. Remember to like this video and subscribe. Hit that subscribe button.
Podcast Closing and Engagement
00:56:10
Speaker
And if there's other topics you want to take on or guest suggestions you have, please let us know. We're happy to have you, and have a great day.
00:56:20
Speaker
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00:57:04
Speaker
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00:57:17
Speaker
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00:57:37
Speaker
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00:57:56
Speaker
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