ACCESSING PRIVATE MARKETS 1.4 Accessing private markets in an interval fund

This video unpacks the workings of an interval fund, an investment vehicle that can bring periodic liquidity to illiquid assets such as private credit and private equity.

David Bradin

Fixed income investment director at Capital Group

6MINVIDEO

[upbeat music]

 

David Bradin, Fixed income investment director at Capital Group

 

What can private markets offer your investors? Exciting new opportunities, which have historically been hard to access and are less liquid than public markets. But when public and private markets are blended thoughtfully, they can unlock access and opportunity. That's why we chose interval funds as the fund vehicle for our Public-Private+ Solutions.

 

As you know, there's a broad range of investment vehicles to pursue individual financial goals. Interval funds aren’t new, but they can offer possibilities that may be new to your clients.  In many ways, interval funds look and feel like mutual funds. But there are some key differences to be aware of, such as liquidity, that may make them more or less suitable for certain investors and objectives. 

 

You'll probably get a lot of questions about these types of funds. We're here to help you answer them. Let's take a look at how interval funds work, explore their potential benefits and see what investing in an interval fund might look like in practice. 

 

[upbeat music]

 

Interval funds are a useful tool for investors looking for exposure to private markets. That's because mutual funds are limited to holding 15% in illiquid assets. Interval funds don't have this restriction. Just like mutual funds, interval funds are governed under the Investment Company Act of 1940, have a five-letter ticker, strike a daily NAV and can be purchased daily at NAV.

 

For investors, the key difference between a mutual fund and an interval fund is that shares of interval funds cannot be sold daily. Instead, as the name interval fund implies, the fund will allow quarterly repurchases of a certain percentage of the fund’s total outstanding shares during quarterly repurchase intervals. Each quarterly repurchase is limited to a predetermined percentage of the total fund outstanding shares. This percentage ranges from 5 to 25%, depending upon the fund. 

 

To be clear, the repurchase limit does not apply to a particular investor's or advisor's position, but to the total fund outstanding shares. For example, if a fund has $500 million dollars in outstanding shares, and the repurchase limit for the fund is 10% per quarter, the fund can allow up to $50 million dollars in total repurchases that quarter. If in aggregate investors seek to repurchase more than the limit, each investor's repurchase amount will be prorated, meaning that shareholders may be unable to liquidate all or a portion of their investment during that repurchase window. If the amount requested by all investors is under the fund’s limit, each request is expected to be granted in full. 

 

Limiting repurchase offers helps align the liquidity of the fund with the liquidity of the fund's underlying investments. This protects long- term fund shareholders by helping avoid situations where a fund may have to sell less-liquid assets. 

 

When explaining this to clients, you might want to use an example that assumes a 10% repurchase limit. You could say something like this: “The maximum repurchase percentage is based on the total of all investor’s requests versus the total fund value. It’s not based upon your own investment amount. That means you might not be able to withdraw as much as you want, even if it’s less than the 10% of your own investment. But it also means you may be able to withdraw an amount as high as your total investment, as long as total repurchase amount requests from the fund from all investors is under the 10% of the fund’s outstanding shares.”

 

[upbeat music]

 

Let’s see what this might look like in practice. In this example, Audrey has $1 million dollars to invest in an interval fund with net assets of $1 billion dollars. The fund has quarterly intervals and a 5% repurchase limit. Purchases can't occur daily, so Audry can't invest in the fund daily at the price of the fund’s net asset value. 

 

Let’s say Audrey keeps her investment without withdrawing for 5 years and it grows from $1 to $1.5 million dollars. At this point, Audrey wants to withdraw $250,000 dollars. Since this is an interval fund, she can’t withdraw the money immediately. She has to request her withdrawal on or ahead of the quarterly repurchase date.  

 

When the repurchase date comes, let’s say in aggregate, investor repurchase requests are for less than 5% of the fund’s outstanding shares. That means Audrey can redeem $250,000 dollars – even though it’s more than 5% of her own investment. 

 

One year later, Audrey has $1.375 million dollars invested in the fund and wants to withdraw half of that, $687,500 dollars. She makes her request, but this time, the total requests from all investors add up to 10% of the fund's outstanding shares, which exceeds the 5% repurchase limit.  

 

As a result, Audrey and the other investors can only receive half of what they each requested – for Audrey, that’s $343,800. If she wants the rest, she’ll have to submit another repurchase request for the next quarterly repurchase.

 

This structure gives managers the flexibility to pursue longer-term investments and strategies suited for investors who can tolerate semi-liquidity, in exchange for potentially higher expected returns. 

 

When discussing interval funds with your clients, think about highlighting these three main points: Most long-term investors have portion of their portfolio that won’t be touched for years.  This part of your portfolio can offer the potential for higher returns and enhance diversification. If you invest in, for example, private credit and other private market opportunities, interval funds may offer a way to the best of both words: higher expected returns relative to public market investments and better liquidity compared to private funds. Remember, our funds do not require investors to meet certain suitability requirement and offer low investment minimums of $1,000 dollars.

 

Now that you understand how interval funds can help your clients access private markets, you can start framing how you’ll communicate this information. As a next step, consider the benefits and the risks of interval funds. How might they align with different clients’ financial needs and goals? Thank you for watching.

Deepen your understanding

Select each resource below to learn more.

An interval fund is a type of closed-end fund that does not trade on an exchange but is instead continuously offered, similar to a mutual fund, but only allows redemptions at regular intervals and up to a certain percentage of the fund's outstanding shares, as predetermined by the fund. This results in interval funds being less liquid than traditional fund structures, meaning investors cannot sell shares as quickly as they can with mutual funds or ETFs, for example, for which they generally have the ability to sell shares daily.

 

Investment managers may use interval funds as a way to offer alternative investments,  including private credit, private equity, real estate and infrastructure to more investors as the fund structure seeks to help reduce or even remove some of the long-standing barriers to wider usage. Given this vehicle’s growing use, financial professionals may consider learning more about interval funds, their benefits, drawbacks and how they could be used in their investors’ portfolios to pursue differentiated outcomes.

CHARACTERISTICSETFsMUTUAL FUNDSINTERVAL FUNDSPRIVATE LP FUNDS
Typical investor eligibilityAllAllAll or accredited investors depending on the fundAccredited/qualified purchasers
Shares offered continuouslyYesYesYesNo, fixed number of shares
Priced dailyYesYesYesNo
LiquidityDailyDailyPeriodic repurchases
often quarterly with minimum of typically 5% - 10% of fund’s outstanding shares		Long investment lock-up periods, often 10+ years
Capital callsNoNoNoYes
Typical investment minimum*Very lowVery lowLowHigh
Percentage of illiquid assets permitted in the fundLimited to 15%Limited to 15%No limit†No limit
Federal tax reporting form issued109910991099K-1

Footnotes/Important information:

 

*Investment minimums vary depending on the vehicle/fund issuer. ETFs can be traded on a fractional basis, so investment minimums can be as low as a brokerage trading platform allows. Mutual funds can be as lowas $100 per share. Interval funds vary, but minimums are typically less than $10,000, whereas LPs have investment minimums that can be $1 million or more.

 

†The fund must have enough liquid assets to cover share repurchases, otherwise there’s no limit.

 

Source: Capital Group.

Let’s walk through this brief example to help illustrate how you and your clients might strategize around interval funds.

Young businessman using digital tablet while working on laptop in business office. Male professional with wireless computer at desk. He is sitting by window in office.

Eric's investment

 

Eric is looking to invest $1 million for the long term. His advisor thinks that public-private funds might be a good investment opportunity for Eric, given his desire for higher yields, his longer time horizon and his tolerance for less liquidity. Together, Eric and his advisor decide to invest his $1 million into the Capital Group KKR Core Plus+ fund.

 

You can learn more about this fund in other materials in this series, but what you need to know now is that this fund has a quarterly interval, and allows up to 10% quarterly repurchase requests of a fund’s outstanding shares under normal circumstances per interval across all investors (not per investor). Keep these details in mind for the remainder of Eric’s story.

 

Eric’s advisor is able to invest his $1 million on any day, at the fund’s NAV price. They don’t need to wait for the interval fund’s repurchase window to buy in.

 

This $1 million in Capital Group KKR Core Plus+ Fund is not Eric’s entire portfolio. Eric’s advisor has allocated this investment as a part of Eric’s overall fixed income holdings. You can learn more about potential allocations of public-private funds elsewhere in these materials.

 

Five years after investing — A large repurchase

 

Over the next five years, Eric’s investment in the fund grows to $1.5 million due to a combination of his new contributions and fund growth.

 

After five years, Eric tells his advisor that he’d like to repurchase $250,000 from the fund. Since this is an interval fund, Eric can’t just redeem the money at any time. The advisor must submit a request to the fund manager in advance of the fund’s quarterly repurchase window deadline. The request is made and, assuming the total repurchase requests for the fund do not exceed the 10% of the fund's outstanding shares repurchase limit for the quarter, Eric is entitled to receive the repurchase amount of $250,000.

For Illustrative purposes only.

 

Notice that this $250,000 was more than 10% of Eric’s entire $1.5 million investment. As was stated earlier, the Capital Group KKR Core Plus+ fund allows for up to 10% of its total outstanding shares to be repurchased per interval. Eric was able to redeem more than 10% of his total investment holdings in the fund because that amount did not exceed the 10% repurchase limit of the fund's total outstanding shares. This illustrates that in certain situations, individual investors will be able to repurchase as much as they request.

 

This won’t always be the case, as we’ll see below.

 

Ten years after investing — A small repurchase request, with a catch

 

In another five years, let’s imagine that Eric has $1.75 million in the fund, due to growth and new contributions. At this point, Eric wants to request to have $150,000 worth of shares repurchased, which is less than 10% of his investment. Eric’s advisor submits this request in advance of the fund’s quarterly repurchase window deadline.

For Illustrative purposes only.

 

This time, however, the total repurchase requests from investors collectively add up to 20% of the Capital Group KKR Core Plus+ Fund total outstanding shares, exceeding the 10% maximum. This means that all the repurchases will be prorated to keep the total repurchase amount at 10% of the fund’s outstanding shares. Eric receives $80,000 instead of his requested $150,000. Even though his own request was below the repurchase maximum proportion of his investment, the fund’s total requests caused Eric’s requested repurchase to be prorated. Eric will need to make another request at a later repurchase window if he wants to withdraw more.

 

Fifteen years after investing — Eric cashes out

 

Five years later, Eric has a $2 million investment in the Capital Group KKR Core Plus+ Fund and decides to liquidate his entire portfolio. His advisor submits the request and, assuming all of the requested amounts of the fund's investors fall below the 10% maximum repurchase amount of the fund in totality, at the next repurchase window, Eric is entitled to receive his $2 million — a full 100% of his investment in the fund. Eric was able to have his entire investment repurchased at this window because other investors were not making similarly large requests at the same time, and Eric’s $2 million on its own was not a major portion of the fund, so total requests summed to less than the 10% maximum. Had repurchase requests exceeded 10% of the fund’s outstanding shares, Eric would have had to wait to fully liquidate.

For Illustrative purposes only.

Lessons learned

Happy man with glasses on just made a deal with another company owner.

Let’s review what Eric’s story illustrates about strategizing with interval funds:

  • Interval funds are better suited for longer term investors. Eric was interested in investing his money for the longer term in exchange for a chance at higher returns than public fixed income investments over the same period. He did not make repurchase requests from the fund for years at a time. Periodic liquidity and limits on total repurchases mean that you and your clients must strategize around these funds with the knowledge that you may not be able to quickly shift your positions in response to new needs and economic developments.
 
  • Interval funds are defined by their periodic liquidity. Eric could not redeem his funds on any given day. His advisor had to make a request in advance of the fund’s quarterly repurchase window. When considering interval funds, be sure your clients understand that their holdings are not available for repurchase on demand and strategize accordingly. Interval funds are better suited for investors without a need for immediate liquidity. Remember that different interval funds can have different interval periods and different repurchase percentage limits.
 
  • Repurchase requests from interval funds are not always met in full. One of Eric’s requests to have part of his investment repurchased from the fund could not be fully met because the investors’ total requests exceeded the fund’s quarterly repurchase limit. Eric’s repurchase was prorated based on the excess, even though his own request at that repurchase window did not exceed the fund-wide limit. As the points above emphasize, interval funds are better suited for investors who do not need very fast access to their invested money. As with the interval periods, keep in mind that different interval funds will have different repurchase limits to consider.
 
  • Periodic liquidity does not always mean that the money is “locked up.” Despite Eric’s one instance of a prorated redemption, he was also able to make two repurchase requests that represented more than 10% of his holdings in the fund. This 10% total repurchase limit applies to the fund as a whole, not to any one investor. Eric was even able to redeem 100% of his investment because the other investors were not making significant requests as a whole.

Checkpoint

Now that you have completed this lesson, you should be able to confidently:

 

  • Define what an interval fund is.
  • Explain to your clients interval fund mechanics, including share repurchase windows and liquidity features.
  • Advise your clients on the suitability of interval funds within the context of their investment horizon, income needs and portfolio diversification goals.

Takeaways

Investing in private markets through an interval fund

Download

End of Module

Continue to the next module to learn about private credit and how public-private credit solutions can increase access and potential returns for clients.

NEXT MODULE

For financial professionals only. Not for use with the public.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the interval fund prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
For Public-Private+ Funds: Capital Group KKR Core Plus+ and Capital Group KKR Multi-Sector+ are interval funds that currently provides liquidity to shareholders through quarterly repurchase offers of up to 10% of its outstanding shares. Capital Group KKR U.S. Equity+ is an interval fund that currently provides liquidity to shareholders through quarterly repurchase offers of 5% of its outstanding shares. To the extent a higher percent of outstanding shares are tendered for repurchase, the redemption proceeds are generally distributed proportionately to redeeming investors (“proration”). Due to this repurchase limit, shareholders may be unable to liquidate all or a portion of their investment during a particular repurchase offer window. In addition, anticipating proration, some shareholders may request more shares to be repurchased than they actually wish, increasing the likelihood of proration. Shares are not listed on any stock exchange, and we do not expect a secondary market in the shares to develop. Due to these restrictions, investors should consider their investment in the fund to be subject to illiquidity risk.

- Investment strategies are not guaranteed to meet their objectives and are subject to loss. Investing in the fund is not suitable for all investors. Investors should consult their investment professional before making an investment decision and evaluate their ability to invest for the long term. Because of the nature of the fund's investments, the results of the fund's operations may be volatile. Accordingly, investors should understand that past performance is not indicative of future results.

- Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility. These risks may be heightened in connection with investments in developing countries.

- Illiquid assets are more difficult to sell and may become impossible to sell in volatile market conditions. Reduced liquidity may have an adverse impact on the market price of such holdings, and the fund may be unable to sell such holdings when necessary to meet its liquidity needs or to try to limit losses, or may be forced to sell at a loss. Illiquid assets are also generally difficult to value because they rarely have readily available market quotations. Such securities require fair value pricing, which is based on subjective judgments and may differ materially from the value that would be realized if the security were to be sold. Situations involving uncertainties as to valuation of assets held by the fund could have an adverse effect on the returns of the fund.

- The fund is a non-diversified fund that has the ability to invest a larger percentage of assets in the securities of a smaller number of issuers than a diversified fund. As a result, poor results by a single issuer could adversely affect fund results more than if the fund were invested in a larger number of issuers.

For Public-Private Credit+ Funds:

- Bond investments may be worth more or less than the original cost when redeemed. High‐yield, lower‐rated, securities involve greater risk than higher‐rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not.

- The funds may invest in structured products, which generally entail risks associated with derivative instruments and bear risks of the underlying investments, index or reference obligation. These securities include asset-based finance securities, mortgage-related assets and other asset-backed instruments, which may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market's perception of issuer creditworthiness; while generally supported by some form of government or private guarantee, there is no assurance that private guarantors will meet their obligations.

- While not directly correlated to changes in interest rates, the values of inflation-linked bonds generally fluctuate in response to changes in real interest rates and may experience greater losses than other debt securities with similar durations. The use of derivatives involves a variety of risks, which may be different from, or greater than, the risks associated with investing in traditional securities, such as stocks and bonds.

- The fund invests in private, illiquid credit securities, consisting primarily of loans and asset-backed finance securities. The fund may invest in or originate senior loans, which hold the most senior position in a business's capital structure. Some senior loans lack an active trading market and are subject to resale restrictions, leading to potential illiquidity. The fund may need to sell other investments or borrow to meet obligations. The funds may also invest in mezzanine debt, which is generally unsecured and subordinated, carrying higher credit and liquidity risk than investment-grade corporate obligations. Default rates for mezzanine debt have historically been higher than for investment-grade securities. Bank loans are often less liquid than other types of debt instruments and general market and financial conditions may affect the prepayment of bank loans, as such the prepayments cannot be predicted with accuracy.

For Public-Private Equity+ Funds:

- The fund also intends to concentrate in the financial services group of industries, and to invest at least 80% of its assets in securities issued by companies based in the United States.

- K-PEC and co-investment risks: The fund's investments in KKR Private Equity Conglomerate LLC (“K-PEC”) and co-investments alongside K-PEC or one or more other KKR vehicles that pursue private equity strategies entail additional risks. Private equity investments are typically illiquid, speculative, and difficult to value, often requiring multi-year holding periods with returns generally realized only upon sale or refinancing of a portfolio company. These investments depend on access to financing, and market disruptions or increased competition may limit opportunities and affect performance. The fund's significant investment in K-PEC creates concentration risk and a decline in K-PEC's value could materially impact the fund's returns. Co‑investment opportunities are competitive and limited and there is no assurance the fund will receive allocations or comparable terms and will generally have less information than for public companies. Through its investments in K-PEC or other KKR Vehicles and co-investments, the fund may have exposure to portfolio companies with limited operating histories, evolving markets, unproven technologies, and inexperienced management, which may require significant capital and create heightened vulnerability to downturns. Most holdings are illiquid, subject to resale restrictions and may require consents or be sold at a discount. Costs associated with investments in private equity are generally greater than those of investments in other asset classes. In addition to bearing their portion of the fund's fees and expenses, shareholders in the fund will indirectly bear a portion of the asset-based fees, incentive fees and other expenses incurred by the fund as an investor in K-PEC or other KKR Vehicles and in co-investments. Incentive fees are paid to KKR when the fund's investments in K-PEC or other KKR Vehicles and/or co-investments deliver returns in excess of a specified hurdle; when paid, these fees reduce the net realized returns of such investments.
This material does not constitute legal or tax advice. Investors should consult with their legal or tax advisors.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.
Capital Group and Kohlberg Kravis Roberts & Co. L.P. (“KKR”) are not affiliated. The two firms maintain an exclusive partnership to deliver public-private investment solutions to investors. KKR serves as the sub-adviser of Capital Group KKR Core Plus+ and Capital Group KKR Multi-Sector+ with respect to the management of each fund's private credit assets. KKR is not a sponsor, promoter, investment adviser, sub-adviser, underwriter or affiliate of Capital Group KKR U.S. Equity+.
All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.
Use of this website is intended for U.S. residents only. Use of this website and materials is also subject to approval by your home office.
Capital Client Group, Inc.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.