(Bloomberg) -- The push to put private assets in the hands of individual investors is breathing new life into a relatively quiet corner of the asset management industry: interval funds.
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Vanguard Group, Capital Group and the TCW Group are among the investment giants who have embraced the semi-liquid funds, partnering with the likes of Blackstone Inc., KKR & Co and Apollo Global Management Inc. to source the private securities.
The revival has seen 25 interval funds launch this year alone, bringing the grand total to 142 funds — while that’s a fraction of the hundreds of new exchange-traded funds that have debuted, it’s already surpassed last year’s annual record for the wrapper in less than six months, Morningstar Direct data show.
The uptick in new entries suggests that interval funds are emerging as the vehicle of choice for offering retail traders access to private markets. As the name suggests, investors can only withdraw from the fund at predetermined intervals, usually quarterly — a key difference versus ETFs, which can be bought and sold throughout the trading day.
Interval funds also aren’t subject to the Securities and Exchange Commission’s rule that caps investments deemed illiquid — a bucket that includes private securities — at 15% of an ETF’s portfolio. That’s made them a preferred solution for issuers looking to meet retail demand for private assets, as well as for private asset firms looking for new sources of capital as institutional fundraising slows.
“Interval funds are effectively the middle bowl of porridge in the Goldilocks scenario. Not as illiquid and cumbersome as traditional drawdown funds, not so liquid as to need to be massively watered down as an ETF,” said Ben Johnson, head of client solutions at Morningstar. “They offer a good balance of episodic liquidity and significant exposure to private assets.”
The TCW Private Asset Income Fund is the latest example, an asset backed finance interval fund that launched this week with an anchor commitment from Apollo S3 Credit Solutions, according to a press release. In late April, Capital Group and KKR unveiled two interval funds that hold approximately 40% of their portfolios in private credit. Meanwhile, Vanguard, Wellington Management and Blackstone filed plans for an interval fund in May. The new entrants join the likes of the Cliffwater Corporate Lending Fund, which has amassed nearly $30 billion since its 2019 launch.
Issuers are seemingly turning to interval funds at the expense of the ETF wrapper. The highly anticipated arrival of the SPDR SSGA IG Public & Private Credit ETF (PRIV) in late February — the first ETF to hold private debt — was met with a strongly-worded letter from the SEC and muted demand from investors. In the months since PRIV’s launch, it’s only attracted two days of net inflows.
The inherent mismatch between illiquid private assets and an ETF, which trades continuously throughout the day, was a guiding factor in leading Capital Group and KKR to opt for the interval fund format, according to Capital Group’s Holly Framsted.
“Using an interval fund structure is how we think we can bring the benefits of private credit to a wider investor audience while prudently managing the illiquid nature of these assets,” Framsted, the firm’s head of global product strategy, said in an emailed statement. “The semi-liquid nature is deliberate — matching the liquidity of the fund structure to the underlying assets.”
Interval funds do have their relative drawbacks. They tend to carry higher fees than ETFs, in addition to investment minimums — TCW’s just-launched fund, for example, requires an initial investment of $10,000 for its retail share class, while the joint Capital Group-KKR funds ask for $1,000. However, those factors aren’t huge deterrents to the appeal, according to Todd Sohn of Strategas.
“Yes there’s a higher fees, yes there’s a hurdle to invest, but it’s not millions of dollars here and you have the quarterly gate, so you can properly price the fund,” the ETF strategist said on Bloomberg Television’s ETF IQ. “It’s kind of the right recipe for private assets rather than an ETF.”