There are nuanced differences between two popular investment structures: Interval Funds and Non-Traded Business Development Companies (BDCs). Understanding these distinctions is crucial for making informed decisions when launching new products. To aid in this exploration, we've prepared a helpful chart to highlight the key characteristics of each.
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Characteristic
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Interval Fund
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Non-Traded BDC
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Business Development Company (BDC)
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Structure
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Closed-end fund
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Closed-end investment company
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Closed-end investment company
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Investment Strategy
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Diverse asset classes: Alt. illiquids including PE, RE, Debt
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Focus on small and mid-sized private businesses
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Focus on small and mid-sized businesses
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Liquidity and Redemption
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Periodic repurchase offers (Typically up to 5% NAV
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Redemption through repurchase offers (Typically up to 5% NAV)
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Traded on exchanges like stocks
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Share Purchasing
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Offered continuously/directly from the fund at NAV
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Offered continuously
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Based upon listing status; shares are either sold back to fund or on secondary market
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Regulatory Framework
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SEC Registration – can be publicly listed or require accreditation
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SEC Registration –
can be publicly listed or require accreditation
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SEC Registration – can be publicly listed or require accreditation
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Distributions
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Regular income and capital gains distributions
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At least 90% taxable income distributed to maintain pass-through status
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At least 90% taxable income distributed to maintain pass-through status
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Tax Reporting
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1099
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1099
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1099
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Management Fee & Fee Structure
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Active Management Total Fees typically 1-4% of net assets
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Active Management Management Fee 0.75%-1.25% of net assets
Performance Fee 12.5-15% subject to hurdle 5-6%
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Active Management
Total Fees typically range 1-2% net assets plus 15-20% of profits
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Now, let's delve into the details.
Interval Funds: A Closer Look
Interval Funds are a relatively newer investment structure that offers a middle ground between traditional open-end mutual funds and closed-end funds. Here are some key characteristics and benefits of interval funds:
- Liquidity Management: Interval funds allow asset managers to offer liquidity at set intervals, typically quarterly, rather than daily like open-end mutual funds. This structure can help managers handle illiquid assets more effectively.
- Access to Alternative Investments: Interval funds are well-suited for asset managers seeking to include alternative or less liquid investments—such as private equity, real estate or loans—in their portfolio. These funds can provide investors with exposure to less conventional asset classes.
- Lower Redemption Pressure: Because investors can only redeem their shares at specific intervals, asset managers experience reduced redemption pressure, helping them manage their portfolios more efficiently.
- Attractive to Long-Term Investors: Interval funds tend to attract long-term investors who are willing to tolerate the restricted liquidity in exchange for exposure to unique asset classes and potentially higher returns.
- Portfolio Flexibility: Managers have the flexibility to invest in a broad range of assets, making interval funds versatile for various investment strategies.
Non-Traded BDCs: A Comprehensive Overview
Non-Traded Business Development Companies (BDCs) are closed-end funds that invest in private companies, providing capital for their growth and expansion. Here are the key characteristics and advantages of non-traded BDCs:
- High Yield Potential: Non-traded BDCs are known for their income-generating potential, often offering attractive dividend yields. This can be appealing to income-focused investors, such as retirees, seeking consistent cash flow.
- Diversification: BDCs typically invest in a diverse portfolio of private companies across various industries, reducing the risk associated with individual private investments.
- Access to Private Markets: Non-traded BDCs allow investors to access the private equity and private debt markets, which are generally less correlated with public markets.
- Longer Investment Horizon: BDCs are typically structured for the long term, which can attract investors with a horizon beyond traditional publicly traded assets.
- Potential Tax Benefits: BDCs may offer tax advantages, such as pass-through taxation, which can be beneficial for certain types of investors.
Choosing Between Interval Funds and Non-Traded BDCs
The decision to launch an interval fund or a non-traded BDC should be based on various factors, including your investment strategy, target investors and the assets you plan to include in the fund. Here are some considerations to help you make the right choice:
- Asset Liquidity: If your investment strategy involves illiquid assets or alternative investments, an interval fund may be more suitable.
- Investor Profile: Consider the preferences and risk tolerance of your target investors. Interval funds may appeal to long-term investors, while non-traded BDCs often attract those seeking income and diversification.
- Distribution Strategy: Determine how you plan to distribute the fund. Non-traded BDCs typically have a sales commission structure, while interval funds may be marketed differently.
- Regulatory Compliance: Ensure that you fully understand and comply with the regulatory requirements associated with each fund structure.
Tax Implications: Consult with tax experts to evaluate the potential tax benefits or implications of each structure for both you and your investors.
The choice between launching an interval fund or a non-traded BDC is a significant decision for asset managers. Understanding the benefits and characteristics of each fund structure is crucial to aligning your investment strategy with the needs and preferences of your investors. By carefully considering your objectives and investor base, you can make an informed choice that sets your fund on the path to success.
To learn more about our interval funds offerings, download our interval funds brochure.
