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- Tender offer and interval funds generally broaden private market access to Accredited Investors with periodic liquidity under the ‘40 Act
- Tender offer funds typically have discretionary, limited redemptions, whereas interval funds commit to a fixed cadence of predictable buybacks.
From liquidity terms to investor eligibility, investment funds that access the private markets come in a range of structures, and understanding them is key to selecting the appropriate structure for your firm’s and its clients’ needs and setting appropriate investor expectations.
There are two major semi-liquid - aka “registered fund” - structures employed to access private markets investments: tender offer funds and interval funds.
Both are regulated under the Investment Company Act of 1940 (the ‘40 Act), and provide investors with certain opportunities for liquidity. They also typically broaden investor eligibility to include Accredited Investors, unlike 3(c)(1) and 3(c)(7) funds, which may only be designed for Qualified Clients and/or Qualified Purchasers only.
Because they are registered under the ‘40 Act and generally available to Accredited Investors, interval and tender funds have additional reporting and compliance requirements that are not required for 3(c)(1) and 3(c)(7) funds.
Tender offer funds
Tender offer funds allow investors to access private markets with the power to buy and periodically sell a portion of shares in the fund during certain liquidity windows.
The funds offer the opportunity to repurchase some of the outstanding shares held in the fund, during certain liquidity events, which may occur at different times, at the current net asset value (NAV).
The timing, amount, and terms of these repurchases are disclosed in advance, but the fund is not obligated to buy back all shares “tendered” by investors, and typically limits repurchases to only a small percentage of the shares.
Interval funds
An interval fund offers shares to investors continuously but, like a tender offer fund, does not trade on an exchange. What makes them different is their commitment to repurchase a set percentage of shares at regular intervals - often 5% to 25% of outstanding shares every quarter - generally providing a more predictable liquidity schedule.
Considerations when selecting a structure
While tender offer and interval funds can make private markets more accessible and offer intermittent liquidity, they come with trade-offs relative to traditional drawdown-style funds.
In a drawdown structure, capital is called from investors over time as investment opportunities arise, avoiding the “cash drag” of uninvested capital sitting in the fund. In contrast, tender offer and interval funds are typically fully funded upfront, which means managers may need to hold significant cash or short-term investments to meet redemption requests, which can moderate overall returns.
Another consideration is liquidity risk during market stress. The underlying assets are illiquid, which means redemption limits may force investors to wait through multiple periods to fully exit, and NAVs may not reflect real-time market conditions. In contrast, drawdown funds typically have longer lock-up periods and no ongoing redemption obligations, allowing managers to focus solely on executing the strategy without managing near-term liquidity demands.
While tender offer and interval funds can provide private markets access to a broader range of investors, RIAs will need to consider the investment strategy and target investor base, and then balance investor liquidity needs with the realities of illiquid assets.
Want to discuss the appropriate fund structures for your private markets program? Get in touch: https://www.optoinvest.com/book-a-demo
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