Unlisted Closed-End Funds: Platform Perspectives and Market Update MAY 2018

Transcription

1 Unlisted Closed-End Funds: Platform Perspectives and Market Update MAY 2018

2 Table of Contents Foreword from UMB Fund Services...2 Introduction Drivers of Growth... 3 Platform Perspective Market Overview Sizing Methodology....9 About Us UMB Fund Services FUSE Research Network (FUSE) Unlisted Closed-End Funds: Platform Perspectives and Market Update

3 Foreword from UMB Fund Services While interval funds and tender-offer funds, or unlisted closed-end funds (CEFs), are not a new concept in the registered marketplace, they have gained steady interest in recent years as a viable option to support the growing demand for non-correlated returns. We are witnessing growing demand for these products and are excited to partner with FUSE to publish this report on unlisted closed-end funds. Given the quickly evolving interest and complexity of these structures, it has been difficult to gain insight into the market potential. We believe this report will be invaluable to not only our clients currently offering unlisted CEFs, but also to managers considering product development in this space. At UMB Fund Services, we have partnered with our clients on their unlisted CEFs for nearly 20 years. Recognizing a need to streamline processing and product development for these funds, we have made significant investments in our servicing technology and a turnkey platform to streamline the launch process for fund managers. For more information on how UMB can assist you with launching or servicing an unlisted closed-end fund, please visit umbfs.com/intervalfunds. UMB Fund Services partnered with FUSE Research Network to produce the following report. While UMB Fund Services believes this report to be accurate and comprehensive, the data presented, positions taken and forward-looking statements made herein are attributable to FUSE Research Network. 2 Unlisted Closed-End Funds: Platform Perspectives and Market Update

4 Introduction In 2017, FUSE Research Network and UMB Fund Services partnered to deliver a market sizing of interval funds and tender-offer funds, collectively known as unlisted closed-end funds (unlisted CEFs). As the growth of these products has accelerated, particularly within the interval fund space, it seems appropriate to provide an updated market sizing. In addition, we will evaluate these strategies from the distributor s perspective, specifically related to placing these products onto their platforms. For a more in-depth look at the product features, pricing structures, and other unlisted CEF attributes, please refer to the August 2017 white paper titled, An Opportunity to Differentiate with Unlisted Closed-End Funds. As of March 2018, there were 109 unlisted CEFs available for purchase by investors regardless of accreditation status, with total assets under management (AUM) of approximately $48 billion. Interval funds continue to outpace tender-offer funds from an asset growth perspective. Since 2014, interval funds have grown at an annual rate of 50.1% to end 2017 with $22.1 billion in assets. At the same time, tender-offer funds dropped to $25.9 billion with a compound annual growth rate of -3.7%. In 2014, interval funds represented only 18.4% of the unlisted CEF marketplace and now stands at 46.1%. It is difficult to ascertain precise asset numbers due to different reporting periods and variability in buy-back and repurchase periods. Even determining the number of active funds is challenging, given that many remain in registration, are master/feeder structures, or have never grown beyond their seed capital. Drivers of Growth One of the primary reasons for growth in the unlisted CEF market is the demand from retail investors and advisors to access truly illiquid strategies that were previously only available to institutional investors. These structures allow for a greater allocation of less liquid equity and debt instruments than traditional open-end mutual funds or ETFs, primarily due to better information about redemptions. In the case of interval funds, there are periodic offers to buy back shares. Regarding tender-offer funds, the frequency and size of tender-offers are at the discretion of the board. This allows asset managers to utilize alternative sources of alpha and higher-yielding strategies such as private equity and debt, which offer far less liquidity than traditional investments. Another appealing feature of these structures is the lower investment minimum for investors to access alternative or illiquid strategies. This is especially true of interval funds where over 70% of investment minimums are less than or equal to $10,000, and many being as low as $1,000. In addition, the tax requirements associated with an IRS Form 1099 compared to a Form K-1 is yet another reason that unlisted CEFs are attractive to the retail marketplace. From the manager perspective, these vehicles provide greater flexibility in how they manage their investments compared to a mutual fund that has limitations regarding the amount allocated to illiquid holdings. They also do not have a cap on the number of investors that unregistered funds and private equity funds have. Finally, and possibly the most important reason for manager interest in these structures is access to the retail marketplace they can provide moving forward. Platform Perspective Given this increased interest, FUSE gathered feedback from leading distribution firms to get a better sense of their viewpoints on these two structures, as well as alternative investments, such as hedge fund strategies, private equity, private credit, real estate, etc. While some distributors cited the lack of liquidity being a challenge, others mentioned that they were encouraged by larger managers with well-known brands entering the space. As is the case with most potential disruptors, 3 Unlisted Closed-End Funds: Platform Perspectives and Market Update

5 consensus lies somewhere in the middle with apprehensive optimism. Among the distributors that do offer unlisted CEFs on their platforms, the majority only make them available on their brokerage platforms or to registered investment advisors (RIAs) since they are a fiduciary. Although FUSE believes that the eventual target audience for interval funds and some tender-offer funds is the broadest market retail distributors are not there yet. On the horizon, availability through models looks somewhat promising but will likely be limited to interval funds. Technological and operational issues currently prohibit distributors from including interval funds in model portfolios. However, sufficient demand will prompt firms to invest in the ability to include these funds in models. Clearing through Alternative Investment Product (AIP) and DTCC is also a concern. As one executive pointedly noted, I wish the industry would get together and talk these issues over to solve the problems. advisory platforms. The education hurdle extends to both advisors and asset managers. Distributors expressed concern about how the vehicles are being used and whether advisors fully understand them and their limitations. As distributors evaluate these structures for placement on their platforms, managers need to identify the type of advisor that will utilize their strategies. Based on a recent FUSE survey of financial advisors, the two most significant obstacles to using interval funds is the lack of liquidity and lack of track record. This is followed closely by the need for more information to help explain the benefits and risks of these structures to their end client. In addition, nearly 30% of advisors listed fees and expenses as an obstacle to interval fund use. Ultimately, the managers that have the greatest success will not only be able to gain access to distributor platforms, but also effectively train and educate advisors on the proper placement of these strategies within portfolios. UMB Fund Services has been involved in promoting the development of the DTCC AIP platform since 2008, representing the administrator viewpoint and advocating for their clients on development of the platform. UMB views the AIP service as a major benefit for alternative fund managers. Straight-through processing delivers a variety of advantages including operational efficiency, greater transparency and reduced risk. However, the greatest benefit UMB sees for its clients is the increased distribution potential for funds that are looking beyond their traditional investor base. The AIP service is one factor that may allow funds access to trading platforms and may speed asset growth. Liquidity and lack of education were the top two challenges distributors noted with utilizing interval/ tender-offer funds. Since the ability to rebalance is viewed as a necessity, liquidity presents an issue on 4 Unlisted Closed-End Funds: Platform Perspectives and Market Update

6 Market Overview Sizing The following section provides an update to our previous white paper, as well as additional exhibits to show the various growth areas in the space. This information includes: Sizing of the overall unlisted CEF marketplace Breakdown of assets by category Top unlisted CEFs by assets Number of unique funds currently offered and in registration Unlisted CEF Assets, ($ Millions) $50,000 $40,000 $30,000 $20,000 $35,575 $29,042 $38,641 $29,988 $40,601 $26,492 $48,006 $25,899 Tender Offer Interval $10,000 $0 $22,107 $6,533 $8,653 $14, Unlisted CEF Assets by Broad Category, ($ Millions) $50,000 $40,000 $30,000 $20,000 $10,000 International Equity Allocation Sector Credit Alternative $ Unlisted Closed-End Funds: Platform Perspectives and Market Update

7 Broad Category by Unlisted CEF Type, % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0.5% 0.2% 0.2% 1.2% 3.7% 14.1% 12.2% 26.3% 32.2% 53.4% 82.0% 52.8% 18.5% Interval Tender Offer Overall 2.6% International Equity Allocation Sector Credit Alternative Top 10 Unlisted CEF Categories, ($ Millions) Assets ($ Millions) Rank Category Year CAGR 1 Multialternative $17,716 $18,241 $14,425 $12, % 2 ILS/Catastrophe Bonds $1,711 $2,944 $4,535 $6, % 3 Equity Long/Short $5,219 $5,219 $4,619 $5, % 4 Real Estate $324 $1,156 $3,287 $5, % 5 Private Equity $2,196 $2,658 $3,155 $4, % 6 Marketplace Loans - - $1,291 $3,122 N/A 7 Loan/Structured Credit $2,556 $2,047 $2,236 $2, % 8 Opportunistic Credit $1,227 $1,560 $1,909 $1, % 9 Option Writing $544 $774 $1,102 $1, % 10 RE Debt $678 $988 $1,132 $1, % 6 Unlisted Closed-End Funds: Platform Perspectives and Market Update

8 Top 10 Unlisted CEF Categories by Unlisted CEF Type, 2017 ($ Millions) Rank Category Interval Tender Offer Total 1 Multialternative $13 $12,570 $12,582 2 ILS/Catastrophe Bonds $6,502 - $6,502 3 Equity Long/Short $2,411 $3,014 $5,425 4 Real Estate $5,210 - $5,210 5 Private Equity $127 $4,768 $4,895 6 Marketplace Loans $3,122 - $3,122 7 Loan/Structured Credit $1,302 $991 $2,293 8 Opportunistic Credit $39 $1,527 $1,565 9 Option Writing $1,532 - $1, RE Debt $219 $977 $1,196 Top Unlisted CEFs by Assets, 2017 ($ Millions) Growth Rank Portfolio Name Type Category 2017 YoY 3-Year CAGR 1 Stone Ridge Reinsurance Risk Premium Interval Fund Interval Credit $5, % 51.6% 2 Skybridge Multi Adviser Hedge Fund Portfolios Tender Offer Alternative $4, % -9.3% 3 Stone Ridge Alternative Lending Risk Premium Fund Interval Credit $2, % N/A 4 Partners Group Private Equity Fund Tender Offer Alternative $2, % 66.9% 5 ACAP Strategic Fund Interval Alternative $2, % 16.6% 6 Griffin Institutional Access Real Estate Fund Interval Sector $2, % 249.4% 7 Versus Capital Multi-Manager Real Estate Income Fund Interval Sector $1, % 147.6% 8 Stone Ridge All Asset Variance Risk Premium Fund Interval Alternative $1, % 41.2% 9 FS Global Credit Opportunities Fund Tender Offer Credit $1, % 37.8% 10 Advantage Advisers Xanthus Fund Tender Offer Alternative $1, % 2.3% 11 Ironwood Multi Strategy Fund Tender Offer Alternative $1, % 5.3% 12 AB Multi-Manager Alternative Fund Tender Offer Alternative $1, % -3.2% 13 CPG Carlyle Fund Tender Offer Alternative $1, % 23.8% 14 Aetos Capital Long Short Strategies Fund Tender Offer Alternative $ % -5.6% 15 Blackstone Real Estate Income Fund Tender Offer Credit $ % 18.9% 16 Total Income+ Real Estate Fund Interval Sector $ % 96.2% 17 Ironwood Institutional Multi-Strategy Fund Tender Offer Alternative $ % 10.1% 18 Blackstone Alternative Alpha Fund Tender Offer Alternative $ % 1.4% 19 Invesco Senior Loan Fund Interval Credit $ % -12.3% 20 Pioneer ILS Interval Fund Interval Credit $ % 142.2% 7 Unlisted Closed-End Funds: Platform Perspectives and Market Update

9 Number of Unique Funds Currently Offered JULY 2017 MARCH 2018 Interval (33) Interval (42) Tender Offer (76) Tender Offer (67) Number of Unique Funds in Registration JULY 2017 MARCH 2018 Tender Offer (12) Tender Offer (11) Interval (25) Interval (29) 8 Unlisted Closed-End Funds: Platform Perspectives and Market Update

10 Methodology Underlying asset data and general vehicle attributes (e.g., strategy type, inception date, minimum investment, etc.) are collected by FUSE from audited annual report filings as well as unaudited semi-annual reports and quarterly schedule of portfolio holdings (Forms N-CSR/ N-CSRS/ N-Q). FUSE searched through all of the N-2 filings since 2013 in the SEC s Edgar database to identify funds for this paper. In addition, tender-offer filings were searched back to 2016 to identify tender-offer funds that were launched prior to Non-traded REITs and BDCs are excluded from this analysis. Assets presented are net assets (i.e., do not reflect total Managed Assets for leveraged products). The periodic display of assets presented reflects a combination of AUM for the exact period where available as well as a proxy representing the closest historical period available (no more than one quarter ago). For example, if a fund has a fiscal year end in October, the October 2017 actual net assets would be used for the displayed aggregation of 2017 AUM. Term trust funds are included in the tender-offer category. The number of unique funds displayed in the charts on page 8 only includes distinct strategies. In cases where there are multiple funds with the same (or substantially similar) strategy or where multiple feeder funds exist, these are only counted as one unique fund. 9 Unlisted Closed-End Funds: Platform Perspectives and Market Update

11 About Us UMB Fund Services UMB Fund Services is a leader in unlisted closed-end fund servicing, offering a unique servicing technology and turnkey start-up platform both designed specifically for Unlisted CEFs. UMB Fund Services offers a broad array of services for mutual funds and alternative investments, including turnkey solutions, to help our clients not only bring new products to market, but also to position themselves for future growth. Key services include fund accounting and administration, investor accounting and reporting, tax preparation, transfer agency, distribution*, custody** and cash management.** At UMB, we excel at adapting in an ever-changing market environment. This agility positions our operation to meet client needs now and in the future. For more information, visit umbfs.com. FUSE Research Network (FUSE) FUSE was launched in 2008 with the view that research and consulting support for asset managers has failed to evolve with the changing needs of the client. The future competitive environment will demand that clients make important business decisions within shorter and shorter timeframes. In order to support clients in this setting, FUSE provides a dynamic research platform that covers our clients current and future decision areas (strategic and tactical). Our goal is to become an invaluable business partner through the delivery of highly informed and forwardlooking recommendations that are among the critical inputs our clients need to optimize results. *Service provided by UMB Distribution Services, LLC **Services provided by UMB Bank, n.a. 10 Unlisted Closed-End Funds: Platform Perspectives and Market Update 2018 fuse research network UMB Fund Services