May 31, 2023 | Interview by David Adler
Launching an interval fund is far from easy, and the list of challenges can seem long and forbidding. At the same time, the opportunities are enormous. Given the recent surge in demand for alternative investment strategies, there has never been a more advantageous time to launch an interval fund. Consulting firms, on a private-label basis, can offer asset managers custom product design and strategic advice on various capital raising pathways.
To learn more, I spoke to leading interval fund expert Kimberly Flynn, CFA. Kim has over 20 years of experience in product development exclusively focused on registered closed-end funds (“CEFs”), including listed CEFs, interval funds and tender offer funds. Kim leads the Alternative Investments team at Chicago-based asset manager and private-label CEF provider XA Investments LLC (“XAI”). Kim’s experience in launching (as well as managing, merging and closing) CEFs led to the formation of XAI in 2016. Since then, XAI has launched a propriety CEF and helped numerous clients launch their own funds. XAI offers consulting services to help asset managers launch their own proprietary funds and get to market quickly and effectively. XAI also partners with firms that wish to serve as sub-adviser and partner to enter the interval fund marketplace.
Q: How does a private-label partnership with XAI work, and what advantages does it offer to an asset manager that is interested in launching an interval fund?
A: XAI offers a turnkey, private-label CEF platform where we develop different types of CEFs including interval funds, tender offer funds and listed CEFs. We handle all activities related to the custom design, product development and launch of unique and differentiated CEFs for our clients. This includes all of the required regulatory elements such as the registration filings and the requisite operational set-up to manage a 1940 Act registered fund. We also coordinate the product build timetable, work with legal counsel to oversee production of the fund prospectus, assist with assessment and selection of fund service providers, provide setup and guidance on operational matters including valuation policies, liquidity management and portfolio management functions including leverage, building a custom website for each fund, and product positioning and full marketing services offering to ensure a successful launch. We can handle every single aspect of the interval fund launch process through our experienced team of interval fund industry experts.
On the XAI platform, we work with clients of all sizes and with a variety of alternative strategies. We have clients who are boutique alternative investment managers with small teams who are interested in accessing the retail and private wealth markets and other clients are some of the world’s largest traditional asset managers who want to enter the interval fund marketplace. We also work with RIAs who are seeking to launch their own proprietary funds.
While our clients hire XAI for a variety of reasons, they all benefit from the advice we provide to de-risk the launch of a new fund. Some of our clients have full product management or product development teams in-house but are bandwidth constrained with multiple high priority initiatives and struggle to make time for a new interval fund launch. Other clients, especially alternative investment managers, have streamlined organizations, and the in-house business development team does not have staff or experience launching interval funds. XAI aligns with our clients for success and we serve as an extension of our client’s investment and product teams. With our rich experience working on many different CEF builds over the years, we are able to transfer interval fund product and market knowledge to our clients during the product development process. XAI works behind the scenes to make sure the project manager at our client is recognized for the project success.
Q: Does XAI provide feedback on whether a prospective client’s idea for an interval fund is feasible or even viable?
A: Yes – we typically start each client engagement with a detailed feasibility study which involves four to eight weeks of workshops around the investment strategy and its fit in the interval fund structure. We focus in on the economics of the interval fund and make sure that clients understand what it takes to break-even and to scale a new fund. We also analyze our client’s firm capabilities and readiness as it relates to managing a registered fund. We want our clients to be successful, and the feasibility study helps our clients align thinking around the details of the proposed fund prior to beginning the full-scale private-label fund build. We assist with expediting internal decision making and providing additional context for such decisions. Our clients often need to take the findings of the feasibility study back to their internal constituents and work to seek approval to take next steps on the project. The feasibility study helps provide the evidence to support the market opportunity and specifically the product opportunity that the firm intends to pursue.
Q: How does XAI guide a client that has already selected an investment strategy and is committed to launching an interval fund?
A: We advise clients that have already chosen to move forward with an interval fund on the optimal product structure given their strategy and objectives. For example, many clients want to understand the benefits and trade-offs with launching a fund in the interval vs tender offer fund structure. With tender offer funds, the fund board has the ability to stop or vary the amount or number of tenders which may be useful in volatile markets for certain illiquid alternatives. We also know the history of the interval fund marketplace and can analyze the competitive landscape to help identify gaps in the market that need to be filled and ways to differentiate the new fund.
Q: How long does it take to launch an interval fund?
A: For the average interval fund, it can take eight to twelve months from start to finish to launch. Recently, both the SEC registration process and the wait time for interval funds to be added to clearing firm platforms have lengthened, making timetable management and sequencing concurrent processes even more critical.
While speed to market is important for some clients who want a first mover advantage, other clients are more concerned with avoiding missteps or are more focused on medium-term milestones like reaching the $100mm or the $500mm AUM mark. XAI is able to help clients achieve their various objectives. Our interval fund platform creates efficiencies in the process that are not otherwise possible. XAI clients achieve a successful fund launch by keeping all bodies of work moving simultaneously. We help facilitate cross-functional working group activities and make sure external service providers are aligned for an on-time fund launch. Like all projects, an interval fund launch tends to uncover numerous sticking points and unforeseen challenges along the way—we focus on highlighting the common sticking points that come up in a fund launch and work with constituents to find the right solution ahead of time.
Q: Why is a private-label partnership so valuable when launching interval funds, specifically?
A: Interval funds are unique in that their N-2 filing or SEC registration does not reflect their practical starting point; reaching $100 million in AUM is the de facto beginning of an interval fund’s life. However, raising $100 million from $0 can be incredibly difficult and requires detailed sales and distribution planning or seed capital. XAI assists clients with their go-to-market plan including sales, marketing, and national accounts planning. In addition to the SEC registration process and distribution planning, firms launching a new interval fund must also manage a fund board review and approval process. XAI has experience managing these concurrent workstreams and ensuring that nothing is overlooked.
Q: How can XAI help new/emerging managers or managers wanting to launch their first CEF?
A: XAI handles complex investment strategies and enjoys working with clients who are trying to do something that is new or different (e.g., a new asset class or new fund structure). In launching interval funds, much of the complexity of a fund launch lies below the surface. XAI dives deep into problem solving and addressing issues that arise through our proprietary interval fund product development process.
XAI can also open doors for fund sponsors when entering a new market. We understand the challenges of launching new initiatives—after all, we’re a fund management firm too. Prior to launch, XAI works with its consulting clients on strategies to raise seed capital or contribute a private fund to help scale a new interval fund. XAI served as a consultant to Thornburg on the launch of its debut listed CEF offering in July 2021 – the $640mm Thornburg Income Builder Opportunities Fund (Nasdaq: TBLD). XAI also manages the $400mm XAI Octagon Floating Rate & Alternative Income Term Trust (NYSE: XFLT) which launched in September 2017. Thornburg and XAI were two of only three new listed CEF sponsors to enter the market in the past eight years.
Q: Where have you seen innovation in the interval fund market recently?
A: The Hamilton Lane interval fund recently filed for a digital share class, introducing blockchain technology into the interval fund space. XAI anticipates that blockchain technology can transform the operational aspects of registered fund industry and expects the tokenization of funds and the addition of blockchain-native share classes to become more prevalent in the near future. A digital share class can help an interval fund sponsor streamline the issuance process and reduce some inefficiencies and expenses. More alternative asset managers are expected to commit to utilizing such technology to broaden investor access to the private markets. XAI will be working with industry participants and asset managers to help implement blockchain technology across the interval fund marketplace.
Q: Are there any interval fund trends you expect will do particularly well going forward?
A: There is still plenty of room for product category expansion in the sustainable investing space, where we’ve observed tremendous growth in the last 10 years in the UK market. Sustainable investing themed funds in the London-listed fund market have had success raising capital across different asset classes including venture capital, private equity, private credit, farmland and infrastructure. In the US interval fund market, these areas of investment are all underrepresented. Infrastructure and real assets make up a relatively small portion of the assets in the interval fund market. In the US interval fund market today, we observe four sustainable focused or impact-oriented funds, but we anticipate more to follow. The fund-of-funds space will continue to grow as well as more asset allocators and institutional investment consultants sub-advising and launching proprietary funds.
Another interesting trend is that of new types of funds sponsors entering the interval fund market. We observe an increasing number of FinTech direct-to-consumer platforms that have launched proprietary funds – many of these funds are fund-of-fund strategies. We also note that RIAs with large pools of discretionary assets under management have launched proprietary interval funds. We help RIAs with product structuring and help these wealth managers identify ways to expand interval fund distribution beyond their initial client audience.
Q: Do you expect continued growth in the private-label interval fund trend?
A: We feel this is just the beginning of the private-label approach to launching interval funds. XAI is the only independent consulting firm in the market today that can guide clients from start to finish through the interval fund product development process and provides hands-on product launch execution services. The XAI platform gives new issuers the highest probability of success when launching their own proprietary funds. As more firms begin working with us in the interval fund marketplace, awareness of what we are able to do for our clients will increase. We are often approached by asset managers that indicate they plan to launch an interval fund and we help them evaluate capital raising pathways that might be best-suited to their goals and preferences.
Q: What are the global opportunities in launching interval funds?
A: Demand for interval funds and similar semi-liquid alternative fund structures is exploding globally, with a huge amount of activity taking place in Europe. We feel managers should not limit their launch and growth plans to the US, while other markets can be a better fit for specific strategies.
We have extensive consulting experience in the London market and deep knowledge of local players, ranging from brokers to media to institutional partners. Recently, we have advised prospective and current clients who are considering launching interval funds in the United States on steps towards also launching a London-listed fund in the United Kingdom or even to contemplate the updated Luxembourg evergreen fund structure which shares similarities with the interval fund.
Q: Any final thoughts?
A: Clients should not be deterred from launching an interval fund, but they should be realistic. Having the right partner and launch strategy is key. XAI can advise on the best structure for a particular investment strategy, conduct a feasibility study and, ultimately, act as an extension to the client’s team throughout the fund build and launch. By working with XAI, asset managers can accelerate both decision making and the entire launch process.
About David Adler: David is an economic analyst and author. His work focuses on illiquidity and behavioral economics. For XAI, David has written several white papers, including “Invest Like the Pros: Using Liquidity Premiums to Drive Portfolio Outcomes,” “Overcoming the ‘Liquidity Mismatch’ in Individual Investor Portfolios” and “Using Alternatives to Achieve Your Retirement Goals.” For the CFA Institute Research Foundation, David wrote “The New Economics of Liquidity and Financial Frictions.” David has an MA and BA in economics from Columbia University. He serves as a Senior Advisor to XAI.
About Kimberly Flynn: Kim is a Managing Director at XAI with a wide range of product structuring expertise. She is a partner in the firm and responsible for all product and business development activities. Kim is a frequent contributor to media and industry events on topics including interval funds, alternative investments and London-listed investment companies. Kim has an MBA degree from Harvard University and a BBA in Finance and Business Economics, summa cum laude, from the University of Notre Dame. Kim earned the CFA designation and is a member of the CFA Institute and CFA Society Chicago.
Disclaimer
The information in this publication is provided as a summary of complicated topics for informational and educational purposes and does not constitute legal, tax, investment or other professional advice on any subject matter. Further, the information is not all-inclusive and should not be relied upon as such.
Illiquid investments are designed for long-term investors who can accept the special risks associated with such investments. Interval and tender offer closed-end funds are not intended to be used as trading vehicles. Unlike open-end mutual funds, which generally permit redemptions on a daily basis, interval and tender offer closed-end fund shares may not be redeemable at the time or in the amount an investor desires. Listed closed-end funds frequently trade at a discount to the fund’s net asset value. All investments involve risks, including loss of principal. Investors considering an allocation to alternatives should evaluate the associated risks, including greater complexity and higher fees relative to traditional investments. Investors should carefully weigh the diversification benefits, expected returns and volatility of alternatives relative to traditional investments. Investments in alternatives involve risks, including loss of principal. Performance data quoted represents past performance. Past performance does not guarantee future results. Current performance may be lower or higher than performance data quoted. Diversification does not eliminate the risk of experiencing investment losses. You should not use this publication as a substitute for your own judgment, and you should consult professional advisors before making any investment decisions.
This publication may contain “forward looking” information that is not purely historical in nature, including projections, forecasts, estimates of market returns, and proposed portfolio compositions. There is no guarantee that any forecasts will come to pass. This information does not constitute a solicitation of an offer to sell and buy any specific security offering. Such an offering is made by the applicable prospectus only. A prospectus should be read carefully by an investor before investing. Investors are advised to consider investment objectives, risks, charges and expenses carefully before investing. Financial advisors should determine if the risks associated with an investment are consistent with their client’s investment objectives.
