Nontraded Funds – NT-REITs, NT-BDCs, Interval-Funds (IFs)

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Nontraded Funds – NT-REITs, NT-BDCs, Interval-Funds (IFs)

Funds have many styles/WRAPPERS and may be listed and traded on exchanges OR unlisted and nontraded. If nontraded, then the issues of VALUATIONS (daily, monthly, or quarterly) and REDEMPTIONS (periodic and limited but defined; optional or mandatory) arise and there can be several variations. This article will focus on NONTRADED-REITs (NT-REITs), NONTRADED-BDCs (NT-BDCs) and (nontraded; implied) INTERVAL-FUNDS (IFs; a special type of nontraded-CEF (NT-CEF)). Note that interval-funds are nontraded by their definition, so that is implied, and not stated as qualifier. It has also become common to refer to nontraded-REITs and nontraded-BDCs as just nontraded-CEFs. The default use of CEFs means the traded-CEFs, and when nontraded, then explicitly as nontraded-CEF (NT-CEF). The OEFs by their definition are listed and traded (at NAV at market close only).

Table (image; Blue Vault) showing differences among NT-CEFs, IFs, OEFs
i.ibb.co/QjyjnJD/Screenshot-2022-12-03-23-24-46.png




Blue Vault bluevaultpartners.com/insights/interval-funds-and-nontraded-closed-end-funds-defined-and-demystified/
NexPoint www.nexpoint.com/2021/08/16/interval-fund-basics/

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NONTRADED-CEFs: NT-REITs, NT-BDCs

These include Nontraded-REITS (NT-REITs; 1960s- ) and Nontraded-BDCs (NT-BDCs; 1980- ). Both are pass-throughs and must distribute 90% of income; TAXATION is at investors’ level. Their VALUATIONS may be irregular, so their prices may be stale. REDEMPTION schedules are optional and may be announced monthly, quarterly, semiannually or annually; redemption amounts may be 2.5-5.0% per quarter. Illiquid assets may be 100% as there are no mandatory redemption requirements.

REITs en.wikipedia.org/wiki/Real_estate_investment_trust
BDCs en.wikipedia.org/wiki/Business_Development_Company

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INTERVAL-FUNDS (IFs)

Interval-funds are special type of nontraded-CEFs that have been allowed since 1990s but have been marketed only since 2010s. They are not listed and can be bought daily at NAV through sponsors, financial advisors or some brokerages. REDEMPTIONS (offered by sponsors) are limited in amounts (5%+ per quarter; typical range 5-25% per quarter) to monthly, quarterly, semi-annual or annual windows; a secondary market for trading/exchange doesn’t exist. If there are more redemptions requested than the limits announced by the sponsors, then the sellers may be assigned shares on pro-rata basis. In order to meet periodic liquidity requirements, the ILLIQUID ASSETS are restricted to 95%. In some listings, they are shown as continuously-offered CEFs. They try to address some issues related to mutual funds/OEFs (disruptive daily inflows/outflows), ETFs (liquid wrapper unsuitable for some illiquid assets) and CEFs (pesky premiums/discounts). They are regulated by the Securities & Exchange Commission (SEC) as are the OEFs, ETFs, CEFs & separate accounts. Many major firms offer IFs – BlackRock/BLK, Blackstone/BX, BNY Mellon/BK, Calamos, Fidelity, Goldman Sachs/GS, Invesco/IVZ, KKR, Lord Abbett, Pimco/Allianz, Principal/PFG, etc.

Note that TIAA Real Estate Account VA (T-REA/QREARX; 1995- ) is NOT an interval-fund; it has mostly directly-owned properties and has a low level of leverage/mortgage. It has LIQUIDITY GUARANTEE from TIAA (triggered in 2009-10), and T-REA pays for that as part of its ER. While there is ONCE/QUARTER withdrawal restriction, there is no limitation on the amount withdrawn; in fact, 2 successive withdrawals can be days apart if timed properly at quarter- end and start. Also, there are limitations on the account size but there are many ways to bypass those (systematic investments, rollovers, using TIAA advisors, etc).

Table (image; NexPoint) showing differences among IFs, CEFs, OEFs, Nontraded-Funds
i.ibb.co/R6kM3sm/Screenshot-2022-12-03-20-04-15.png




ADDENDUM, 12/5/22

DAILY PRICING of illiquid securities may not be reliable. The 3rd party pricing services may use matrix pricing or guesswork for things that haven’t traded recently. This may not be as bad as infrequent pricing (by NT-CEFs, NT-BDCs), but still not good. As pricing is more art than science, it is also possible that during periods of heavy redemptions, prices may be marked down more aggressively (and still be within the plausible ranges); reverse when there are heavy inflows, and prices may be marked up more aggressively. The IFs cannot react through fund flows (limited) or discounts/premiums.

PERIODIC REDEMPTION limits of IFs are based on fund AUM. In normal situations, with stable or rising fund assets, most small/medium size investors may be able to get out entirely (if they want) and may not be stuck for up to 20 years (so, the roach-motel analogy may work only some of the time). But when there are high redemptions, there may be OVERSUBSCRIPTIONS of redemption requests and PRO-RATA system may be used for redemptions accepted. The news of high redemptions, or their hitting the limits, may cause anxiety among fund holders and more holders may try to redeem than otherwise. Anticipating oversubscription of redemption requests, some holders may request higher levels of redemptions than they really want. Although the redemption limits are designed to prevent “runs”, the news of redemption limits being hit may feed upon itself.

Some old NT-REITs and NT-BDCs have converted to the newer IF format and some newer REITs and BDCs have adopted the IF structures.


IF Association intervalfunds.org/
IFs at Stock Market MBA stockmarketmba.com/listofintervalfunds.php
IF Tracker intervalfundtracker.com/
NexPoint www.nexpoint.com/2021/08/16/interval-fund-basics/
TIAA T-REA/QREARX www.tiaa.org/public/investment-performance/investment/profile?ticker=41091375

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Fidelity Private CRE Fund

Fidelity has jumped into private commercial real estate (CRE). This FIDELITY CORE REAL ESTATE FUND fund requires investor accreditation, $25K initial minimum, +$5K additional monthly additions, ER 1.0% plus 12.5% of performance over +5%, 1099 (not K-1).

Fund will not be listed or traded on exchanges.

After 3 years of operations, quarterly redemptions up to 5% of fund assets allowed at the option of Fidelity.

It is suggested as an addition to traditional 60-40 stock-bond portfolios.

Note that Blackstone BREIT and Starwood SREIT have been in the news due to reaching their quarterly 5% redemption limits.

TIAA Real Estate Account VA QREARX is different in that it its Liquidity Guarantee (from TIAA) allows quarterly redemptions of any amount.

Listed real estate funds behave differently due to their leverage and market factors. Examples include VNQ, XLRE, FRESX, and hybrid FRIFX. Fidelity also has multi-asset FMSDX that combines stocks-bonds-alternatives.

An interesting time for Fidelity to enter private CRE area.

Edit/Add, 2/7/23. Fido's timing is certainly interesting. CRE is under pressure of redemption at private real estate BREIT, SREIT, etc that may take the rest of 2023 to resolve. And here comes Fido private CRE fund ready to buy what they may have to sell (sort of a liquidity provider). I don't know but TIAA QREARX may be a buyer too.

Big fund families (Fido, Vanguard, etc) launch new funds when things are neither too hot or too cold and at a time when sector rebound potential is high. This may turn out to right or wrong, but Fido's timing intrigues me.

Video www.fidelity.com/go/alternative-investments-core-real-estate?ccsource=em_Promo_1057918_1_0
Video Transcript media.fidelity.com/assets/Fidelity.com_VMS/868/695/CoreRealEstateVideoTranscript_1.17.23.pdf
Limited SEC/Edgar Info www.sec.gov/Archives/edgar/data/1953520/000195352023000001/xslFormDX01/primary_doc.xml
Fidelity Term Sheet  www.fidelity.com/bin-public/060_www_fidelity_com/documents/alt-new/pdf/core-real-estate-trust-fund-1-termsheet.pdf
Fidelity Overview  www.fidelity.com/bin-public/060_www_fidelity_com/documents/alt-new/pdf/core-real-estate-trust-fund-1-fund-overview-book.pdf