Interval funds have been experiencing a surge in popularity as an innovative investment structure, particularly within the realm of alternative assets. This rise can be attributed to the growing demand from both institutional and retail investors who are constantly seeking ways to diversify their portfolios, enhance returns, and effectively manage risk. Interval funds cater to this demand by offering a unique structure that adeptly balances the need for liquidity with the opportunity to invest in a range of illiquid asset classes, such as real estate, private equity, and private credit.

The limited liquidity of interval funds

Interval funds accept daily subscriptions but, unlike their exchange-traded counterparts, offer limited liquidity windows. Investors in interval funds can redeem their shares only during predetermined intervals, typically on a monthly, quarterly, or semi-annual basis, with redemption limits usually ranging from 5% to 25% of the outstanding shares. This subscription and redemption mechanism, based on the net asset value (NAV), highlights the critical need for timely and insightful valuations of the underlying assets, especially given their illiquid nature.

Benefits of interval funds for investors

Valuing these assets can pose significant challenges as they often lack readily available market prices. Interval funds address this by providing investors with an estimated NAV at the end of each interval, which is derived from a comprehensive valuation of the underlying assets. This valuation takes into account factors including company performance, expected cash flows, guideline transactions, and comparisons with guideline public companies. The daily estimated NAVs are subject to adjustments based on ongoing evaluations of asset performance and overarching market conditions. It is noteworthy that due to the long-term nature of the investments, daily NAV fluctuations tend to be less pronounced compared to those experienced by traditional mutual funds and liquid markets in general.

Determining NAV with an independent third-party valuation firm

The complexity and subjective nature of valuing interval funds necessitates a deep understanding of the specific asset classes in which the fund invests. This is where independent third-party valuation providers come into play, offering an indispensable service. Skilled firms provide a crucial layer of objectivity and expertise, delivering independent and timely assessments of the fair value of underlying assets. This independent evaluation is essential not only for fund managers who rely on these assessments to make informed decisions about the fund's NAV, but also for maintaining investor confidence in the transparency and objectivity of the valuation process.

Interval funds represent a significant evolution in the landscape of alternative investments, offering a viable structure for investing in less liquid assets while managing liquidity needs. The challenges inherent in valuing such funds underscore the importance of independent valuation services, which ensure the accuracy and integrity of NAV calculations. As the demand for alternative investments continues to grow, the role of interval funds and the independent valuation providers that support them will undoubtedly become increasingly pivotal in the investment community.

Citrin Cooperman is here to support you in making well-informed decisions amidst the rise of interval funds. To learn more about this type of fund and our team’s approach, please contact Daniel DiDomenico at ddidomenico@citrincooperman.com or your Citrin Cooperman advisor.