Real estate interval funds are working to regain the momentum they were enjoying pre-pandemic. Steady inflows of new capital around $2.2 billion per year between 2016 and 2018 took a leap forward to $3.5 billion in 2019. Yet, as with much of the rest of the real estate investment universe, 2020 brought a drop in fundraising and negative net inflows due to a surge in redemption requests from investors.
According to data from Robert A. Stanger & Co., redemptions for 2020 totaled more than $2 billion, while fundraising slowed to $1.8 billion, resulting in net inflows of $278 million. Many in the sector are hoping that 2020 will end up being only a painful hiccup in an otherwise strong market for real estate interval funds. Interval funds are not able to gate redemption requests, and most funds allow up to 5 percent of shares to be redeemed per quarter as stated in their prospectuses.
“It was the uncertainty that drove redemptions, and there also was a bit of investor psychology at play,” says Trisha Miller, executive managing director of Robert A. Stanger & Co. and chair emeritus of the Institute for Portfolio Alternatives. People starting filing redemption requests in late spring and summer. Once the queue started forming and funds went pro rata, it triggered even more redemption requests from financial advisors. “My impression is that companies are pretty committed to clearing the queue in the near future, and it’s likely that those redemption requests will come down as there is less uncertainty and more optimism,” she says.
Once people can get past the pandemic-related jitters, the hope is that investor appetite for real estate interval funds will return. “People want exposure to real estate in their portfolios, especially with how high the equity markets are, and people also are looking for yield because of the low-yield environment,” says Miller. So, there is demand for real estate and a lot of capital flows coming into the real estate category in general from retail investors, she says.
Growing appetite for interval funds
Interval funds have emerged as the preferred investment vehicle within the unlisted closed end fund (CEF) market. According to a market report published by UMB / FUSE Research Network, the market share of interval funds grew from 19 percent at year-end 2014 to 53 percent of the $62 billion CEF market as of March 2020. Research from Closed-End Fund Advisors Inc. shows further growth of the market over the past year with interval funds accounting for $39.5 billion in what has become a $75 billion non-listed CEF market. Real estate funds account for about one-third of the market at $12 billion in AUM.
Interval fund structures have been widely adopted by the institutional management sector and are no longer the cottage industry it was even a few years ago, says Dr. Randy Anderson, chief economist of Griffin Capital and CEO of Griffin Capital Asset Management Company. Griffin Capital started its interval fund business about seven years ago and is currently the largest player in the space. The company’s Griffin Institutional Access Real Estate Fund has grown to about $3.9 billion in AUM, while its newer Griffin Institutional Access Credit Fund that operates in partnership with Bain Capital has an AUM of $490 million.
Interval funds are targeting retail investors through a variety of sales channels. “Interval funds were designed to democratize access to high quality institutional types of strategies,” says Anderson. Depending on the individual fund and how it’s structured, some are open only to accredited investors, while others are open to non-accredited investors. Minimum investment levels range from $1,000 to $1 million.
Funds “democratize” access to private real estate funds
Interval funds fall into the ’40 Act fund category, which is a pooled investment vehicle offered by a registered investment company as defined in the Investment Company Act of 1940. The ’40 Act defines the rules around how the assets can be packaged and sold. That ’40 Act wrapper provides more transparency and regulation for investors, notes John Cole Scott, CFS, chief investment officer at Closed-End Fund Advisors. Interval funds give investors exposure to private, illiquid real estate investments that they are not going to find in a public REIT stock, notes Scott. When it is used right, the portfolio is often comprised of 60 percent to 75 percent private investments, he says.
Most funds are structured to give a daily NAV that allows advisors to analyze volatility within a quarter, and current yield profiles range between 3.3 percent to 6.0 percent, according to Closed-End Fund Advisors.
Interval funds are gaining in popularity for a number of reasons. One is that the structure provides a lot of access to institutional, research-driven strategies. It allows investors to combine liquid with less liquid assets that can provide favorable risk adjusted returns. Interval funds allow investors to invest across different quadrants, including public and private real estate and both equity and debt, notes Anderson. “That ability to have active management, and the ability to be in those four quadrants can provide a good, complete solution, and people really like that,” he says.
The interval fund structure also improves on some of the problems of the past, such as offering lower fees, greater transparency with more frequently updated NAV and easier tax reporting. It’s like a hedge fund exposure, except it doesn’t require subscription agreements, investors receive a 1099 instead of a K-1, and there is liquidity with redemption opportunities quarterly, says Scott. Closed-End Fund Advisors often chooses interval funds to reduce portfolio volatility, as well as to play capital in a specific sector, such as real estate or credit. Interval funds that are sold through wirehouses do look like an open end fund, because they have a ticker symbol. “The risk and challenge is reminding people that this is an interval fund that is not daily redeemable,” he adds.