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Having won over institutional investors such as pension funds and endowments, private credit managers have now set their sights on individual investors, a constituency they are increasingly accessing through interval funds.

With more investors wanting access to the double-digit yields private credit can offer, fundraising in the retail channel has ramped up. While the proliferation of non-traded BDCs has promoted access to retail investors, interval funds are beginning to hold their own as they become an increasingly popular tool for this group to get in on the action.

There have been several such funds launched in recent weeks. Principal Global Investors began offering a private credit interval fund that lends to companies with $5mn to $50mn of EBITDA. StepStone Private Wealth launched similar fund that will target senior secured private credit investments using a “multi-lender approach.”

“The interval fund structure offers greater liquidity, accessibility to retail investors, daily share prices, and a perpetual life structure, making it a more shareholder-friendly vehicle for most investors,” said Shiloh Bates, CIO at Flat Rock Global.

In 2020, Flat Rock converted its private BDC into an interval fund, noting investors in these funds don’t need to be an accredited investor or sign onerous subscription paperwork to invest, thus making it easier to access. Lack of volatility in interval funds and a wider investor reach also factored into Flat Rock’s decision to convert, according to Bates.

The rise of interval funds

Unlike most closed-end funds that sell shares and then trade on an exchange, interval funds enable investors to redeem or add shares at certain times. Also, they are not publicly traded entities; the daily share prices are what investors buy in at and then can cash out during the next redemption period.

These types of funds are particularly attractive to investors because of their return potential and mandatory periodic liquidity offered through quarterly repurchases of between 5% and 25% of shares at net asset value.

In addition to the lack of the subscription document, you may begin investing right away and earning a dividend immediately, unlike a private-equity-style structure in which it may take months for LPs to be fully invested.

“We made [StepStone Private Credit Income Fund] available to all investors, not just high-net-worth investors, on a ‘buy with a click’ basis, eliminating the friction of subscription agreements,” said Bob Long, CEO of StepStone Private Wealth, the private wealth arm of StepStone Group.

The appeal of interval funds is evident in the numbers. Currently there are 93 active interval funds, representing $89bn in assets under management, according to There are 43 interval funds pending registration with the SEC.

While still a relatively small market compared with other fund types, interval funds have seen rapid growth in the last decade; assets under management in 2014 were only about $6.5bn.

This is particularly true for credit strategies.

Interval Fund Tracker, another interval fund database, shows more than 50 interval funds manage more than $30bn in credit assets. For its part, real estate fund managers oversee 11 funds with more than $10bn, while there are only five private equity interval funds.

“There’ve been a lot more interval funds raised recently on a relative basis,” according to Jonathan Gaines, a partner at Dechert.

Whether it’s because we’re in the “golden age” of private credit or the “democratization” of the asset class, as many have touted, LPs are showing no signs of reducing allocations to the space and retail investors are increasingly in the mix too.

In fact, LPs polled by Coller Capital in the summer edition of its biannual Global Private Credit Barometer expect to expand their private credit allocation. Some 70% of LPs said direct lending offered the best opportunities among credit strategies in the next two years, beating out all other debt-investing options.

Not the only fund in town

In addition to interval funds, non-traded BDCs have emerged as another popular way to access the retail channel, and both can earn similar returns, but the case for interval funds can be made by looking at the end investor’s need and appetite for risk.

Structure should flow from investment strategy, says StepStone Private Wealth’s Long. “We believe that a direct-lending focused strategy complemented by a modest allocation to specialty credit provides a distinctive risk/reward profile for individual investors,” Long said.

Non-traded BDCs may offer redemptions once per quarter but are not required. A decision to halt these redemptions cuts off a liquidity path for the fund’s investors.

“The 5% per quarter redemptions in an interval fund are mandatory, while BDC boards typically retain discretion, and thus investors can have more confidence in the liquidity offered in an interval fund,” says Long.

Another attraction of investing in these BDCs would be the leverage, sources say. BDCs can also utilize 2:1 leverage on a debt-to-equity basis, while interval funds limited to 0.5:1 without using preferred stock, according to Gaines.

­“If you don’t need the higher leverage limit or flexibility, it may make sense to consider raising an interval fund since it’s typically quicker to launch than a non-traded BDC and may be more suitable for certain distribution channels [such as RIAs],” Gaines said.

StepStone’s Long though said they can meet investor expectations without that extra leverage.

“While BDCs do have the flexibility to take on twice as much leverage as an interval fund, we don’t believe that extra leverage is necessary for the [StepStone interval fund] investment strategy to deliver our targeted returns,” he said.

Still, there’s no denying the attractive yields these funds BDCs offer, and they will remain a steady source of access to private credit investments. But it doesn’t need to be an either-or calculation.

“There is absolutely a place for both BDCs and interval funds as part of a private credit strategy,” said Gaines.


Krista Giovacco | LinkedIn
LevFin Insights



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