How Interval Funds Are Opening Private Markets to Everyone

In each episode , we'll explore the cutting-edge trends , tools and strategies driving today's financial landscapes and paving the way for the future . With the finance industry at a pivotal point , influenced by groundbreaking innovations , it's more crucial than ever to understand how these technological advancements interact with market dynamics .

Joining us today is Kimberly Ann Flynn , president of XA Investments and a partner of the firm , where she leads all product and business development efforts . She heads up their proprietary fund platform and consulting work , and she's especially known for her expertise in closed-end fund product development .

Kim is a regular speaker at industry events , covering everything from interval funds to alternative investments . She is a CFA charterholder , a member of the CFA Society Chicago , and she holds her Series 7 , 63 , and 64 licenses . Kim , welcome to the podcast .

So , if you take it from an investor's perspective , a lot of US investors are our portfolios reflect sort of concentration in some of the largest stocks in the US market , and so investors , I think , were taught a lesson in 2022 , when neither stocks or bonds performed , and if you think about the classic principles of portfolio diversification , it's to have exposure

to a lot of different types of assets that are hopefully moving in different directions when the stock market corrects . So I think we've gotten a taste of 2022 again in the last couple of months of volatile equity market trading and alternative investments . They can deliver on a lot of different goals .

So if you have private credit , for example , it can deliver on a retiree's goal for income in retirement . If you're talking about private equity , maybe as you're saving for a second home purchase or saving for retirement , you want something with additional upside potential , so private equity is going to bring that .

But then , if you think about the firms that manage private equity and private credit , there's a lot of motivation that we see from these money managers who see the individual investor as a huge opportunity .

So there's a lot of time and attention being spent on investor education in a way that there wasn't five years ago , and part of that has to do with you know .

We don't have pensions anymore , and so the responsibility for saving for retirement is now my own , and so I want opportunities like endowments or pension funds who've long been investing in things like real estate or infrastructure or private equity . These are opportunities with a lot higher return potential .

Some of them there's trade-offs , maybe there's additional risk , maybe there's a lack of liquidity , and so that's with private markets . That's why that education is so important .

of private companies selling those companies after five , six years to other private equity buyers . And the reason we're starting to read more about that is because the IPO markets have been , you know , episodically open and shut , so the capital market windows for these companies haven't been as available or as open .

So I think this is much to investment bankers , you know , chagrins . They'd love to see more equity IPOs , but the capital market windows haven't really been conducive to it . But there's also fundamental reasons that companies prefer to stay private .

So we're seeing a lot of growth happen in the private phase because if you're the entrepreneur , the founder of a business , going public means you're going to have quarterly reporting of earnings . There's going to be a lot more transparency and scrutiny around how you run your business .

So I think a lot of business owners are saying you know , we're going to prefer to stay private longer . Private equity is a way for us to get liquidity . Private credit is also a way for us to grow our business .

So there's now ways for these business owners to accomplish what they need to grow their business while remaining private , and doing so without that quarterly earnings cadence . That sort of drives short-term decision-making .

So I think there's a lot of reasons that compel these companies to stay private for longer , and I don't think anybody's suggesting that that's going to change too soon .

So , for investors looking to tap into either private equity or private credit , what are the main strategies for an investor

to gain access ? For an investor to gain access ?

They also have suitability restrictions and so if you're not an accredited or a qualified client , you couldn't even get into some of those private funds . So you know , if you know your financial advisor , if you have a lot of wealth , you've probably been approached by private opportunities in real estate or in private equity .

But now these private market opportunities are accessible really to everyone , and the reason for that is that they are now available in an SEC registered product wrapper . You know it's a similar , similar , but there's differences . To a mutual fund or an ETF Mutual funds and ETFs are regulated by the SEC .

To a mutual fund or an ETF Mutual funds and ETFs are regulated by the SEC . They have independent fund boards that protect shareholders . So there's a type of SEC registered fund that's called an interval fund . There's about 270 interval and tender offer funds that are basically open-ended like a mutual fund , so they're available for purchase .

And take private credit , for example , you can buy a private credit interval fund . There's about 90 available in the market . You could buy direct lending . There's a lot of interest right now in direct lending because banks have stepped away from lending . You could buy an asset-backed lending fund .

Stepped away from lending , you could buy an asset-backed lending fund secured by hard assets . You could buy a structured credit fund . You could buy a multi-strat credit fund .

So , partly because the yields on these private credit funds are quite attractive relative to , let's say , high yield or senior loans , you're picking up anywhere from 200 to 400 basis points of additional yield . So there's a lot of individual investor interest .

Most of these private credit funds don't have any suitability restrictions and because it's an SEC registered product , it produces a 1099 . So for a lot of investors it's an easy way to get private market exposure . For a lot of investors .

Apollo , for example , is starting with financial advisors , educating the financial advisors , who will then , in turn , educate a lot of investors Like Apollo , blackstone , kkr they all have developed these rich resources and education for investors A lot of it's actually available on their websites .

Investors a lot of it's actually available on their websites . So there's much more information because these are effectively , because they're SEC registered products , their retail facing websites have a lot of that education information . So if you were a private fund investor , think about trying to find information on a hedge fund or a private equity firm .

Their websites basically have a paragraph about the firm and nothing else , or it's restricted access . You can't click into it . So all of these leading alternative managers have had to develop a web presence that they didn't have a few years ago , partly because otherwise , how are they going to serve up some of those educational tools ?

Because it comes in the form of white papers , videos , other content , as they're trying to educate , not just on the asset class If I'm trying to learn about what is direct lending , but I'm also still trying to understand what is the structure and how do I get liquidity and things of that nature ?

So there's a lot of education , both on the structure itself , because it may be new to you , but also on the underlying asset class and the benefits or risks of that investment .

So , just as mutual funds have various share classes to offer their products into different distribution channels , a digital share class or a tokenized share class would allow the fund to be basically sold seamlessly without transaction costs . So there's a lot of innovation that I think we're going to see , especially with these private markets funds around tokenization .

And so we've seen some fintech firms who've uh launched platforms , uh democratized platforms , if you will , to allow anyone uh without a financial advisor , for example , not everybody has a financial advisor , so if you want to buy one , you could go to um , fundrise , yieldstreet , sofi , um , and it's early days in terms of some of that direct to consumer-consumer

availability . So , for example , I'm a Fidelity customer with my retirement savings . You can't yet go to Fidelity and just type in the fund's ticker and buy the fund . I think as an industry we will get there , but to support what now ? The market now is 270 funds because it's growing very quickly . There were 50 interval funds launched last year .

The industry has to play catch up a little bit with respect to the build out of the operations and the technology systems , as you say , to support that level of growth , but I think we'll get there soon enough to make it more open for investors .

So there's firms like that that are opening up access to a broad , diversified mix of private companies . I think that's really interesting . That fund has grown and scaled quite dramatically .

We are seeing one of the trends we reported on in some of the research that we do is that AI now as a theme , investment theme or just in the prospectus disclosures , it's an area of interest for some of these technology funds that are coming to market .

So we are seeing some more narrow focused AI funds or technology funds where it's a piece of what they're doing .

So I think there's a lot of investors who are , you know , looking at ways to play the AI theme , and the public markets may not be the only way to participate , because a lot of these companies are venture-backed companies and so you need to get in earlier to benefit from the growth in the AI space in the private companies .

So we're seeing some interesting venture capital strategies that are just now on file . Takes about 6 to 12 months for these products to launch , but I think we're going to see more of that .

So in the interval fund space there really hadn't been anything dedicated . So now I think some of the energy funds that are coming you know some of them are are energy transition . Some of them are are sort of the old school energy combined with energy transition . So you know it's been a while .

You know advisors had sort of I think a lot of investors had over allocated to energy MLP products . So it's interesting to see if energy will make a comeback under the Trump administration . I think that's what some of these new entrants are thinking .

a lot of market volatility going on in the midst of trade wars . What should investors keep in mind and how do they look at risk versus traditional products ?

You know , a private equity private fund typically would have like a 10-year term . Infrastructure , those investment windows are even longer . It might be like a 15-year term .

And so with private market assets , they do bring a lot of potential return and diversification benefits , but the trade-off there is that there's a lack of liquidity , and so sometimes investors talk about the liquidity premium associated with investing in private markets , but that means you don't have the same liquidity and your expectations should be different when you're

buying one of these private market strategies than when you're buying an ETF , and I think that there's a high preference for liquidity from daily liquid vehicles . And so I think it's really important , before you would allocate part of your portfolio to private markets , that you think with a longer investment horizon in mind for that segment of your portfolio .

And so I think it's in sharp contrast to things like crypto Crypto , people would argue , might be an alternative investment . Even there's gold ETFs for the gold bugs , but those products are fairly liquid . Crypto and gold products are fairly liquid , meaning you could get liquidity within a day or two .

These semi-liquid products , the interval funds that I'm talking about to these semi-liquid products , the interval funds that I'm talking about , most of them just have a quarterly liquidity window and so , and if everybody , let's say you found yourself in the end of 2008 and everybody wants liquidity at the same time , shareholders would be prorated , so you wouldn't

necessarily get the liquidity on the timetable that you're thinking about . So that's really important because , if you think about it , you own your home . If you want to maximize the price of your home when you go to sell it , you're not going to fire , sell it and sell it tomorrow . You're going to hire an agent .

You're going to take two or three months , whatever it takes , to get the highest price . The same thing would be true for an airport in an infrastructure portfolio or a private company in a private equity portfolio . It takes time to realize that .

So the other , besides liquidity , just as I was mentioning , valuation is an important consideration , because valuation is going to work different with some of these long duration assets . There's the risk that the valuation might become stale , and so you want to be thoughtful as you're evaluating private market products .

Ask some good questions about valuation frequency , valuation process , make sure you're comfortable with that and make sure you understand when and how you can get liquidity .

a lot of pressure in 2022 , 2023 . There's a firm called Lotus L-O-D-A-S . Lotus is providing secondary market liquidity for non-traded REITs , non-traded BDCs , interval funds , tender funds . The good news for interval and tender funds is that , besides the real estate sector , most of the funds are in a very positive .

You know there's more demand for the shares of the fund than there is demand for liquidity .

We monitor that very closely , but there are I think we'll see because they the Lotus Exchange brings buyers and sellers together , and so we need more technology solutions to bring buyers and sellers together , because the market clearing price for a private equity fund in 2008 may look very different than it is in 2025 .

And so if you're bringing those buyers and sellers together in dislocated markets , you know you can get the clearing price that's supportive of transactions in the market , and so I think that's important with any product , that's if you're providing liquidity on a quarterly basis , but I need the liquidity next week .

One of these secondary markets for liquidity would be able to provide liquidity , likely at a discount , but at least they're there as a solution , and I've talked with other firms that are looking at what Lotus is doing and trying to bring buyers and sellers together , effectively arbitraging the difference between where the market price may be and where the NAV of the

fund may be . But I think it's still early and there's room for more in terms of innovation in that area .

And these markets have developed in terms of regulatory regimes and then moving into either OTC , then you get electronification , et cetera , et cetera , and they follow patterns . As it relates to private equity private credit here .

As it relates to private equity private credit , here , would you say , reits is the area to watch as the roadmap for the industry I actually do .

The education started , the product structuring innovation started with non-traded REITs , and so that was what went first , and I think also many investors their first experiences with alternative investments has been with buying a rental property , buying a piece of land , and so these are tangible assets and I think that's why that was an entry , and so what followed the

non-traded REITs has been BDCs , and now there's public BDCs , non-traded BDCs , there's private BDCs and business development companies BDCs . Those are a financing tool for US small or middle market companies to get capital to grow . It's unique to us in the US , but that's what followed the evolution of REITs . Now we have interval and tender funds .

Pretty much anything , any strategy , fits into an interval or a tender fund . So that's why you see hedge fund content , you see private credit , you see infrastructure , you name it . There's endowment style strategies . Interval funds can really house anything .

That's private markets , and I think that there's still a lot of growth left , but we're not starting at ground zero . We've been building on some of those innovations .

is AI slipping in here ?

Ai is changing how we build products , how we structure products . It's going to touch every aspect , every aspect , even if the investor is not aware that it's happening . I think the SEC with Chairman Atkins he's a big proponent of AI and crypto , and so I think we're going to see the SEC be supportive in a way .

Now I think that the SEC is going to want to make sure that asset managers are disclosing the nature of the use of AI . A lot of companies , asset managers who are worried about giving away their secret sauce .

They have closed door chat GPT tools , so it's something that their portfolio managers and analysts can be comfortable using and making sure that their data doesn't drift out , you know , isn't educating the AI tools outside of their firm . So we're seeing rapid innovation and there's going to be consequences .

There's going to be upsides and downsides and I think , as an industry , we kind of have to . We're in testing mode with some of this stuff . But I do think that , like you know , it was just like I was speaking with my dad last night .

He said somebody at his church recommended he read a book and instead of reading the book he did a chat , gpt summary , to see if he actually wanted to spend the time reading the book . That's going to be true for investment products too . Right , you're going to drop in a fund . You're gonna be like well , tell me , summarize .

You know the benefits and the risks of this fund , and so you know , right now you read a fact sheet , maybe you read a prospectus , but I think that there's going to be a lot of tools that help us make decisions , um , and hopefully in a more thoughtful way .

But you know , if you can be an investor in some of that cutting edge technology , you know there's going to be a lot of losers in the venture space and AI . But that's why , when you're investing in venture capital , you know you want to invest with one of the best , most skilled venture capital managers .

But they're also basically placing a lot of different bets right , because not every investment is going to be a winner . Basically placing a lot of different bets right , because not every investment is going to be a winner .

So I you know we always say that manager skill in private markets is even more important than with a mutual fund manager selection , because the return dispersion , you know , between the best and the worst mutual fund manager is actually pretty .

It's a pretty tight range , whereas with private markets the best and the worst there's a huge , like you know , 10% return difference between the best and the worst in private markets . So manager selection is all the more important when you're talking about hedge funds and private markets , and so you know . That's why . That's

why that's important that you're investing with a manager that is time tested , has a track record , and you can be comfortable that they know what they're doing .

So things like farmland investing , things like infrastructure investing , which can give you yield , but also inflation protection , I think we're going to see a lot of demand for those real asset strategies around the globe , strategies around the globe and that's an area where we've seen some new products get launched , especially in the infrastructure category in the last

year . But I think we're going to see more in the way of other inflationary protected real asset strategies , because I think that's a gap in most investors' portfolios .