Registered private investment funds such as tender offer funds, interval funds, and non-traded business development companies (BDCs) and real estate investment trusts (REITs) offer access to institutional-quality managers through fund structures engineered to meet the needs of individual investors. For advisors considering ‘40 Act private investment funds for client portfolios, it can be helpful to understand these strategies and structures in relation to traditional mutual fund and private investment fund structures to determine where they may fit into client portfolios.
Mutual funds: Actively managed public market exposure
Traditional mutual funds provide active, long-term investment management and are available to all retail investors, with minimums typically between $500 and $5,000. These funds have significant oversight and are largely limited to investments in publicly traded securities. While they offer daily liquidity, mutual funds are intended to be longer-term investment vehicles held for three to five years. Performance dispersion among actively managed mutual funds, particularly those investing in U.S. equity markets, is low, and these funds often struggle to outperform their benchmarks after fees. While mutual funds are often a core holding for high-net-worth investors, they are limited public market investments and do not provide access to the return and diversification potential of the private capital markets.
Private investment funds: Return and diversification opportunities for large investors
Traditional private equity funds make long-term investments in private companies and offer the potential for significant long-term outperformance versus public equities, even after the higher fees are considered. These funds are exempt from SEC registration and typically have high investment minimums of $5 million or more, which suit the large, sophisticated investors like pensions, endowments, and family offices that have historically been the focus of private equity firms. Over the past 15 years, private equity strategies have become more accessible to qualified purchasers (investors with $5 million or more in assets) through the growth of feeder funds, which provide access to these funds at investment minimums as low as $100,000, but they have mostly remained out of reach to the broader high-net-worth market of accredited investors.1 Return dispersion is high, with top-quartile funds dramatically outperforming those in the bottom quartile. As a result, investing with experienced, high-quality managers with strong track records is essential.
Registered private investment funds: The benefits of private markets, purpose-built for high-net-worth investors
The registered fund market has grown significantly in recent years and offers accredited investors a way to gain exposure to private equity, private credit, and private real estate strategies at investment minimums that typically range from $25,000 to $50,000. These funds are purpose-built for high-net-worth investors: They’re simple to invest in, do not have call-downs, and issue 1099s as opposed to K-1s for direct investments in private equity funds. While these ‘40 Act registered funds offer more liquidity options than traditional private equity funds – and as a result, hold cash balances to cover periodic redemptions – they are also intended to be long-term holdings of five to seven years.
Long-term thinking drives private investment returns
Mutual funds and private investment funds are intended (and in some cases are largely required) to be longer-term holdings. In the case of private equity, the ability to think and act with a long-term perspective is one of its largest advantages over public markets. Private equity fund managers invest in companies where they can drive significant value creation, with a basic roadmap for a multi-year vision that is often developed in tandem with a target company’s management team and put in place before investing. Compared with public company management teams, private equity managers are less pressured to meet short-term demands, and instead can focus on executing their long-term strategy.
Because liquidity can be a concern for high-net-worth investors, registered private investment funds typically offer limited quarterly liquidity (generally 5%-25% of NAV) after a 1-year holding period. However, they should not be viewed as short-term holdings. By incorporating private investments into asset allocations, advisors can help drive portfolio diversification and return potential and encourage investors to think longer term, potentially avoiding some of the emotional decision-making that can hinder wealth creation.
(1) Individuals qualify for accredited investor status with at least $200,000 in annual income (or $300,000 of joint income) or a net worth of $1 million or more.
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