Directors Overseeing Alternative Investments

The asset management industry is experiencing a convergence, with traditional fund companies seeking exposure to alternative asset classes and institutional investors looking to expand their retail investor base through registered investment companies. Registered investment companies, such as interval funds, tender offer funds, and business development companies (BDCs), are increasingly being utilized for this purpose.

Registered Funds Providing Access to Private Assets

Registered investment companies that provide investors with access to private or less liquid investments—while operating within the framework of the Investment Company Act of 1940—typically are structured as closed-end funds that offer periodic (rather than daily) liquidity. The most common structures include:

Business Development Companies 

  • Closed-end investment companies designed primarily to invest in private or smaller U.S. operating companies.
  • Typically, private credit and equity investments.
  • Must invest a significant portion of assets in qualifying private or small public companies.
  • May use higher levels of leverage than other registered fund structures.
  • Can be publicly traded or non-traded, with periodic liquidity through share repurchases or secondary trading.

Interval Funds

  • Closed-end investment companies that provide continuous offering of shares but limit redemptions to regular, pre-defined intervals.
  • Investment focus on illiquid and alternative investments, including private markets.  
  • Required to offer repurchases of a set percentage of shares (typically 5–25%) on a fixed schedule.
  • Not exchange-traded; shares are purchased and redeemed at net asset value (NAV).
  • Provide predictable, periodic liquidity to investors.

Tender Offer Funds

  • Closed-end investment companies that provide liquidity through periodic tender offers, rather than a fixed redemption schedule. 
  • Similar investment focus to interval funds—private credit, private equity, real estate, and other alternative assets.
  • Liquidity is offered at the discretion of the fund’s board, not on a mandatory schedule. 
  • Investors may tender shares for repurchase during these windows, subject to limits. 
  • Provides flexible but less predictable liquidity.

Independent Director Oversight Responsibilities

Independent directors overseeing these products have unique oversight responsibilities in light of the products’ structure and the less-liquid private assets associated with these investment strategies. Independent directors overseeing these funds should gain a fundamental understanding of: 

  • Board oversight considerations for BDCs, interval funds, and other registered investment vehicles holding alternative investments. Directors should be aware of the rules that govern these products, and the issues that could arise with less-liquid underlying assets held within the structure. 
  • Valuation rules and practices relevant to less-liquid instruments. Independent directors have a specific oversight responsibility over valuation of fund assets. This obligation could present more challenges where the underlying investments are more difficult to value.  
  • Liquidity risk management. With alternative asset classes, fund boards need to exercise particular vigilance in overseeing liquidity needs that arise within registered funds.  

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Additional Resources

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