Securities and Exchange Commission Chair Paul Atkins announced the intent to pursue a proposal to allow 1940-Act registered, closed-end funds (i.e., U.S. publicly traded funds and interval funds) to significantly invest in private funds (including private equity, private credit, or hedge funds). Currently, registered closed-end funds are generally prohibited from investing more than 15% of their assets in private funds, unless the fund is sold only to accredited investors, and it requires minimum investments of $25,000. He explained that the goal would be to afford all retail investors the ability to access exposure to the important asset classes private funds invest in.
If adopted by the SEC, this change could pave the way for publicly traded, closed-end funds that invest substantially in private funds. As a result, these closed-end funds’ investors would gain exposure to the private funds’ asset classes, even illiquid ones, and at the same time enjoy some form of daily liquidity through the ability to trade their closed-end fund shares on the exchange at market prices (albeit at prices that would likely be discounted to the fund net asset value (NAV)). Moreover, managers of these publicly traded funds would enjoy the coveted benefit of managing a “permanent capital vehicle” since the primary liquidity mechanism offered to investors could simply be the ability to trade their closed-end fund shares on an exchange.
In addition, the announced change (if adopted) could also pave the way for retail investors to access multi-strategy closed-end interval funds or tender offer funds that invest substantially in a mix of private equity, private credit, or hedge funds.
In short, the adoption of Atkins’s proposal should generate significant, innovative product development involving closed-end funds and should help boost private fund capital raising.
If you have any questions, or would like additional information, please contact one of the attorneys on our Investment Funds team.
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