In Real Time
In Real Time
Why Interval Funds? with Brian Buffone, Managing Director and Head of Equity Investments for Commercial Real Estate at BSP
In Episode 5 of In Real Time, we speak with Brian Buffone, Managing Director, and head of equity investments for commercial real estate at BSP. Brian discusses interval funds, and illustrates what makes them appealing as a portfolio manager and the potential benefits for individual investors.
Key topics covered:
- Interval funds: what are they and how they work
- Attributes of interval funds
- Opportunities & challenges
- Prevalence of interval funds in the market
Views expressed are those of BSP. Past performance is not necessarily indicative of future results. All investments involve risks, including possible loss of principal. There can be no assurance that an investment will be able to implement its investment strategy and achieve its investment objectives. Diversification does not ensure a profit or guarantee against a loss.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
Thank you for joining us today for the fifth installment of our flash podcast series. In real time, if you've been listening along with us over the last few episodes, you may be surprised to hear a new voice. My name is Amanda Murray, and I'm a vice president at benefit street partners or BSP VSP is a leading alternative asset management firm with nearly 27 billion in assets, under management and operates as a boutique alternative investment arm of Franklin Templeton. We do our best to keep these podcasts short. So I'm going to jump right in. I'm excited to introduce you to our guest today. Brian[inaudible]. Brian is a managing director and serves as head of equity investments for commercial real estate. Thanks for being with us today, Brian. Thanks Amanda. Based on his role at the firm, we've asked Brian to speak with us today about interval funds to start us off. Brian, could you tell us about your role at BSP and then set the stage with a definition of what is an interval fund?
Speaker 2:Thanks, Amanda. Um, my role at benefit street partners is head of equity investments within the commercial real estate group. I am also the portfolio manager of an answerable fund that we run. Uh, interval funds in general are alternative investment vehicles for individual investors to gain access to strategies. They might not typically be able to access the universal funds are registered under the investment company act of 1940 they're priced on a daily basis based on the net asset value. And they are a liquid on typically a quarterly basis where the fund will redeem a certain number of shares for investors to redeem and cash out on their positions within that specific interval fund.
Speaker 1:One of the reasons that I asked you to define interval funds is because interval funds. I wanted the newer kids on the block when it comes to product structure, what benefits does this structure bring to individual investors?
Speaker 2:They are fairly new in the investment universe. They've been around for just the past five or six years. They're an exciting vehicle for investors to put their money, to work and get diversification, uh, but more so access to investment opportunities that they normally probably wouldn't have access to the interval funds themselves invest in, uh, alongside the investments of pension funds and endowments, sovereign wealth funds, uh, and a lot of these private investment vehicles that they're putting their, their pooled capital to work in. Typically have minimum investment sizes of$1 million,$5 million,$10 million, some of them so a smaller investor or even a midsize investor has a difficult time, if not an impossible time getting access to those types of investments that they're able to get access to, um, by, by pooling their investments in these interval funds. Um, I think given the fact that being able to, uh, have access to those funds is one thing, but also being able to be diversified across a number of different funds within that interval fund and not having to invest all of your$1 million capital allocation into just one additional private fund. And in our instance, private real estate fund, you can invest in eight, 10 or even 20 funds at one time and be diversified across the whole, a whole spectrum of different private funds with one single investment into an interval fund
Speaker 1:As a portfolio manager for an interval fund. What makes the interval fund structure so appealing to you?
Speaker 2:Well, real estate specifically, and that's our background here is the third largest asset class available to investors behind fixed income and equities. Historically, it's been very difficult for individual investors to get, uh, access, uh, and, and diversification within the real estate industry. That being said real estate has always historically provided a very stable, consistent income and capital appreciation over time, uh, versus other asset classes. So for an investor to be able to now get access to that on a simplified basis, and again, to be able to invest in these funds that they normally would not have had access to. We think it's a great opportunity for investors to get more diversified, uh, and to have asset allocations into vehicles that they normally wouldn't have. It also provides a lower volatility, uh, versus being in some of the, uh, public market space, uh, within the stock market and within public REITs. As we've seen specifically over the last six months, these direct real estate investments that the interval funds are allocating their capital to provide a lower volatility and a lower correlation to the overall stock market, giving investors an alternative to put their money to work, and again, be diversified across different asset, uh, asset classes and asset allocations.
Speaker 1:When we're talking about the attributes of an interval fund, it's also important to talk about the flip side. So could you address some of the challenges that you see and find as you're managing assets within the interval fund structure?
Speaker 2:The challenges, I think are the level of diligence that, that goes into the investment process. And I say it's a challenge. It ends up being another benefit to an investor because the challenge being that the, the background and the resources that the fund manager or the fund sponsor or the parent company of, of the fund manager can provide helps an investor to underwrite, analyze, uh, research, uh, these multitudes of funds that come across, uh, come across that manager's desk and individual investor, wouldn't be able to do that on their own or they could. But again, it's a, it's a very tedious, uh, long drawn out process if done correctly. Uh, but I, again, I think that that's probably the biggest challenge internally is the process and running that diligence, uh, to the level that we would expect if we were an investor, we would want, uh, we would want somebody to be diligencing these funds in the way, uh, that they're, they are spending the time they are spending the resources really digging in on these funds. But I would say that that's the biggest challenge is doing that across 30, 40, 50, sometimes a hundred different funds and tracking them on a, on a quarterly or monthly basis. Uh, and then figuring out what are the top 10, what are the top 15 or top 20 funds that we want to be invested in? It's just a very lengthy, uh, and, and, uh, in depth process that we run through, uh, on, on our diligence process. And again, I think it's, it's a challenge internally. Uh, it's a thoughtful process, but it also ends up being a benefit because the investors know that we're putting in that level of diligence in selecting, um, selecting funds on their bath.
Speaker 1:When you think about the interval fund structure, its benefits and its constraints, what type of assets and asset classes do you feel are best suited for that structure?
Speaker 2:I believe it would be asset classes and asset allocation that would be difficult for an investor to get directly on their own. Uh, the real estate, uh, sector, uh, real estate asset class in general is probably, uh, for an individual investor, the most difficult, um, asset allocation or asset investment class for them to get their arms around, uh, purchase multiple properties or multiple funds invested in, in real estate and be able to do that diligently. Um, I think with, within that real estate sector, getting more diversification with multifamily industrial class, a office class, a retail, you also get geographic diversification in, uh, in certain funds, you get capital stack diversification where some of these funds are invested in, uh, in, in the debt side of the real estate, as well as on the equity side of the real estate. So you get a very broad range of diversification and without being in the real estate sector, again with real estate being historically the, uh, the third largest asset class behind equity and fixed income, I think it's, I think that's the biggest benefit of interval funds and the biggest target market for these interval funds, uh, to be invested in allocated into
Speaker 1:This question might be a little redundant based on where we've been already. But what do you think is the most underplayed aspect of interval funds?
Speaker 2:Yeah, I, I, we've talked a lot about diversification. We've talked a lot about access. I don't need to, um, you know, continue to, to drill down on those. But I do think that probably the most underappreciated component of, of the interval funds themselves are the sponsors resources or the, the manager of the funds resources that they may have behind them. Assuming that the, the manager of the interval fund is, is a large institution or backed by a large institution. They have a number of resources behind them from underwriting to research, to accounting, to ongoing diligence, that the fund is able to give investors this high level of resource that they normally would not have been able to get typically on their own. And I think that the investors are, are looking or should be looking to make investments into the fund themselves and then to the funds holdings themselves. But in addition to that, they're also making an investment into the management team and into the sponsor of the fund because of those resources. So I think, again, just as much as they're investing in the individual performance or individual holdings of the fund themselves, I think the management team and, and, and background resources of that have a lot to do with, uh, an investor's decision in making an allocation or investment into an interval fund
Speaker 1:With interval funds becoming more prevalent in the marketplace. We're seeing them launch quite often, there's even websites dedicated to tracking new interval funds coming to market. Where do you see the future of interval funds heading? And you can touch on things such as asset classes, fees, liquidity, features, anything like that.
Speaker 2:I think that the market, the interval fund market is going to be growing pretty substantially over the next five to 10 years. Again, as I touched on earlier, it's a fairly young profile or option alternative investment option for investors, um, being only five to six years old or so, uh, and I think that as that as the interval fund market itself becomes more prevalent as an alternative investment option for investors. I think you'll see a lot of growth. I think the growth will come in the sectors that again are difficult for investors to otherwise get access to on their own or get access. And at the same time diversification, um, I think two sectors that are probably going to be the, the leaders and the interval fund, uh, in the interval fund world are the real estate, uh, interval funds and the credit interval funds. Both of those, again, take, as we just touched upon in our last question, the, they take a lot of resources from the sponsor and the manager of those funds to be able to do the diligence on the ongoing tracking, to, uh, to have these funds perform in the way that investor would expect them to perform, uh, in general. And so we're drilling down into, uh, sub funds, sub private funds, and, and then on the credit side, uh, credit funds or we're debt investments. That again, it's very difficult for an individual investor to get access to those. So I think that, that you'll see, uh, a growth in the interval fund market overall, and specifically into these, uh, real estate, uh, debt and credit type funds, or the at least funds that have access to, to those and allocations to those as far as, as far as liquidity and fee structure. Uh, I think as the larger the fund the funds get and the fun interval fund universe gets, I think you'll, you will see fees potentially start to come down. I think you will see liquidity, uh, issuances, uh, uh, essentially start to increase most funds today, issue liquidity on a quarterly basis. Most interval funds on a quarterly basis. I think you could see that as, as the industry grows. I think you could see that, um, scaled back to a monthly basis, which again, would be a big advantage to an investor, um, to get liquidity more, uh, every month instead of every three months, that's just an opinion that I have, we'll see how that plays out. Uh, but I do, I do think that there there's a massive growth potential within the inner will fund universe, just to give helps, give investors access to funds and diversification, to funds other funds and investment vehicles that they normally would just never have access to. And so for them to be able to invest side by side with pension funds, endowment funds and sovereign wealth funds, I think it, it gives the investors a very, um, a very nice sense of security and a nice sense of being able to have access to, uh, to funds that were historically only, uh, only had the, those larger type investors were the only ones that had the ability to put their money to work in those types of funds.
Speaker 1:Thanks, Brian, you know, I'm going to wrap up here and say that our goal with these podcasts is to bring our listeners short, informative snippets into our senior investment team's perspective on current market trends and fund structures and where they see the market's going. So I hope we deliver that today. And I look forward to doing this again with you soon, Brian.
Speaker 2:Great. Thanks, Amanda. I appreciate it.