Tom Sittema, executive chairman of Conversus, puts it succinctly: “This is not your grandfathers’ type of fund management.”

He is referring to the travails that Conversus, now a subsidiary of New York-based StepStone, faces in trying to make the Conversus StepStone Private Market Fund (CPRIM) a success. Eschewing mainstays of the alternative investment world, hedge funds and commodities, CPRIM offers accredited investors access to a diversified portfolio of private equity, PE secondaries, real estate, infrastructure and private debt. In its first 10 months ending 31 July 2021, the fund returned 52 percent.

“Advanced analytics, we believe, will be critical to our success,” Sittema tells affiliate title Private Funds CFO. “Having the ability to quickly assess the opportunities, determine the effect of new investments on the mix, and quickly deploying the capital is critical to eliminating cash drag.”

In a sense this is Conversus’ second bite of the apple. CEO Bob Long co-founded and brought Conversus Capital public back in 2007, listing the fund on the Amsterdam Stock Exchange.

And for a while it had the distinction of being the largest publicly traded fund in Europe, with $3 billion in assets. It long earned a reputation as an innovator, placing among the world’s 50 top ‘gamechangers’ ranked by Private Equity International.

“The thing that people need to know most about this is that a daily NAV is not something to laugh at”
Jason Roos
BC Partners

But Conversus Capital, like so many of its publicly traded peers, was never able to eliminate the considerable discount to NAV characteristic of publicly listed funds during its lifetime. So, Long wound the fund up and returned his attention to the US.

Now the firm is back with what he calls “a better mousetrap” – a tender offer fund that he says could easily grow to $10 billion.

More and more private fund managers are looking for ways to tap a growing investor base of small institutions and individuals, which have different return requirements, liquidity needs and compliance requirements than the traditional large, institutional investor base.

“We generally tend to see increased interest in so-called non-traditional fund structures after a financial crisis or market dislocation, and so it’s not surprising that the trend has emerged again,” says Aaron Schlaphoff, partner at Kirkland & Ellis’s investment funds group regulatory practice in New York.

“Managers like [this influx of new investors] because you can build scale and your cost base can be spread over a larger asset base over time, as opposed to a finite runoff portfolio where you’re trying to winnow down your expense profile, which isn’t always easy to do,” says Jason Roos, CFO, credit at BC Partners, which acquired the management contract for credit-focused interval vehicle Alternative Credit Income Fund in late 2020.

Initial considerations

Funds designed to meets the needs of this new base of investors can take many forms, but industry professionals involved with such vehicles warn they warrant special consideration before diving in.

“In this kind of investment, it’s easy to wind up checking into a Hotel California, where you can never leave”
Joel Kress
Pomona Capital

“The administration of this is a sizeable lift,” says Roos. That applies to any of these non-traditional structures, from closed or open-ended, registered ’40 Act funds, to unregistered business development companies and private/public hybrid funds, according to managers and service providers involved with non-traditional funds.

Managers of these funds like Roos say anyone, especially smaller firms, looking to enter the market need to get the right service providers. “Don’t try to build it in-house,” says Roos. “If you’re a small shop, there’s a lot of value in admins, distributors, etc. This type of fund and the distribution channels carry with them a significant amount of regulatory oversight and day-to-day management.”

Those vendors will also need someone in-house to direct them, he adds.

BC Partners’ Alternative Credit Income Fund has five share classes, some offered through brokerages, some through RIAs, and each has a different fee schedule. That comes with a significant compliance burden with respect to allocations, Roos says.

That fund, which allows investors to come into the fund every day and the opportunity to redeem on a quarterly basis, also requires daily net-asset valuations. “The thing that people need to know most about this is that a daily NAV is not something to laugh at,” Roos adds. “You have to have in-house or external valuation specialists involved daily, and an escalation protocol on anything that happens in the market on a daily basis.”

Escalation protocols are executed in the event of major market events or moves, and involve a valuations committee consisting of senior officers of the fund to approve that day’s NAV.

Those managing ’40 Act funds will also have to be prepared for greater oversight, Schlaphoff says. “The Investment Company Act generally requires registered funds to have a majority-independent board of directors, which means you’re inviting a layer of oversight that most private fund managers will not have encountered previously.”

And firms running registered funds or BDCs need a separate compliance programme that sits alongside the traditional investment adviser compliance programme, with both groups interacting with each other to ensure the train stays on the tracks, says Schlaphoff.

And managing a ’40 Act portfolio comes with restrictions. For example, partnering with another fund managed by the firm can prove difficult for these US Securities and Exchange Commission regulated funds because of strict prohibitions about investing with affiliates.

“If I owned two private funds and had an investment I wanted them to share, I would put the investment in an SPV and then give half to each fund,” explains Joel Kress, treasurer of the Pomona Investment Fund, a ’40 Act tender offer vehicle. “I couldn’t do that in a ’40 Act fund because it prohibits affiliates from participating for fear that some fund might be favored or disadvantaged.”

That regularly puts these funds before the SEC searching for a special exemption from the prohibitions of the ’40 act.


The first consideration in designing a non-traditional fund: what wrapper to choose. Many managers favour the more traditional closed-end fund approach, some continuously offered, some not; others for evergreen structures; both require registration with the SEC as registered investment companies under the ’40 Act. Others are experimenting with unregistered, closed-end business development companies, private open-ended funds, or other unregistered hybrid private/public asset funds – the iterations of structures are many.

“The CFO’s role is to quietly say to that luminary, ‘We have certain logistical issues that we need to button down and that there may be certain things we can’t offer’”
Keith Miller

Tender offer funds have been the preferred wrapper, particularly for private equity offerings, since the market really started in the early 2000s, although Schlaphoff notes that a significant majority of new registrations for unlisted closed-end vehicles are interval funds. Tender offer funds allow for more discretion and flexibility for managers to decide the size and timing of redemptions, while maintaining a minimum level of liquidity, such as 5 percent, according to iCapital.

Tenders are usually done quarterly and overseen by an independent board, with up to three months to pay the offers. Interval funds, most often the choice of credit managers, generally require more cash on hand as they must meet minimum periodic tender offers at shares’ net asset values.

With the Bow River Evergreen Fund, Bow River Capital of Denver has come up with a hybrid interval/tender offer structure. This Delaware-chartered registered investment company represents perhaps the first such fund, according to Joshua Deringer, partner at Faegre Drinker Biddle & Reath of Philadelphia. The structure combines the formality and the firm liquidity pledge of the interval fund with the flexibility of the tender offer system, by offering interval fund-style redemptions two quarters a year and tender-offer style redemptions for the other two quarters.

The Evergreen Fund, which has $130 million in assets, holds almost 80 percent private equity both direct investments and secondary offerings. It started life as a traditional private fund, but this year was rolled into a registered investment company. The reason: the rollover presented a way to achieve size and scale without sacrificing return or running afoul of SEC diversification rules that require funds to avoid too many concentrated holdings of more than 5 percent of any security. “The question was how do we maximise liquidity but also maintain flexibility for operation,” says Jeremy Held, managing director, registered asset business, at Denver-based Bow River Capital. “We believe we’ve achieved that balance with this structure.”

Meanwhile, The Pomona Investment Fund has taken measures to close if the fund does not provide regular liquidity. If the fund’s board fails to offer liquidity up to 12 percent over a year, a vote will be put to shareholders, who will determine the fund’s fate, says Pomona’s Kress. This measure is designed to keep the fund from locking in investors indefinitely.

BC Partners also runs a BDC, Portman Ridge Finance Corporation. That structure gives the fund the benefit of permanent capital, says Roos. “The permanent capital has some advantages to it, in that we can look at the asset return profile relative to a longer-term, cheaper, financing spread and start to manage that spread as opposed to being constrained by deal-by-deal economics.”

“It’s not easy to capture every possible scenario but if you don’t, the world can become very complicated”
Aaron Schlaphoff
Kirkland and Ellis

Before choosing a structure, though, managers must first identify exactly who they want to sell the fund to, says Schlaphoff. Think about your audience’s liquidity and return requirements and their investment timeline. “If you want to charge a more traditional performance fee [on a registered fund, for example], investors will need to be qualified clients, and that means you’re already carving away from the universe of retail investors who can be accessed,” for example, he says.

Registered funds of funds can only be sold to accredited investors, under SEC rules. Managers need to think about what they’re willing to sacrifice, and for what benefit.

For those looking to sell ’40 Act funds to a broader investor base, they’ll have to choose between marketing via registered investment advisers and brokerages like Charles Schwab or Fidelity. “You need to think about who you’re marketing to,” says BC Partners’ Roos. “There can be very different expectations between the RIA community and the brokerages. Some of the large institutional RIA platforms may take a lot longer to get investors in the door, but once they’re in, it can be much less burdensome from a compliance and due diligence perspective. Brokerages can speed up execution, but, long-term, involve a lot more due diligence.”

Brokerages also charge significant fees for providing access to their investors, Roos says. “It’s definitely part of the equation on the profitability of the fund itself.”

And it’s just as important to understand what the firm can and cannot offer, as it is to identify an audience. Brokers and other platforms tend to hire third-party due diligence firms to vet the fund manager and the fund itself. “That can be very expensive; much more than what I was expecting,” says Roos.

Advertising rules can be outright prohibitive for ’40 Act funds. “The sales team will not like the marketing approval protocol, because it slows them down to a degree on what they’re able to market,” says Roos.

“They won’t be able to get it out the door tomorrow, it could be days or weeks depending on the nature of the material.”

FINRA rules require funds to have a chief compliance officer, and to regularly review advertising to make sure it’s not misleading. “I can’t even explain the J-curve… in advertising. That’s considered promissory,” says one private equity CFO at a ’40 Act fund manager.

Roos says the firm uses a third-party administrator to facilitate pre-clearing with FINRA on all marketing.

Structuring…and internal expectations

“What you see frequently is you’ve got a luminary at the organisation who’s got a vision and they want to execute on this vision, but the detail is not something that they need to really get into – they’ve got an idea and the idea needs to be executed,” says Keith Miller, an audit partner in the financial services group at EisnerAmper.

“The CFO’s role is to quietly say to that luminary, ‘We have certain logistical issues that we need to button down and that there may be certain things we can’t offer’.”

“This is not your grandfathers’ type of fund management”
Tom Sittema

Miller, who is seeing a wave of fund managers looking to create public/private asset hybrid funds, says it’s important to discuss the firm’s goals before even beginning to think of structure, not just with the CFO, but with critical service providers – auditors, fund administrators and attorneys, for example.

“That’s when the process of building a pretend fund model kicks in, in order to work through various scenarios,” he says. In helping to build these funds, Miller says he often sits partners down and creates a spreadsheet to run market scenarios through proposed sets of rules. Running the model past service providers allows funds to benefit from their previous experiences and advise for and against certain approaches to structure and process.

“This kind of planning does a really good job of reeling in overenthusiastic decision makers who may want to offer far too much,” Miller says.

Kirkland’s Schlaphoff agrees that special attention needs to go into planning and documentation.

“You really have to be very careful when you’re drafting documents for novel fund structures, to make sure that you’re thinking of every possible outcome – what happens if the market turns or if you get unexpected redemption requests? Have you drafted your fee provisions with enough specificity and does your administrator understand how to run the calculations?

“It’s not easy to capture every possible scenario but if you don’t, the world can become very complicated.”

Grey areas in documentation are where most of the major problems arise in non-traditional fund structures, Miller adds.

Asking yourself how various parties will interpret various provisions is key, says Miller. “Will the attorney write the rules of the funds consistent with the model we previously built in a spreadsheet? Will the fund admin be clear on what they need to do so that when they are setting their own accounting systems, they aren’t making assumptions themselves, to, say, treat the capital allocations as they would in a ‘regular’ private equity fund, or that they are correctly bifurcating a contribution between the illiquid and liquid equity of the fund structure?”

Miller is speaking specifically about public/private hybrid funds, but the questions apply to any non-traditional fund structure.

Liquidity…and investor expectations

Managing non-traditional funds requires a deft hand; someone particularly adept at monitoring the ebb and flow of cash. Not only do fund managers have to know how fast the money is coming in, but they also must meet any capital needs to make investments, process distributions and execute redemptions, for example. All this must be done while maintaining a liquidity sleeve that provides ready cash for redemptions – whether at regular intervals or, as in a tender fund, at the board’s discretion.

“The biggest risk factor comes down to the promise of liquidity and making sure you are actually equipped to provide what you promised to investors,” says Michael Trihy, Bow River Evergreen’s portfolio manager. “Private equity is generally not a yielding asset, it’s longer dated, much harder to fit into a wrapper like this.”

“The question was how do we maximise liquidity but also maintain flexibility for operation”
Jeremy Held
Bow River Capital

Investor expectations were what caused the initial market in registered funds to fizzle in the first decade or so of the millennium, according to an iCapital report. While increased liquidity relative to traditional private funds is a major attraction for many investors, managing it appropriately can be critical to a non-traditional fund structure’s success or failure.

“Perhaps the most critical concept for advisers and their clients to bear in mind when considering ’40 Act funds that invest in private companies is that, regardless of the liquidity terms, these are fundamentally longer-term holdings and should be viewed as such in a broader portfolio,” the report says.

Failing to meet redemption obligations can result in the gating of the investment, in which investors receive only a portion of their requested redemption – an act which if done for a sustained period could prompt a slow redemption run on the fund, resulting in potentially fatal reputational risk.

One such vehicle, The Endowment Fund, slipped into oblivion earlier this year, ending a tumultuous 17-year history that saw it rise to $4.7 billion then shrink to $461 million by the end of 2020. The fund fell from favour in the fallout from the global financial crisis, as returns disappointed and investors started heading for the exits. Its manager began limiting withdrawals in 2012, and continued to shrink until its remaining assets were sold and rebranded earlier this year by an Austin, Texas-based manager.

“In this kind of investment, it’s easy to wind up checking into a Hotel California, where you can never leave,” warns Pomona’s Kress.

Gates are a particularly important feature during times of severe volatility in public markets, such as was seen at the start of the covid-19 pandemic. The ability to close off redemptions in the event of a serious, unanticipated downturn is a “feature not a bug” designed to protect all, says Bow River’s Trihy. “In a worst-case scenario, you need the gates,” he adds. “The worst thing would be to run out of liquidity and be forced to sell at a discount.”

Bow River’s Evergreen Fund aims to keep 20 percent of fund assets in cash or liquid investments, attempting to reach extra return by investing half the money in market-neutral strategies, and other alternatives with weekly and monthly liquidity. The most liquid half will be in short-duration bonds, Trihy says.

Investors must sign up for monthly subscriptions, but they can receive access to a broadly diversified portfolio of private equity for an investment of as little as $50,000, rather than shelling out millions just to rub shoulders with institutional investors in the PE arena.

Evergreen trades through the Alternative Investment Product Services system, a global communications network for alternative investments, as opposed to the National Securities Clearing Corporation. Trihy says that AIP benefits ’40 Act fund managers in that, by having to sign documents and attestations to access the monthly subscriptions, investors must become aware that they are not going to be able to move in and out at the click of a button.

Tax and reporting on novel fund structures can be onerous for managers and confusing for investors. “You’re going to be looking at some high-level tax issues that you haven’t had to worry about before” if you ran a traditional, closed-end fund previously, says EisnerAmper’s Miller of public/private hybrid funds. The logic extends to other new structures.

Tim Toska, group sector head of private equity at Alter Domus, says investor expectations need to be managed carefully.

Speaking of unregistered, open-ended funds, Toska says managers need to be upfront with investors about issues like how quickly their funds will get drawn, dividend reinvestments, distributions and other aspects they may not be accustomed to under novel structures, lest they get confused. “You see that happen, especially with managers who are going into this product for the first time.”

Chasing waterfalls

Getting the right technology to support operations of non-traditional funds is crucial

Gary Shelto, managing member of Investors Economic Assurance, which was recently acquired by Alter Domus, says he’s been seeing managers move into a “middle ground” between traditional private equity and registered funds; for example, by creating unregistered evergreen funds.

Kartik Shah, European head of product, innovation and technology at Apex Group, says he’s even seeing “exotic structures” of private funds that are pushing boundaries, for example by switching back and forth between closed and open-ended before converting finally to open-ended.

Whether registered, unregistered, evergreen or closed with different share classes, waterfalls can get incredibly complex, quickly.

“It’s certainly not something that you can do with an Excel-based process or something you can put together in some of the older generation of accounting systems,” says Tim Toska, group sector head of private equity at Alter Domus, of some of the unregistered nontraditional funds he and Shelto are seeing. “You need to have a really dynamic tool.”

Redemptions, dividend reinvestment programs, the ability for investors to buy in regularly, buckets of public equities or other liquid securities and other characteristics novel to most private funds professionals mean managers aren’t just calculating one waterfall.

“I often tell our clients, ‘Assume every investor’s waterfall is unique,’” Shelto says. “It’s almost like death by a thousand cuts, you have so many different dimensions to deal with.”