USA – ILLINOIS Trends and Developments Contributed by: Beth Vogel, Mayer Brown
by these private credit investments. At the end of the investment period, the fund is liquidated, and investors receive their principal, plus any profits. Closed-end funds typically invest in less liquid assets than open-end funds, but beyond that, the fund manager will largely decide what assets the closed-end fund invests in. To attract additional investors to closed-end funds, private credit managers have offered interval funds and tender funds, which allow investors certain opportunities to redeem their investments before the final liquidation, subject to specified annual caps. Interval funds allow investors to purchase shares at any time but only permit redemptions at specified intervals, such as quarterly or annually. Similar to interval funds, tender funds allow investors to redeem shares at specific intervals, but the repurchase offers are made at the discretion of the private credit fund’s management, giving them greater control of the liquidity of the fund by not requir - ing redemptions. Both listed and non-listed closed-end funds continue to be popular with asset managers and investors. As reported by Kroll, as of 31 October 2024, there were 257 closed-end funds (includ - ing interval funds and tender funds), with total assets of USD208 billion in the market across asset classes (not just private credit). The num - ber of closed-end funds increased during 2024, and, as of 31 October 2024, there were still 21 private credit closed-end funds in the registra - tion process with the Securities and Exchange Commission (see ‘Regulation’ below). BDCs Publicly traded business development com - panies (BDCs) are also closed-end funds that are investment companies registered under the Investment Company Act of 1940, but, unlike
other closed-end funds, BDCs are subject to certain investment restrictions, primarily that BDCs must have at least 70% of their invest - ments in “qualifying assets” , which are limited to private or public US companies with market capitalisation of less than USD250 million. As of the end of 2023, there were approximately 50 publicly traded BDCs with over USD130 bil - lion in assets under management in the aggre - gate, according to the LSEG’s BDC Collateral. This number has only grown over 2024 as more asset managers have either completed or com - menced the process of listing a new BDC. These types of BDCs are a relatively liquid investment. In addition to publicly traded BDCs, there are non-traded BDCs, which have similar assets under management. Non-traded BDCs conduct continuous public offerings, but are not listed on an exchange and therefore have limited liquid - ity for investors unless a liquidity event, such as an initial public offering, occurs. Liquidity events are generally scheduled to occur five to seven years after launch; however, the last few years have seen a significant increase in the number of “perpetual life” or “evergreen” non-traded BDCs, which have an indefinite duration. This allows the fund managers to reduce the risk to investors that they will need to liquidate the BDC assets during market downturns, resulting in lower returns for the investors. Since they are not publicly traded, non-traded BDCs allow certain investors to access the private credit market, but still have limited redemptions more similar to non-BDC closed-end funds. Because private credit assets can be hard to trade, ie, illiquid, interval funds, tender funds and BDCs that limit redemptions are often used by private credit managers to have greater control over their liquidity. Open redemptions could cre -
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