Brandon Grimm, left, chief investment officer at Gilbert & Cook, and Charles Gans-Lartey, managing director of Ares Wealth Management, recently spoke to financial advisers in West Des Moines. (Photo: Steve Dinnen)
By Steve Dinnen
Diversification is key to succeeding with your investments. But sometimes even the smartest portfolio can’t avoid trouble, and this year, pretty much every stock is down. Bonds have done little to smooth things over. However, a different opportunity is catching on as investors see its potential to deliver commendable returns that aren’t tied to the up-down-up-down cycles so common to stocks.
Interval funds, also called tender offer funds, are basically giant loan offices. They loan money to corporations, collect their profits from repayments, and then share with investors who have bought into them. They’re financial instruments whose performance over time has little correlation to the swings of the stock market. They sport respectable returns, typically in high single digits to low double digits. Those never approach the highs of the boom years, but they escape the lows of a bust.
Direct lending, the gauge for these loan programs, posted an annual performance of around 5.6% in 2022, while the Dow Jones Industrial Average shed 8.7%. A year earlier, the direct lending index rose almost 12%, as the Dow climbed 18.7%.
Plenty of giant asset managers, like BlackRock and Apollo Global Management, operate in this space. (Note: The interval funds they offer are not the same as shares of these publicly traded firms.) Another huge player is Ares Wealth Management, with $348 billion in assets under management in their credit group. Its managing director, Charles Gans-Lartey, recently stopped by the West Des Moines offices of financial advisers Gilbert & Cook to present an example of how his firm’s interval fund works.
Ares does its own underwriting on loans it provides to private firms. It’s a lender, not a lender-buyer. “We don’t loan to own,” Gans-Lartey said. Instead, they provide first loans that are secured by liens — or second lien loans, or mezzanine loans, notes, real estate mortgages and other financial instruments. They look for borrowers who have EBITDAs — earnings before interest, taxes, depreciation and amortization — of $10 million to $250 million.
Ares likes companies that are established in their fields. They lend to a variety of clients, though Gans-Lartey said they’re not interested in consumer goods.
Defaults, which obviously would depress earnings, are negligible. That doesn’t mean this is a risk-free investment. The Financial Industry Regulatory Authority wrote in January that interval funds in general merit attention from investors for no other reason than the fact that entry costs — commissions — can be higher than they might see with mutual funds. Interval funds also lack liquidity; you can’t decide at 10 a.m. to close out your position and accomplish that task by day’s end. And FINRA notes that earnings on interval funds can include return on capital, which makes it seem they are earning more than they actually do.
Still, a return rate that easily bests CDs and has proved its stability over long periods of time has attracted savvy investors. Interval Fund Tracker shows the funds had $95 billion in assets at the end of 2024, a 30% jump in just one year.
Interval funds have been very popular at Gilbert & Cook. Brandon Grimm, its chief investment officer, said clients have flocked to them as they’ve become aware of them, and now they account for a quarter of the total assets managed by the firm.
Even so, interval funds aren’t available to the general public. Broker dealers sell them, as do registered investment advisers. That’s the capacity in which Gilbert & Cook is operating, with Ares and its clients. As Grimm put it, “They’re only available through an intermediary.”
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