“I’m thinking about investing in a tender offer stock”, says your doctor. Inhaling deeply with a warm stethoscope on your back, “you might want to consider a fund”, exhaling your response. “Ok, what are tender offer funds?” the doctor asks as he enters data into your electronic chart. You smile, “let me tell you what I learned on Event Driven Daily …”

What are Tender Offer Funds?

Tender offer funds are closed-end investment funds that allow investors to redeem (tender) their shares at periodic intervals. These funds do not trade on exchanges like traditional exchange traded funds (ETF), tender offer funds provide their investors’ liquidity through periodic repurchase (tender) offers. These funds are also known as interval funds.

What are tender offer funds and how they work can best be understood by examining a fund’s key factors:

Fund Structure – Tender offer funds are closed-end funds (CEF). Closed-end funds are investment funds that issue a fixed number of shares through an initial public offering (IPO). CEFs are usually traded on an exchange and here’s where tender offer funds differ.

Repurchase (Tender) Offer – The fund extends an offer to repurchase a specific percentage of its shares from investors at either quarterly, semi-annually, or annual intervals. This process is called a tender offer or tendering shares, and investors have the option to sell their shares to the fund or not participate in the tender offer.

If the investor tenders their shares, they receive cash at the fund’s net asset value (NAV). NAV is an investment fund’s per share value and is calculated: total assets – total liabilities divided by the total number of outstanding shares.

Market Price and NAV – Tender offer funds repurchase investor shares at NAV, which differs from traditional CEFs that may trade at a premium or a discount to NAV. Repurchases at NAV align closer to the current market value of the fund’s underlying assets.

What are tender offer funds and how they operate is more than the opportunity to redeem your shares at NAV, there’s more.

Investment Strategy – Tender offer funds invest in real estate, private equity, mergers, or distressed securities – this is not an exhaustive list. The investments tend to be illiquid, and the fund’s periodic repurchasing manages and provides the needed liquidity to invest in assets that may not be suitable for the portfolios of traditional open and closed-end funds.

Regulatory Compliance – These funds are regulated by the Securities and Exchange Commission (SEC). Specifics under this overarching regulatory umbrella are:

  • Investment Company Act of 1940 – This act provides the primary framework for regulating investment companies, tender offer funds included.
  • Securities Act of 1933 – Under this regulation, tender offer funds are required to register their securities with the SEC and provide a prospectus detailing essential information for potential investors.
  • Securities Exchange Act of 1934 – Secondary trading of securities, including tender offer fund shares, is governed by this act. It mandates continuous disclosure to investors through timely and accurate quarterly and annual financial reports.
  • Regulation S-K and S-X – The content investment companies must provide in their registration statements, prospectuses, and periodic reports, and their format are administered by these regulations.

What are tender offer funds if they are not an attractive avenue for investors seeking exposure to illiquid assets while retaining a measure of liquidity through the fund’s periodic repurchase offers.

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