Post by yogibearbull on Dec 23, 2021 0:46:37 GMT
Closed-end funds (CEFs) are complex – IPOs, secondaries, rights-offerings, premiums/discounts, leverage of various types, activist actions. The CEF structure is quite old (late-1800s) but due to its complexity, it never caught on with the masses and other structures have evolved – mutual funds/OEFs (mid/late-1930s), ETFs (early-1990s), interval-funds (1990s (allowed)/2010s (marketed)). CEFs often develop discounts few months after their IPOs, and for many CEFs, the discounts persist, so there has been tinkering in the form of managed-distributions (not very effective), term structures, etc.
There are some newer CEFs now and many investors may not be familiar with how they differ from the older CEFs.
1. The sponsoring firm pays the IPO expenses for the newer CEFs and that tends to control underwriting costs to 2-3%. The old practice was to pay underwriting costs from the fund itself and that became a gravy train for everybody with costs typically 5-6%. That then led to immediate premium for older CEFs post-IPO, subsequent price weakness and investor disappointments that led to post-IPO discounts few months after the IPO. The newer CEFs try to avoid this – as the sponsor is paying the underwriting costs, the CEF can deploy 100% of the assets raised, and the sponsor has good reasons to control the underwriting costs. But why is the sponsor so generous? Don’t forget that the sponsor will make lots of money later from portfolio management, fund administration and servicing, and it will more than recover its initial out-of-pocket costs. So, in theory, the newer CEFs shouldn’t go into post-IPO discounts, but if most CEF investors believe that will happen, then that will happen, and present buying opportunities for the newer CEFs.
2. The newer CEFs have a special term structure. Typically, there is 12-year term, but the termination date has some flexibility. The CEF board can extend the termination date first by 1 years, and then by another 0.5 years, so by 1.5 years total. Another possibility is that within 12 months of the termination date, the CEF board can make tender offer for 100% of shares at NAV if a sizable residual fund can remain as viable (the size can be specified at IPO) for holdouts (interested holders); if there are not enough holdouts to meet the threshold for residual fund, then the entire tender offer is cancelled and the CEF must be liquidated by 12-13.5 years. This means that if there is sufficient interest in continuing the fund, then most CEF holders are bought out at NAV, but a small remainder CEF can continue with unlimited term for the holdouts (interested holders) and the CEF has no further obligation to make tender offer for shares (although it can as any CEF can); this is the only way the mini-CEF can continue beyond 13.5 years This has an interesting implication for CEF holders who buy it at discount during market disruptions – they are guaranteed to be made whole during a termination window that may go from slightly less than 12 years to 13.5 years and that can kick in additional returns.
In time the CEF investors will start to distinguish these newer CEFs from the Older CEFs, but until then, take advantage of the inefficiencies that may develop during market selloffs that hit all CEFs.
Examples of 2 such newer CEFs are of current interest to me: First, the new multisector bond CEF PDO (inception 1/29/21). If you are wondering why Pimco needed another multisector bond CEF when it already has PDI (that now has former PKO and PCI merged into it), you now know why – PDI is with the older CEF structure and PDO is with the newer CEF structure. Second, Thornburg income-builder/world-allocation/multi-asset TBLD (inception 7/27/21) that is a cousin of its mutual fund TIBAX/TIBIX.
For a brief introduction to CEF structures, see www.nuveen.com/en-us/insights/closed-end-funds/closed-end-funds-structures
LINK
There are some newer CEFs now and many investors may not be familiar with how they differ from the older CEFs.
1. The sponsoring firm pays the IPO expenses for the newer CEFs and that tends to control underwriting costs to 2-3%. The old practice was to pay underwriting costs from the fund itself and that became a gravy train for everybody with costs typically 5-6%. That then led to immediate premium for older CEFs post-IPO, subsequent price weakness and investor disappointments that led to post-IPO discounts few months after the IPO. The newer CEFs try to avoid this – as the sponsor is paying the underwriting costs, the CEF can deploy 100% of the assets raised, and the sponsor has good reasons to control the underwriting costs. But why is the sponsor so generous? Don’t forget that the sponsor will make lots of money later from portfolio management, fund administration and servicing, and it will more than recover its initial out-of-pocket costs. So, in theory, the newer CEFs shouldn’t go into post-IPO discounts, but if most CEF investors believe that will happen, then that will happen, and present buying opportunities for the newer CEFs.
2. The newer CEFs have a special term structure. Typically, there is 12-year term, but the termination date has some flexibility. The CEF board can extend the termination date first by 1 years, and then by another 0.5 years, so by 1.5 years total. Another possibility is that within 12 months of the termination date, the CEF board can make tender offer for 100% of shares at NAV if a sizable residual fund can remain as viable (the size can be specified at IPO) for holdouts (interested holders); if there are not enough holdouts to meet the threshold for residual fund, then the entire tender offer is cancelled and the CEF must be liquidated by 12-13.5 years. This means that if there is sufficient interest in continuing the fund, then most CEF holders are bought out at NAV, but a small remainder CEF can continue with unlimited term for the holdouts (interested holders) and the CEF has no further obligation to make tender offer for shares (although it can as any CEF can); this is the only way the mini-CEF can continue beyond 13.5 years This has an interesting implication for CEF holders who buy it at discount during market disruptions – they are guaranteed to be made whole during a termination window that may go from slightly less than 12 years to 13.5 years and that can kick in additional returns.
In time the CEF investors will start to distinguish these newer CEFs from the Older CEFs, but until then, take advantage of the inefficiencies that may develop during market selloffs that hit all CEFs.
Examples of 2 such newer CEFs are of current interest to me: First, the new multisector bond CEF PDO (inception 1/29/21). If you are wondering why Pimco needed another multisector bond CEF when it already has PDI (that now has former PKO and PCI merged into it), you now know why – PDI is with the older CEF structure and PDO is with the newer CEF structure. Second, Thornburg income-builder/world-allocation/multi-asset TBLD (inception 7/27/21) that is a cousin of its mutual fund TIBAX/TIBIX.
For a brief introduction to CEF structures, see www.nuveen.com/en-us/insights/closed-end-funds/closed-end-funds-structures
LINK
