New Year, New Closed-End Funds In The Works

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Written by Nick Ackerman, co-produced by Stanford Chemist

2022 is on its way, and we started off with a continuation of some of the rockiness we ended 2021 with. Tech has been a sore area, but that could be short-term pain for some longer-term gain as valuations come down a bit. Still, the markets seem elevated more broadly, and fund sponsors are still on the hunt to raise capital.

Total Assets of CEFs

Total Assets of CEFs

Statista

Over the last couple of years, the closed-end fund market has launched some interesting funds. Despite that, the total AUM managed through CEFs remains flat. This has happened as funds liquidate at their termination date or liquidate due to horrific performance. I am primarily looking at the energy CEFs that are liquidated through 2020. Today, I’m looking at 4 funds that are in the works that could make it to market.

Earlier in 2021, I had covered 2 funds that were in the pipeline but have seemingly moved nowhere since then. MainStay CBRE Global Infrastructure Megatrends Fund (MEGI) was one; they launched in October of 2021. The other one covered was Cohen & Steers Select Infrastructure Income Fund; I haven’t seen any new filings or updates there.

N-2 Filing And Preliminary Notes

As a quick reminder, this is the form that is required to offer any new shares to the market – whether the registered investment company [RIC] is existing or going to be created. Any time new shares are “minted,” so to speak, an N-2 filing is required.

The other thing we need to emphasize here is that these are preliminary filings. That means the information can change a little or even drastically. These funds might not launch at all and could be scrapped entirely – you just never know. With that, here is the disclosure these filings carry with them:

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the Registration Statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

To sum up – when the funds actually begin trading, if they do at all, they could be different from this original information. There will be a final prospectus that we can dive into when this happens. The names are even subject to change – but we will be addressing them as their tentative names.

COHEN & STEERS REAL ESTATE OPPORTUNITIES AND INCOME FUND

One that could be of particular interest is another C&S fund. Tentative ticker of RLTY. This time, it looks like they have another REIT fund in the works. As they are a popular REIT sponsor, it isn’t too surprising. Unlike the infrastructure fund, this one has had several updated filings, which could indicate this one as being more promising to make it to market.

The objective is quite similar to what we’d see with their other funds; “high current income,” with a secondary objective of “capital appreciation.”

The way in which the fund will invest is quite similar to Cohen & Steers Quality Income Realty Fund (RQI).

Here’s the specific wording for RLTY from the N-2 filing:

The Fund seeks to achieve its investment objectives by investing, under normal market conditions, at least 80% of its managed assets (i.e., net assets plus the principal amount of loans to the Fund from financial institutions or debt securities issued by the Fund, the liquidation preference of preferred shares issued by the Fund, if any, and the proceeds of any reverse repurchase agreements entered into by the Fund) (“Managed Assets”) in (i) real estate-related investments and (ii) preferred and other income securities. The Fund’s real-estate related investments may include, for example, public equity, debt and preferred securities issued by real estate investment trusts (“REITs”) and other companies that invest in or provide services to real estate.

The fund will also allow for up to 40% of its assets to be invested in preferred securities. That could make it tilt towards the way Cohen & Steers REIT & Preferred Income Fund (RNP) invests. Since that fund is heavier in preferred exposure than RQI.

One small difference is the fund seems to add more flexibility by investing in private investments.

…REITs and similar REIT-like entities; private investments in public equity (“PIPEs”); real estate private placements, securities issued by real estate companies prior to an IPO…

The fund intends to utilize leverage, as we’ve seen with most of Cohen & Steers funds. In addition to that, they have the term structure that we’ve seen all funds launching with. In this case, they are expecting the termination date on the twelfth anniversary.

They allow for the fund to switch to perpetual with the standard tender offer that is also in funds being launched these days. That is a tender offer for 100% of the outstanding shares at 100% of NAV. If the fund has $200 million in net assets after the tender offer, they can eliminate the termination date.

They may also extend the fund’s termination date “once for up to one year” and “once for up to an additional year.” That gives the advisor more flexibility to not liquidate during a panic sell-off or some other adverse market conditions. This is fairly standard but sometimes what changes is the second part, where many other funds choose the “additional” extension to only be six months. That is the case with the three other funds we will be touching on.

BlackRock Science and Technology Trust III

Here is another interesting fund, and quite a surprising one, at least for what has been recently happening. Tech has been in quite the sell-off and struggling, especially in the more innovative growth space. Yet, BlackRock is looking to establish another tech-oriented fund. This could mean there is still some fairly aggressive demand for this type of fund that BlackRock is seeing.

BlackRock Science and Technology Trust (BST) tends to focus on large-cap tech names though it isn’t limited to just large-cap. Then there is BlackRock Science and Technology Trust II (BSTZ). That fund focuses on smaller or rapidly growing companies. It doesn’t appear to have a ticker, so we’ll call this tentative fund Z3 for now.

Z3 seems like it’ll be aligned more towards the way BSTZ invests. From their N-2 filing:

Under normal market conditions, the Trust will invest at least 80% of its total assets in equity securities issued by U.S. and non-U.S. science and technology companies in any market capitalization range, selected for their rapid and sustainable growth potential from the development, advancement and use of science and/or technology.

As part of its investment strategy, the Trust intends to employ a strategy of writing (selling) covered call options on a portion of the common stocks in its portfolio, writing (selling) other call and put options on individual common stocks, including uncovered call and put options, and, to a lesser extent, writing (selling) covered and uncovered call and put options on indices of securities and sectors of securities. This options writing strategy is intended to generate current gains from options premiums and to enhance the Trust’s risk-adjusted returns.

They also include the 25% target of private investments. However, that is a soft limit; they can invest in restricted securities “without limit.”

Under normal market conditions, the Trust currently intends to invest up to 25% of its total assets, measured at the time of investment, in illiquid privately placed or restricted securities

While tech might be out of favor now, another fund like this will make a new swap partner that should be more comparable between Z3 and BSTZ.

Similar to BST and BSTZ, no leverage will be expected to be used. Though they always leave the wording that they may leverage up. The fund’s term is the twelfth anniversary as it was for RLTY. Same thing for their tender offer that lines up with BST and BSTZ too. That is a tender offer for 100% of outstanding shares at 100% of NAV. If they have $200 million in net assets, they can switch to a perpetual fund.

This fund can extend the termination “once for up to one year” and “once for up to an additional six months.” As I mentioned above, the one-year and six-month extensions are fairly standard – though it isn’t too uncommon to see one year and an additional year extension either.

BST was an older fund, and when they launched, they raised $400,260,000. BSTZ launched, and they raised an impressive $1.4 billion. Nearly 3.5x what BST raised. It’ll be interesting to see the size of Z3 if it makes it to market.

Thornburg Strategic Income Opportunities Trust

Thornburg might not be too well known in the CEF space. However, managing capital isn’t new to them, being around since 1982. This is the second CEF they have in the works after they launched Thornburg Income Builder Opportunities Fund (TBLD) mid-way through 2021. That fund seems to be performing fair enough, though it is really too short of a period to gauge for any sort of meaningful track record.

From their N-2 filing, the tentative ticker for this fund is TSIO. TSIO will have an investment objective of “current income and total return.” To achieve that, the fund will invest “at least 80% of its managed assets in fixed income securities around the globe.”

That leaves the fund fairly flexible in terms of what it can invest in, including any sort of debt security. However, they expand that there are some limits, such as no more than 50% in MBS. They also note that “the trust may invest in non-U.S. domiciled entities including up to 30%” in foreign issuers – which seemed fairly clear given the “global” word above.

Up to 25% can be invested with foreign currencies, though I’d assume that, like most CEFs, will primarily invest with U.S. dollars. The fund will also “invest no more than 25% of its Managed Assets in bond, debt or credit investments rated CCC or lower at the time of investment.” That still leaves a fairly large exposure to some of the most junk-rated debt – though it is fairly standard for most bond funds to include similar wording.

Overall, it seems a relatively straightforward multisector bond fund that could include up to 20% equity securities. In practice, though, it’s likely that they will invest nearly 100% in debt securities.

The fund has a termination date that is expected to be on the twelfth anniversary. This is assumed as they allow for an extension for “once up to one year (i.e., up to December , 2034) and once for up to an additional six months (i.e., up to June , 2035)…”

They can switch to a perpetual fund with the typical 100% of outstanding shares at 100% of NAV. In this case, they haven’t provided the net asset amount that they would require to switch to a perpetual fund. For TBLD, they went with a $100 million level. They raised $580 million when they launched TBLD.

RiverNorth Managed Duration Municipal Income Fund II, Inc.

Last but not least, we have another potential offering from RiverNorth in the muni space. They’ve been putting out a new muni fund for the last several years now. This fund’s tentative ticker is RMMZ.

In 2019, they launched the predecessor, RiverNorth Managed Duration Municipal Income Fund (RMM). Before that, they launched RiverNorth Opportunistic Municipal Income Fund (RMI) in 2018. There was RiverNorth Flexible Municipal Income Fund (RFM) in 2020 and RiverNorth Flexible Municipal Income Fund (RFMZ) last year, in 2021.

I have covered each of these funds previously, and they all sort of providing for similar exposure. They utilize a hybrid approach between themselves and MacKay as a subadvisor. I mentioned this in my RFMZ piece that seems to continue to hold true as we get yet another muni fund from RiverNorth:

One of the main questions might be why did RiverNorth make basically 4 of the same fund? I believe the answer to that is that it all has to do with raising capital. They likely wanted to manage more assets but demand varies from year to year. Thus, pushing them to bring only 1 of these muni funds to market over the last several years. RFMZ launching in 2021, RFM in 2020, RMM in 2019, and RMI kicked off this series of clones in 2018.

Launching all these funds could be better than raising capital through a rights offering. Those often cause shorter-term price volatility to current shareholders. Eventually, these funds could be merged at some point as well.

RMMZ is again using the hybrid approach to invest between a “Tactical Municipal Closed-End Fund Strategy” and “Municipal Bond Income Strategy.” The subadvisor manages the latter and shifts between 35 to 75% of the managed assets, investing in muni bonds directly. The CEF strategy will be 25 to 65% of the managed assets.

They once again choose the same tender offer as their previous funds. If they have at least $100 million in net assets after the tender of 100% of outstanding shares at 100% of NAV, then they can switch to a perpetual fund. For RFMZ, they have a 15-year term. RMI has a 12-year term, so it isn’t exactly clear as to what the term for RMMZ could be. They don’t provide the wording in the preliminary prospectus at this time.

Though they do have that the fund can put off the termination date for the usual; “once for up to one year, and once for up to an additional six months.”

Conclusion

These are some of the latest funds in the works; they may never see the light of day. So it is critical to be aware that this is just a preliminary filing, and nothing is finalized. They may change entirely by the time they launch, too (if they launch at all.) Make sure to check the latest data before making any investment decisions.

RMMZ and TSIO could be some great funds for certain investors. With the potential launch of RMMZ, there is no lack of RiverNorth muni funds that one could choose from. They are all relatively smaller, so liquidity could be another issue. It is also great to see TSIO being launched as Thornburg is trying to provide even more options in the closed-end fund space. The entire CEF AUM has been staying relatively stagnant more broadly, so it’s always good to see new efforts.

However, I’m more particularly drawn to RLTY and “Z3.” These will provide more options in funds that I already own and the type of exposure that I want over the long term. More options in something you want to own can be a powerful thing. As valuations change between funds, one can take advantage of such opportunities by swapping one for another.

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