Tender Offer Mechanics
Definition
Interval fund tender offers establish periodic liquidity windows enabling shareholders to request repurchase of 5-25% of outstanding shares quarterly or annually at net asset value (NAV). Regulatory framework: SEC Rule 23c-3 requires interval funds to offer liquidity between 5-25% of shares at NAV at intervals of 3, 6, or 12 months (most common: 5% quarterly = 20% annualized liquidity). Tender process timeline: (1) Announcement phase—fund notifies shareholders 14-42 days before tender deadline via prospectus supplement and account statements specifying: repurchase percentage offered (5% of outstanding shares typical), tender period dates (10-21 day window for submissions), NAV calculation date (typically 2-5 business days after deadline), settlement date (5-7 business days after pricing), (2) Submission phase—shareholders submit repurchase requests electronically or via physical forms during tender window, requests irrevocable once submitted, shareholders may tender partial positions (minimum $1,000-$5,000 typical), (3) Proration mechanics—if total requests exceed offered percentage, fund prorates acceptance proportionally (example: 5% offer, 8% requests submitted = 62.5% proration rate, investor requesting $10,000 receives $6,250), (4) Settlement—fund repurchases accepted shares at NAV, wire transfers or checks distributed within 7 days, remaining untendered shares continue holding. Tender frequency distribution: Quarterly tenders (60-70% of interval funds providing maximum liquidity flexibility), semi-annual tenders (20-25% balancing liquidity and operational costs), annual tenders (10-15% minimizing administrative burden for stable portfolios).
Why it matters
Tender mechanics determine actual liquidity available to interval fund investors creating material differences from marketing representations. Critical considerations: (1) Proration risk—fund advertising 5% quarterly tenders suggests 20% annual liquidity, but reality: if consistent oversubscription at 2:1 ratio (10% requests versus 5% offers), actual liquidity 10% annually not 20%, investors trapped longer than expected, (2) Timing vulnerability—tender frequency creates discrete liquidity events unlike daily mutual funds, investor needing liquidity between tenders (medical emergency, job loss) faces: waiting 3-12 months for next tender, forced sale in illiquid secondary market (30-50% discounts typical), or hardship redemption requests (uncertain approval, board discretion), (3) NAV manipulation concerns—tender pricing based on NAV calculated 2-5 days post-deadline creates potential for: stale pricing (illiquid holdings not marked to market), favorable treatment (fund selectively updating valuations before tenders), information asymmetry (insiders tendering ahead of NAV declines). Real-world examples: Private credit interval funds (Blackstone, Ares, Owl Rock) managing $50B+ saw 2022-2023 tender pressure as rising rates reduced appeal—some experienced 15-20% tender requests (3-4x offered 5%), triggering proration at 25-33%, investor expecting 100% liquidity received 25-33%, created secondary market discounts 10-20% to NAV. Understanding tender mechanics critical for: Advisors evaluating interval fund suitability (clients needing predictable liquidity should avoid, long-term allocators acceptable), investors sizing positions (never exceed percentage comfortable locking up 3-5 years accounting for proration), and platforms conducting due diligence (tender fulfillment history, proration frequency, suspension track record indicate fund quality and portfolio liquidity).
Common misconceptions
- •Tender percentages aren't guarantees—5% quarterly tender means fund will repurchase up to 5%, not must repurchase 5%. If only 2% of shareholders tender, fund repurchases 2% (100% fulfillment). If 10% tender, fund repurchases 5% (50% fulfillment via proration). Actual liquidity varies quarterly based on shareholder behavior.
- •NAV isn't necessarily fair value—interval funds holding illiquid assets (private credit, real estate, venture capital) use Level 3 valuations based on models not market prices. Tender NAV may reflect stale appraisals, optimistic assumptions, or delayed markdowns. Secondary market discounts 10-30% below NAV often indicate market skepticism about reported valuations.
- •Equal treatment doesn't mean equal liquidity—while all tendering shareholders receive same proration percentage, practical differences exist: Large shareholders ($10M+ positions) tendering maximum amounts receive larger absolute liquidity ($500K at 5% tender) versus small shareholders ($100K positions receiving $5K). Creates concentration risk as large shareholders exit faster than small.
Technical details
Tender announcement and notification requirements
SEC disclosure mandates: Rule 23c-3 requires funds to provide: Minimum 14 days advance notice to shareholders (via prospectus supplement filed with SEC, direct mail to registered shareholders, account statement notices). Notice must specify: Tender percentage offered (5-25% range), tender period opening and closing dates, NAV calculation date and methodology, settlement timeline, proration mechanics if oversubscribed, shareholder rights and obligations. Additional disclosures: Material portfolio changes since last tender, NAV trends (current vs prior tenders), historical proration rates (if applicable), contact information for questions.
Notification timing and channels: Prospectus supplement: Filed with SEC 10-15 days before tender period opens, contains full legal terms and conditions, available via SEC EDGAR and fund website. Direct shareholder communication: Mailed or emailed notification to all registered shareholders of record 14-21 days before tender deadline, includes tender form (physical or electronic submission link), deadline reminders sent 3-5 days before close. Account statement disclosure: Quarterly statements include upcoming tender dates, previous tender results (proration rates, participation percentages), year-to-date tender fulfillment statistics.
Tender period duration: Standard tender windows: 10-14 days (most common, balances shareholder consideration time with administrative efficiency), 15-21 days (used by complex funds providing extended review period), 7 days (minimum, rare except for annual tenders with advance notice). Irrevocability rules: Tender requests typically irrevocable once submitted (prevents gaming by withdrawing if NAV increases pre-pricing), some funds allow withdrawal if material adverse event occurs (fund suspension, manager resignation, force majeure). Deadline enforcement: Hard cutoff—requests received after deadline (typically 4pm ET) rejected for current tender, no exceptions for mail delays or technical issues (burden on shareholder to submit early).
Board approval and discretion: Board of trustees/directors reviews tender offer parameters quarterly/annually: Confirming offered percentage appropriate given fund liquidity and portfolio conditions, approving NAV calculation methodology and third-party appraisals, authorizing tender suspension if necessary to protect remaining shareholders, reviewing tender results and proration calculations for accuracy. Discretionary authority: Board may reduce offered percentage (from 5% to 3% if portfolio liquidity constrained), suspend tender entirely (during market dislocation or portfolio stress), extend tender period (if natural disaster or system failure prevents shareholder participation). Board actions must be documented in meeting minutes and disclosed to shareholders via Form N-CSR filings.
Proration mechanics and fulfillment calculations
Proration formula and examples: Basic calculation: Proration rate = Offered shares ÷ Requested shares. Example 1 (oversubscription): Fund with 10M shares outstanding offers 5% tender (500K shares), receives requests for 1M shares (10%). Proration rate = 500K ÷ 1M = 50%. Investor requesting 1,000 shares receives 500 shares (50% fulfillment). Example 2 (undersubscription): Same fund receives requests for 300K shares (3%). Proration rate = 100% (fund accepts all requests). Investor requesting 1,000 shares receives 1,000 shares (full fulfillment).
Share class proration nuances: Funds with multiple share classes (A, C, I shares) typically run separate tenders for each class: Class A tender: Offers 5% of Class A shares, accepts Class A requests, prorates if oversubscribed based on Class A requests only. Class C tender: Separate 5% offer, separate proration calculation. Prevents cross-class subsidization—Class A shareholders cannot tender into Class C quota. Exception: Some funds pool all classes for single tender, prorate proportionally across all share classes, disclosed in prospectus.
Rounding and minimum tender amounts: Fractional share handling: Most funds repurchase fractional shares to ensure precise proration (investor requesting 1,000 shares at 50% proration receives exactly 500.00 shares, not 500 shares with remainder rejected). Some funds round to nearest whole share (investor receives 500 shares, 0.00 share remainder remains invested). Minimum tender amounts: $1,000-$5,000 minimum tender request prevents administrative burden of processing tiny redemptions. Investors with positions below minimum must tender entire position or nothing. Example: Investor with $800 position cannot tender $500 (below minimum), must tender all $800 or wait.
Oversubscription and queue management: Chronic oversubscription patterns: Funds consistently experiencing 2-3x oversubscription (10-15% requests versus 5% offers) face shareholder dissatisfaction and eventual redemption pressure. Some funds respond by: Increasing tender percentage from 5% to 10% quarterly (doubling liquidity), adding special redemption windows (one-time 25% tender to clear backlog), or converting to daily-liquidity CEF structure (exiting interval fund format entirely). No queue system: Interval funds do not maintain redemption queues—each tender evaluated independently. Investor rejected in Q1 tender (via proration) must re-submit full request in Q2 tender, no priority or carryover from prior requests. Creates uncertainty—investor could be prorated at 50% for multiple consecutive quarters delaying full exit 2-3 years.
NAV calculation and pricing mechanics
NAV determination date and process: Pricing date: Typically 2-5 business days after tender deadline (allows fund to gather final valuations, complete pricing calculations). Standard flow: Tender deadline Friday 4pm ET → Pricing date Tuesday (3 business days) → Settle following Friday (7 days post-pricing). NAV components: Liquid securities (publicly traded stocks, bonds) marked to market using closing prices on pricing date. Illiquid assets (private credit, real estate, venture investments) valued using: most recent third-party appraisals (updated quarterly or semi-annually), internal models (DCF, comparable transactions, adjusted cost), manager estimates (for positions lacking external valuations). Cash and accruals: Include cash holdings, accrued income, estimated expenses through pricing date.
Level 3 asset valuation challenges: Fair value hierarchy (FASB ASC 820): Level 1—quoted prices in active markets (public stocks, bonds). Level 2—observable inputs (private securities with recent transaction prices). Level 3—unobservable inputs (private assets requiring modeling). Interval funds holding 30-60% Level 3 assets face: Valuation lag (appraisals updated quarterly but tenders occur monthly/quarterly creating potential staleness), Subjectivity (discount rates, growth assumptions, comparability adjustments all involve judgment), Conflicts of interest (managers incentivized to maintain high NAVs supporting fundraising and performance fees, especially before tenders).
Independent valuation and oversight: Third-party valuation agents: Funds hire specialized firms (Duff & Phelps, Lincoln International, Houlihan Lokey) to value illiquid holdings quarterly/annually. Cost: $50K-$500K annually depending on portfolio complexity. Scope: Typically 10-30% of portfolio independently valued each quarter (full portfolio valued annually), rotating coverage ensures all assets periodically reviewed. Board valuation committee: Trustees establish committee reviewing: Third-party valuation reports and methodologies, manager-proposed valuations for assets without independent appraisals, NAV trends and sudden changes (investigate >5% single-quarter NAV swings), pricing complaints from shareholders or secondary market discounts indicating mispricing. Committee must approve final NAV before tender settlement.
Tender-specific pricing considerations: Liquidity discounts: Some funds apply modest discounts (1-3%) to NAV for tender purposes reflecting: transaction costs (selling portfolio assets to fund redemptions), market impact (large redemptions forcing asset sales at unfavorable prices), dilution protection (preventing exiting shareholders from avoiding costs imposed on remaining holders). Controversial—SEC scrutinizes as potential unequal treatment. Swing pricing: Alternative approach where NAV adjusted up/down based on net flows (redemptions = NAV down 0.5-1%, subscriptions = NAV up 0.5-1%). Protects remaining shareholders from trading costs but creates NAV volatility. As-of pricing: Ensures tender pricing reflects same date (pricing date NAV, not stale NAV from days prior). Funds must price consistently—cannot use NAV from prior week for tenders while monthly statements use current NAV (would create arbitrage opportunities).
Settlement process and operational timeline
Post-tender settlement sequence: Day 0 (Pricing date): Final NAV calculated incorporating all portfolio positions, expense accruals, and income. Day 1-2 (Confirmation): Fund processes tender requests, calculates proration if applicable, generates shareholder confirmations showing: shares tendered, shares accepted (post-proration), NAV per share, total proceeds, settlement date. Confirmations mailed/emailed within 48 hours of pricing. Day 3-5 (Payment processing): Fund liquidates portfolio positions if needed to fund redemptions (most funds maintain 3-10% cash reserve specifically for tenders avoiding forced sales). Payment instructions verified—wire transfer details, check mailing addresses. Day 5-7 (Settlement): Proceeds distributed via: wire transfer (most common for institutional/large shareholders, same-day receipt), ACH transfer (2-3 day settlement), physical check (7-10 day mail delivery, declining in usage).
Liquidity management and portfolio sales: Pre-tender positioning: Funds typically increase cash positions 2-4 weeks before tender deadline: Selling highly liquid positions (public securities, government bonds) to raise 2-5% cash buffer above normal levels, reducing new investment commitments to preserve dry powder, accelerating distributions from portfolio companies/properties (requesting scheduled payments early if possible). Post-tender adjustment: If redemptions exceed expectations (high proration), fund may: Sell additional liquid positions post-tender to replenish cash (5-10% of portfolio turnover), draw credit facilities temporarily (most interval funds maintain $10M-$100M+ revolving lines for redemption funding), defer new investments until cash rebuilt (1-2 quarters).
Share cancellation and outstanding share count: Mechanics: Repurchased shares retired/cancelled, not held as treasury shares. Reduces total outstanding shares proportionally. Example: Fund with 10M shares outstanding repurchases 500K shares (5%), outstanding shares become 9.5M, each remaining share represents 1/9.5M ownership (vs 1/10M previously) = 5.26% increase in ownership percentage. Economic impact: Remaining shareholders experience slight ownership concentration (good if portfolio appreciating, bad if declining), NAV per share unchanged (total NAV and share count both decline 5%, ratio constant), expense ratio potentially increases (fixed costs spread over fewer shares, though typically minimal 0.01-0.05% impact).
Reporting and recordkeeping: Shareholder communications: Post-tender reports distributed showing: Total shares tendered, Total shares accepted, Proration percentage if applicable, Settlement amounts by shareholder, NAV used for pricing. Regulatory filings: Form N-CSR (semi-annual reports) includes: Tender history (dates, percentages offered, participation rates, proration rates), Portfolio turnover attributable to tender-driven sales, Expense impacts from tender operations. Form N-PORT (monthly holdings report) filed 60 days after month-end showing: Portfolio composition before and after tenders, Cash levels and liquidity metrics, Valuation methodologies for Level 3 assets used in tender pricing. Records retention: SEC requires 6-year retention of: Tender notices and shareholder requests, NAV calculations and supporting documentation, Board meeting minutes approving tenders, Third-party valuation reports. Auditors review annually as part of financial statement audits.