On Monday, October 3, RiverPark Funds launched RiverPark Commercial Real Estate Fund (RCRIX). Like several of RiverPark’s funds, RCRIX began life as a hedge fund. Unlike any of its predecessors, though, it is being structured as an interval fund.
What does that mean? Morty Schaja explains the investment case:
The Fund’s objective is to seek current income and capital appreciation consistent with the preservation of capital by investing predominantly in the approximately $600 billion commercial mortgage backed securities (“CMBS”) market that is secured by income-producing commercial real estate assets predominantly in the United States.
RiverPark believes that the Fund provides a unique opportunity to generate mid-single digit income yields (based upon current coupons and purchase discounts) with both limited credit and interest rate risk and with a proven and experienced manager.
With negligible interest rate sensitivity, limited credit risk and single-digit returns, the fund might be an alternative to those attracted to David Sherman’s closed RiverPark Short-Term High Yield Fund (RPHYX).
The fund will begin life with $50 million in assets from its private predecessor, of which $10 million is the manager’s own money. The fund will be managed by Edward L. Shugrue III, CEO of Tallmadge LLC.
The closed-end interval structure is interesting. It means that you can buy shares whenever you want, but you can only redeem shares quarterly. The manager will have the option of redeeming between 5% and 25% of the fund’s shares quarterly, at NAV and without any additional fees. As a practical matter, that allows the manager to sidestep the pressure of day-to-day liquidity and the risk of needing to liquidate illiquid positions in the face of some transitory investor panic. In theory, that allows stronger long-term returns and a more rational portfolio.
The decision to adopt an interval fund structure is an implicit recognition of the exceptional risks posed by this asset class. Commercial real estate has experienced an extended boom, valuations are high and the chair of the Boston Federal Reserve has warned that banks may be pursuing the market too vigorously. The rewards of the strategy may well substantially outweigh the risks, but that shouldn’t be taken for granted. Proceed with care and vigilance.
Investors purchasing directly from RiverPark face a $2,500 minimum initial investment. The fund’s opening expense ratio is 1%. Because of the predecessor fund’s long track record, the RiverPark folks have a pretty detailed factsheet in draft. It will likely be available at the RiverPark Funds site at the official launch.