iDirect Private Markets Fund Seeks Regulatory Approval for Enhanced Share Class Flexibility

The fund’s proposal aims to introduce multi-class share structures, allowing for diversified fee models and investor options.

October 08, 2024

iDirect Private Markets Fund, a continuously offered non-diversified closed-end management investment company, is seeking approval from the U.S. Securities and Exchange Commission (SEC) for exemptions under various provisions of the Investment Company Act of 1940. The company aims to implement a multi-class share system, introduce early withdrawal charges (EWC), and establish asset-based distribution and service fees for its Class A and Class I shares, with potential future share classes.

The fund, managed by iCapital Registered Fund Adviser LLC, has a strategy focused on long-term capital appreciation through direct investments and partnerships with leading private equity managers. By seeking regulatory exemptions, the fund aims to improve flexibility in its operations, benefiting both investors and the broader private market ecosystem.

A key component of iDirect’s application to the SEC is the ability to offer multiple share classes with different fee structures. Currently, the fund offers Class A and Class I shares, with varying sales loads, service fees, and distribution costs. Class A shares carry a sales load of up to 3.5%, a shareholder services fee of 0.25% annually, and a distribution fee of 0.35%, while Class I shares are exempt from these charges.

The fund’s request for regulatory relief would allow it to introduce additional classes of shares in the future, each with its own distinct fee model. This would give investors a wider range of options to tailor their investments based on their preferences, portfolio size, and expected holding periods. Each class of shares would have expenses allocated proportionally, ensuring fair treatment among investors.

The multi-class system proposal aligns with the broader industry trend of offering flexible investment options in closed-end funds, a model that has proven successful in open-end investment structures.

Another critical aspect of the fund’s filing is the request to impose early withdrawal charges (EWCs) on shares repurchased within one year of purchase. EWCs, similar to contingent deferred sales charges (CDSLs) commonly used by open-end funds, would allow the fund to recoup distribution costs if investors exit prematurely.

Under the current structure, iDirect Private Markets Fund provides periodic liquidity to its investors through quarterly repurchase offers. These offers, capped at 5% of the fund’s net asset value, enable investors to exit their positions without waiting for a full redemption event. By implementing EWCs, the fund can balance its need for stable capital while still providing liquidity options for investors.

The application seeks to ensure that all EWCs comply with applicable FINRA regulations and are structured in a way that avoids penalizing long-term investors.

Enhanced Distribution and Service Fee Model

The proposed amendments also include plans to establish asset-based distribution and service fees for the fund’s share classes. These fees would be used to compensate financial intermediaries for marketing and distribution services, as well as for maintaining shareholder accounts.

The application points out that the requested relief is consistent with similar orders granted to other funds in the market, allowing for a modernized approach to shareholder services. Importantly, the fees would adhere to FINRA’s regulatory guidelines, ensuring investor protection and transparency.

By introducing these fees, iDirect aims to enhance its operational efficiency and investor services, ultimately leading to better performance outcomes for its shareholders.

SEC’s Role and Precedent

The U.S. SEC plays a pivotal role in regulating how investment companies operate and interact with shareholders, ensuring transparency and fairness in the market. Under Sections 18(a)(2), 18(c), and 18(i) of the Investment Company Act of 1940, investment companies face limitations on the types of shares they can issue, voting rights, and the imposition of certain fees. iDirect’s filing seeks exemptions from these provisions to implement its multi-class share system.

Historically, the SEC has recognized the need for closed-end funds to adopt more flexible structures to compete in a market where liquidity and fee transparency are increasingly demanded by investors. The fund cites several similar exemptions granted to other closed-end funds, highlighting the precedent for its application.

Notably, other funds, such as Aether Infrastructure & Natural Resources Fund and AMG Pantheon Credit Solutions Fund, have successfully implemented similar multi-class systems, creating a robust framework for diversified investor options. iDirect’s proposal follows this well-established regulatory path.

Looking Ahead: Strategic Advantages

For iDirect Private Markets Fund, obtaining the SEC’s approval would represent a significant step toward offering more dynamic investment options. The ability to implement different share classes would provide investors with customized fee structures and liquidity options that better align with their financial goals.

Additionally, the flexibility to impose EWCs would help the fund maintain a stable investor base, discouraging short-term exits while allowing for more efficient management of long-term capital. This stability is particularly important in the private markets, where investment horizons are typically longer than in traditional public markets.

Conclusion

iDirect Private Markets Fund’s application to the SEC for regulatory exemptions demonstrates a forward-thinking approach to managing a closed-end investment company. By seeking to introduce a multi-class share structure, impose early withdrawal charges, and establish asset-based distribution and service fees, the fund aims to offer more tailored solutions to its investors, while maintaining transparency and regulatory compliance.

With a track record of innovation in the private equity space and the backing of its adviser, iCapital Registered Fund Adviser LLC, the fund is well-positioned to continue growing its asset base and providing investors with diversified opportunities in global markets.