Every semi-liquid vehicle — interval funds, tender offer funds, perpetual BDCs, NAV REITs — provides liquidity the same way: a periodic offer to buy back a limited number of shares at NAV.
Investors generally understand that in outline. What causes surprise is the mechanics: the sequence, the timing, the arithmetic of proration, and where the cash actually comes from.
The cycle
1. Notice. The fund announces the offer — the amount being repurchased, the request deadline, the date NAV will be determined, and the expected payment date. Notice periods are set by the applicable rule and by fund policy.
2. The request window. Shareholders submit repurchase requests, generally through the platform or intermediary holding their position. Requests can typically be withdrawn until the deadline; in a tender offer, shareholders generally have withdrawal rights during the offer period.
3. The deadline. After it, requests are usually irrevocable.
4. Valuation. NAV is struck on a specified date after the request deadline.
This is the first thing that surprises investors, and it is structural: you commit to sell before you know the price. For a fund holding assets that are fair valued rather than market priced, there is no way around it — the fund must know how many shares to repurchase before it can complete a valuation reflecting that. The gap between deadline and valuation date is typically short, and in a volatile period it is not nothing.
5. Proration, if needed. Discussed below.
6. Settlement. Proceeds are paid, generally within a period stated in the offer.
The whole cycle from notice to cash commonly runs weeks. An investor who needs money in days should not be relying on this mechanism.
The proration arithmetic
If shareholders collectively request more than the fund is offering, every request is filled at the same percentage.
The arithmetic is simple and its consequences are not. Suppose a fund offers to repurchase 5% of shares and receives requests totalling 12.5% of shares. The fill rate is 5 divided by 12.5, or 40%. A shareholder who requested full redemption of their entire position receives 40% of it.
Three consequences follow:
The unfilled balance is generally not queued. The shareholder must submit a new request at the next window. There is no place in line.
Exiting fully can take several cycles. At a 40% fill rate repeated quarterly, a shareholder wanting out entirely is looking at multiple quarters — assuming the fill rate does not deteriorate.
Fill rates deteriorate exactly when they matter. Oversubscription happens when many shareholders want out simultaneously, which is when the portfolio is stressed. The mechanism is least accommodating precisely when it is most needed.
None of this is hidden; it appears in every prospectus. It is simply the arithmetic that investors rarely work through until they are inside it.
The request-inflation dynamic
Because proration fills a percentage of what is requested, an investor who wants to exit fully has an apparent incentive to request more than they hold or want — inflating the request so that the prorated fill delivers the intended amount.
This is worth understanding as a dynamic rather than adopting as a tactic, for two reasons.
First, it is self-defeating in aggregate. If many shareholders inflate requests, total requests rise, the fill percentage falls further, and the inflation must increase to compensate. This is a familiar dynamic in any prorated allocation system, and it makes the fill rate less informative about genuine demand.
Second, it can backfire individually. If the offer is not oversubscribed, an inflated request is filled in full, and the investor has sold more than they intended. Funds may also have terms addressing over-requesting.
The practical guidance is simply to read the fund terms and request what is actually wanted, understanding that a full exit may take time.
Where the cash comes from
A fund facing repurchases has four sources, and the order tells you a lot about how well it is managed.
The liquid sleeve. Most semi-liquid funds hold a portion of the portfolio in cash and liquid instruments specifically to meet repurchases. Interval funds are required to maintain liquid assets against their offers. This is the first and safest source, and it is a permanent cost — the sleeve earns no illiquidity premium.
Portfolio cash flow. Interest, distributions, amortisation, and scheduled realisations. In credit strategies this is substantial and is why credit is a natural fit for the wrapper.
New subscriptions. In a continuously offered fund, incoming money can fund outgoing money.
This is worth thinking about carefully. It works well when inflows are healthy and it fails at exactly the wrong moment, because subscriptions dry up under the same conditions that generate redemptions. A fund whose liquidity depends materially on new money is more fragile than its stated liquid sleeve suggests, and that dependence is visible in the flow disclosures rather than in the liquidity policy.
Credit facilities. Borrowing to bridge repurchases. Useful for timing, and it adds leverage and a lender whose terms may bind at the worst moment.
Asset sales are the last resort. Selling illiquid holdings into a weak market to fund exits transfers value from remaining shareholders to exiting ones — the outcome every part of the structure is designed to avoid.
The fairness problem underneath
Every element above is really about one question: is the NAV right?
Investors both enter and exit at NAV. If NAV is overstated, exiting investors take value from those remaining. If understated, exiting investors are shortchanged. In a drawdown fund, valuations are reporting and realisations settle the score. In a semi-liquid fund, the valuation is the transaction price.
This is why valuation governance in these structures is a shareholder-fairness matter rather than a disclosure matter, and why independent valuation input, consistent methodology, and board oversight deserve more weight than they usually receive in the sales conversation.
What to actually check
- Repurchase history: offers conducted, sizes, and every instance of proration, reduction, or suspension. Disclosed in fund reports.
- The liquid sleeve: how large, and what it holds.
- Flow dependence: whether repurchases have been funded substantially by new subscriptions.
- Credit facilities: size, terms, and covenants.
- The timing sequence: notice, deadline, valuation date, settlement — and whether the total elapsed time fits any liquidity need.
- Valuation governance: who values, how often, with what independence.
An investor who has checked these six has understood the liquidity of the vehicle. An investor who has read the stated cap percentage has not.
This guide is educational and general; it is not investment, tax, or legal advice. Repurchase terms differ materially by fund; read the specific offer documents.
Frequently Asked Questions
How does a repurchase window work?
The fund issues notice of the offer, shareholders submit repurchase requests during a stated window, the fund determines NAV on a specified date after the window closes, and shares are repurchased at that NAV with proceeds settled shortly afterward. Because NAV is struck after the request deadline, investors submit requests without knowing the exact price.
What does proration mean in practice?
If shareholders collectively request more than the fund is offering to repurchase, each request is filled at the same percentage. A shareholder requesting full redemption in an offer filled at 40% receives 40% of what they asked for. The unfilled balance is generally not carried forward, so they must request again at the next window.
Can I cancel a repurchase request?
Generally yes, up to the deadline stated in the offer, and in a tender offer shareholders typically have withdrawal rights during the offer period. After the deadline the request is usually irrevocable. Terms vary by fund and should be read from the specific offer.
How does a fund raise the cash to pay repurchases?
Usually from a combination of a liquid sleeve held for the purpose, cash from portfolio income and realisations, incoming subscriptions from new investors, and credit facilities. Selling illiquid holdings into a weak market is the last resort, because it damages remaining shareholders.
Should I request more than I want in case of proration?
Some investors do, and it is worth understanding the dynamic rather than the tactic. If many shareholders inflate requests anticipating proration, the aggregate rises and the fill percentage falls further, which encourages more inflation. Funds may also have terms addressing this. Requesting more than intended can also result in receiving more than intended if the offer is not prorated.
Sources
- Investment Company Act of 1940, Rule 23c-3 (periodic repurchases by closed-end companies)
- Securities Exchange Act of 1934, Rule 13e-4 and Regulation 14E (issuer tender offers)
- ASC 820, Fair Value Measurement
