First Eagle interval fund offers healthy income in exchange for liquidity

With a 2021 total return of nearly 11%, including a 7% income yield, the First Eagle Credit Opportunities Fund is likely to continue gaining appeal among financial advisers working with clients hungry for strategies that fit the income side of the portfolio.

Launched in September 2020, the First Eagle interval fund has seen its assets balloon to $390 million from $40 million a year ago, when it temporarily waived the 1.2% management fee.

Although the fee cut, which ended Sunday, surely helped draw assets, the flows were also boosted by the fund’s placement on the major brokerage platforms.

The fund is part of the lineup from First Eagle Investments, a $109 billion asset management firm.

In the world of interval funds, which are named for their reduced liquidity compared to mutual funds, this one is relatively straight forward, and is accessible to retail class investors with a $2,500 minimum investment.

While the strategy includes regularly moving parts to capture yield, especially in the current rising interest-rate environment, the portfolio is broadly divided into two main categories: opportunistic credit, which often includes purchasing chunks of syndicated loans, and private credit, where First Eagle is the direct lender and underwriter.

The bulk of the opportunistic side is made up of levered loans.

Robert Hickey, one of six managers working on the fund, said a hypothetical example of an investment on the opportunistic side would be a bank like JPMorgan lending $1 billion to company like Boeing and then spreading its risk exposure by syndicating off most of the loan to other investors.

On the private credit side of the portfolio, the fund is often making loans to smaller companies that have been acquired by private equity investors with loans-to-value ratios in the 30% to 50% range.

That level of loan-to-value represents a kind of insurance against default, Hickey said.

What makes the strategy so appealing now is the floating-rate nature of the underlying loans, which will continue to drive income higher as the Federal Reserve continues to hike interest rates over the next several months.

“I have not encountered anyone who sees rates going anywhere but up in next 12 to 18 months,” Hickey said. “Any floating-rate coupon in the portfolio will go up in response to the Fed, and everything in the portfolio is floating, with the exception of a small percentage of high yield and cash.”

The private credit market, which represents the least liquid side of the portfolio, is part of a $1.2 trillion market today that is expected to grow to more than $2.5 trillion in the next four years.

In addition to the strong yield, which is paid out in the form of monthly dividends, and a weighted average duration of 0.42 years, First Eagle is betting on the growing appeal of the interval fund wrapper.

According to Jack Snyder, First Eagle’s head of retail alternative sales, interval funds overall raised about $9.5 billion per year from 2018 through 2020, but last year that total jumped to $19 billion.

“Investors have realized 100% of fixed income doesn’t need to be 100% liquid,” Snyder said.

Interval funds offer quarterly liquidity of up to 5% of the outstanding shares, meaning it would be difficult to redeem a client’s entire investment all at once, especially if there are a lot of investors seeking liquidity.

“Interval funds had some fits and starts in the early 2000s,” Snyder said. “But they are growing now because the need for yield is alive and well.”