Fidelity is entering the alternative investment market with the registration of two new funds: one Non-traded BDC, and one interval fund. Fidelity Private Credit Fund is a non-traded Perpetual Life BDC that has an initial registration statement on September 6, 2022, and an updated draft on October 28, 2022. Fidelity Multi-Strategy Credit Fund is an interval fund that filed a draft registration statement on October 11. Both funds are still pending effectiveness from the SEC.
In this article we take a closer look at Fidelity’s new BDC and Interval Fund, and speculate on some of the broader implications of Fidelity’s entrance into the alternative investments market.
Fidelity BDC Fee Structure
Fidelity Private Credit Fund is targeting a maximum capital raise of $1 billion, and a minimum capital raise of $100 million. It will hold investor’s funds in interest- bearing escrow accounts until they receive purchase orders for at least $100 million in any combination of share classes. Based on expressions of investor interest, they expect to hold a first closing and break escrow in 2023Q1. Fidelity’s new BDC will have a base management fee of 1.25% per year. Additionally, it will charge an incentive fee consisting of two parts. The first part of the incentive fee is based on income- the manager will receive 12.5% of pre incentive fee net investment income over a 5.0% hurdle rate. Additionally, the fund will pay the manager 12.5% of cumulative realized capital gains.
Fidelity Distributors Company , LLC will conduct the non-traded BDC offering, and won’t charge any sales load. Some financial intermediaries may charge sales loads or placement fees for for S,and D shares, although total amount cannot exceed 3.50% for Class S and 1.50% for Class D. Servicing/distribution fee will be 0.85% for Class S shares and 0.25% for Class D shares.
Fidelity Interval Fund Fee Structure
Fidelity Multi-strategy Credit Fund plans to conduct a continuous offering for an unlimited amount of shares. The draft prospectus for Fidelity’s Interval Fund still needs several details to be filled in. In particular, the management fee amount is not yet specified. It will have two share classes: Class A and Class I. Minimum investment will be $1,000,000 for Class I. Minimum investment for Class A is not yet specified. Most likely it will be a retail share clas with a low (ie $2,500 or lower) minimum investment. Fidelity Distributors Company, LLC will also conduct the interval fund offering.
Fidelity BDC and Interval Fund Strategy Comparison
Fidelity’s BDC and interval fund are both credit focused , but there are important differences between their strategies. As a BDC, the Fidelity Private Credit fund will invest at least 70% of assets that meet regulatory requirements of the BDC structure- generally this will mean U.S. firms with market values of less than $250 million. BDC portfolio companies are generally private and sponsor backed, but they might also be small cap public companies. Fidelity Private Credit Fund will primarily focus on directly originated loans to private companies but will also invest in syndicated loans and other liquid credit investments. Fidelity Private Credit Fund has the official objective of: “Generate current income and, to a lesser extent, long term capital appreciation”
Fidelity’s interval fund will invest in a broader range of credit assets as the name “Fidelity Multi-Strategy Credit Fund” implies. According to the registration statement, it will invest opportunistically in various credit instruments. The foundational credit assets will include direct lending, real estate debt, leverage loans,h high yield bonds, collateralized loan obligations. Fidelity’es interval fund will also make opportunistic credit investments in distressed debt, special situations, convertible bonds, preferred stocks, and privately originated dals. The investment objective for Fidelity’s interval fund also reveals a broader mandate: “Provide a high level of current income and capital appreciation through investments across a variety of high-income oriented asset classes including both liquid and illiquid securities.”
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