Investment in rule 506b funds under reg D

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theorist
Posts: 1329
Joined: Sat Sep 28, 2019 11:39 am

Investment in rule 506b funds under reg D

Post by theorist »

I am wondering if any bogleheads have invested in a “private placement” type of fund as specified by rule 506b under regulation D? I have been looking at a fund that plays by this rule as a possible investment for “fun money”. At 5% of my portfolio it wouldn’t be a huge issue if there were a disaster, but I’d like to know if others here have experience with such funds? From what I can tell, they are still reasonably well regulated, just with less protections and rules on their conduct than the 506c funds that I think are more normal for conventional investors.
Tanelorn
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Joined: Thu May 01, 2014 9:35 pm

Re: Investment in rule 506b funds under reg D

Post by Tanelorn »

You have the right take on the 506b vs 506c. Smaller funds may start with B and switch later as they want to accommodate more investors. As for the investment, it’s as good as the fund or manager.
Nahtanoj
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Joined: Tue Apr 04, 2017 7:01 am

Re: Investment in rule 506b funds under reg D

Post by Nahtanoj »

Can you sell the fund after you buy it? How often? And how much? Can the manager block you from taking your money out?

One of the beauties of mutual funds and ETFs is that you can get out of them any time you want. With funds sold through private placements, you might be stuck in them for years.

Today’s Wall Street Journal has an article by Jason Zweig about a huge Blackstone real estate fund that has been in the news recently because it just announced new limits on investors’ ability to get out.

Even if a fund is supposedly doing well, you might decide you would prefer to have the option to get your money back when you want, rather than when the manager wants.
Tanelorn
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Re: Investment in rule 506b funds under reg D

Post by Tanelorn »

Nahtanoj wrote: Sat Dec 10, 2022 3:26 pm Today’s Wall Street Journal has an article by Jason Zweig about a huge Blackstone real estate fund that has been in the news recently because it just announced new limits on investors’ ability to get out.
That wasn’t a new limit, it was always in the fund docs.

https://www.wsj.com/articles/breit-blac ... 1670609862
As a private real-estate investment trust, it doesn’t offer daily liquidity; in the aggregate, investors can sell only 2% of the fund’s assets per month or 5% per quarter.
There’s always a trade off between liquidity and returns, so if you’re not willing to invest in a less liquid fund, these types of things are not for you. Certainly it’s worth reading the fund docs in full with an eye to any lockup period (soft or hard), possible gates, side pockets, and the like, depending on what type of investing the fund will be doing.
Nahtanoj
Posts: 130
Joined: Tue Apr 04, 2017 7:01 am

Re: Investment in rule 506b funds under reg D

Post by Nahtanoj »

The Jason Zweig article says the Blackstone private fund “announced it would restrict redemptions in December.”

The fact that this possibility may have been disclosed in the offering documents doesn’t help if you didn’t read the offering documents, or if you did read them but the limits on liquidity didn’t register.

The point is that liquidity is valuable, and you should figure out what the limits are before you invest in any private fund, because you don’t want to be surprised later.

Things to look for would be any pre-set limits on redemptions or withdrawals, as well as whether the manager can impose additional limits or restrictions (“gates”) under certain circumstances. (If additional limits are imposed, it will tend to happen precisely when there is an uptick in investors’ interest in getting out.)
Goldwater85
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Re: Investment in rule 506b funds under reg D

Post by Goldwater85 »

506b and 506c are just two rules providing exemptions from registering sales of securities under the Securities Act. The choice doesn’t tell you anything about how the fund is orgnanized and both exemptions can be used by operating companies just as easily.

506b is a long-standing exemption. 506c was enacted recently, to accommodate broad advertising. If anything, I’d be more leery of a 506c offering, as it implies a fund that is widely marketing to the mass affluent, as opposed to going after institutional and UHNW money.
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