RiverNorth Capital & Income Fund: Can Repurchase Offers Bridge the NAV Discount Gap?

The RiverNorth Capital and Income Fund (RSF), a closed-end fund focused on high-yield credit instruments and specialty finance investments, has long struggled with a persistent discount to its net asset value (NAV). Yet, its quarterly repurchase offers—mandated by Rule 23c-3—offer a unique mechanism to address this gap. In this analysis, we explore how RSF's liquidity management strategy, centered on these repurchases, could narrow the discount and enhance shareholder value.

How RSF's Repurchase Offers Work

RSF allows shareholders to sell shares back to the fund at NAV quarterly, with a cap of up to 5% of outstanding shares. If demand exceeds this limit, shares are repurchased on a pro-rata basis. For example, in its April 2025 offer, shareholders submitted 1.54 million shares, but only 174,273 shares (5% of outstanding shares) were repurchased at $16.15 per share. A similar oversubscription occurred in January 2025, when 1.68 million shares were submitted.

The goal of these repurchases is twofold: to provide liquidity to shareholders and to reduce the discount by decreasing supply in the open market. However, the fund's discount has persisted, averaging -6.31% over six months as of April 2025.

Liquidity Management and Discount Dynamics

1. Pro-Rata Allocation Limits Impact:
While repurchases reduce supply, the strict 5% cap often leaves demand unmet. In April 2025, only 11% of submitted shares were repurchased, limiting the immediate impact on liquidity. This suggests that repurchases alone may not be sufficient to eliminate the discount without sustained demand for shares.

2. Discount Volatility and Z-Score Analysis:
The fund's discount has fluctuated between -3.24% and -9.96% over the past year. As of April 2025, its 1-year Z-Score of 1.42 indicates the discount is above its historical average but within statistical norms. This suggests that while the discount is elevated, it isn't entirely abnormal for RSF's risk profile.

3. NAV Growth vs. Market Performance:
RSF's NAV has grown at a modest 4.87% annualized rate over the past year, while its market price rose 9.25%, outperforming NAV growth. This divergence highlights investor sentiment: while the fund's underlying assets grow steadily, market participants are willing to pay a premium during certain periods, only to retreat due to perceived risks.

Risks and Challenges

RSF's discount persistence isn't solely a liquidity issue—it's tied to its high-risk portfolio. The fund invests heavily in non-investment-grade securities, including loans to specialty finance companies and alternative credit instruments, which are prone to defaults. These risks are amplified by its 11.04% leverage, increasing volatility.

Moreover, the fund's 9.71% annual expense ratio (including interest) is elevated for a closed-end fund, potentially eroding long-term returns and deterring investors.

Investment Implications

1. Income-Seeking Investors:
RSF's 10.75% distribution yield (based on April 2025's market price) makes it attractive for those prioritizing income. However, shareholders must weigh this yield against the risk of NAV erosion from credit defaults or rising interest rates.

2. Discount Narrowing Potential:
If RSF can consistently grow NAV while reducing leverage or expenses, the discount could shrink. A 7% discount (vs. NAV) is already narrower than its 1-year average of 6.99%, suggesting gradual improvement.

3. Strategic Repurchase Timing:
Investors might consider purchasing RSF shares ahead of repurchase offers to benefit from the temporary liquidity injection. For instance, buying before the next offer (likely in July 2025) could capitalize on reduced supply.

Final Analysis

RSF's repurchase offers are a double-edged sword: they provide liquidity but haven't fully closed the NAV discount. The fund's high-risk, high-reward strategy appeals to income-focused investors, but its elevated expenses and exposure to credit cycles warrant caution.

Investment Advice:
- Buy: For aggressive income investors willing to accept credit risk, RSF's 10.75% yield offers compelling upside.
- Hold: For those already invested, monitoring NAV growth and expense trends is critical.
- Avoid: For risk-averse investors, given the structural risks and the likelihood of persistent discount volatility.

In conclusion, RSF's repurchase mechanism is a useful tool for managing liquidity but insufficient on its own to resolve the discount gap. Success hinges on the fund's ability to grow NAV sustainably while mitigating its risk profile—a challenge that will test even the most patient investors.