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Recently I realized something…
In a lot of my videos and in the course I allude to open and closed ended funds,
But I have never really explained what they are.
So in light of this I thought it would be a good of a time as any to talk about this important topic!
The Difference
Now understanding these structures is CRUCIAL to your fund.
It’s important in:
- Designing your fund.
- How long investors will commit their capital to you.
- How quickly they can get in and out.
- And really how you want to structure it overall.
Now both closed and open funds deal with these things in their own way.
So let’s go over that and get into it.
Closed-End Funds
A lot of Venture Capital, Private Equity, and Real Estate Funds us this model.
Typically how this works is that they will say that the fund will be 7-10 years long.
(Or the lockup period, which is how long they have to go without their principal)
They might take the first 18 months to raise money but then cut off raising at that 18 month mark.
At this point they will invest the money for about 5 years or so and then at that point start selling off equity, maybe IPO, liquidate the businesses, or exchange real estate.
The goal would then be to completely liquidate their positions by year 7….
So from years 5-7.
But if the economy is poor this could be extended through year 10.
With this time model in closed ended funds you are getting your biggest returns in years 5, 6, & 7.
Now with these assets it makes sense to have your fund closed because it is very difficult to take money out of seed funding, a business, or real estate and return it to the investor.
In fact, it’s almost impossible to do this individually.
If the asset your fund will be investing in is not liquid or can be liquidated easily then it is probably smart to go with a closed-end structure.
Open-Ended Funds
In an open-ended fund structure investors are able to come in and out of the fund as they please.
So if you establish that your fund will be 10 years in length then investors can come into your fund at any time in that 10 year period.
You probably guessed that this fund structure is more typical of Hedge Funds…
Or funds with more liquidity.
I know I said that we would use the 10 year timeline for this as well but in reality open-ended funds start and go on for basically as long as they want to.
However, with open-ended funds there are some nuances.
For example, in my fund I tell investors they can come and go as they please, but when you come in you have to leave your money in for a minimum of 1 year.
And then after 1 year it is a 60-day notice.
This gives me time to work their money out of the fund.
And the same goes for an open-ended fund you might want to start.
You can add nuances to your fund so long as they are legal.
Conclusion
Now obviously there is more to it than this but I wanted to briefly cover what they were so that in the future I could help dispel some confusion.
If you do want to hear more about this, then the link up above should take you to a video where I go a little deeper.
We also have a private facebook link down below where you are free to ask questions about funds or even join my course.
I know that sometimes it can seem like there are a lot of little things to remember, but these foundational pieces are what will make you successful in the ling run.
Feel free to reach out and ask questions too!
Hope this helps,
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DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.
