What is the difference between an open ended fund and a closed
ended fund? Either in private equity or a syndication or a
real estate fund? What is it that makes that difference?
We're going to go through that in this video
let's talk about the difference between an open ended fund and a
closed ended fund. Now first, a caveat. I don't mean the
difference between a fund and a syndication. In reality, a
syndication is a group of feed people coming together for a
common purpose, where a fund is a group of money, you know, a
grouping of money, a pile of money for a common purpose. So
to me, they're kind of the same thing. So whether it's for one
asset, or whether it's for a group of assets, a pool of
assets, either a blind pool or a directed pool. That's not what
we're talking about. We're talking about closed ended funds
or open ended funds. So what exactly are we talking about?
And what's the distinction? So I think it's helpful to draw it
out. And I'll provide some examples along the way. So here
is a two different timelines at the top is closed ended fund,
and at the bottom is an open ended Fund, in a closed ended
fund. We've got an investor and who comes in here, and maybe
he's got another investor who comes in here. And then he's,
there's maybe another investor, who comes in here. And then
together, they all traveled down the same path until a liquidity
event here.
And maybe there's different payouts, and there's different
things along the way. So an example, a typical real estate
syndication, we buy the building here at time zero, we maybe we
are raising funds for a month or three months, then we all
traveled down this path, until it's time to sell the property,
sell the property, divide the proceeds, maybe along the way,
we're paying little distributions here in there. But
everybody's staying in together, it's all going as one piece down
that line. So that is a closed ended fund. So what exactly is
an open ended fund, an open ended fund is completely
different. A best example of an open ended Fund is a mutual
fund. So a mutual fund, you have people coming in at all sorts of
different times and exiting at all sorts of different times. So
let's say you've got someone here, who buys in here, travels
down for a few months, and exits here. And then maybe there is
another person who comes in here, travels down and exits
here. Totally different. And then maybe there is a third
person who comes in here and travels down and then exits
here. So you've got these different entry and exit points.
The difference, obviously, is that hold period. So what the
challenge of an open ended fund oftentimes is, is determining
what we call net asset value. Net Asset Value is the price
think of it as the price per share. So for mutual fund, maybe
this time it starts at $100 a unit that's fair, maybe it's
risen to 110. And then maybe it's gone to 120. Maybe it falls
back down to 115 and then 105 But then it skyrockets back up
to 130. At any given point, you can see what the profits are. So
for this blue line, you can see he bought in at 100 and he's
exiting at 105 So he has a gain of five with the green has
bought in at 110 and exit at 130. They have a gain of 20 the
red guy though he lost five he bought in at 120 and it went
down to 115. So he lost five. So but we know With any given point
what everybody has, and everybody is treated the same.
But what if this was not a mutual fund? What if this was a
property or a portfolio of properties. So there is an
important property bought here, a property bought here, a
property bought here and here. And this one sold here. This one
was held all the way to here. This one was exchanged into this
one, which was sold here, how are you going to find out figure
out what sort of values the blue guy gets, the green guy gets or
the red guy gets, it's very challenging. So I'll do another
video on net asset value and how that's done and how we handle
that. But you can see for a real estate fund, that's the true
challenge. That's why they are much, much more complicated, and
much, much more difficult to do. It costs more in legal fees to
put it together. Because it's more complicated. It costs much
more and accounting fees because it's more complicated. All of
those things make it just that much trickier. So I hope this
makes it clear what the difference between a closed
ended fund is and an open ended fund. So let's go over what the
key takeaways from this are. For First, open ended funds in
private equity, allow investors to enter and exit positions
freely. So sometimes there will be a lockup period. But
basically, it lets people come in at any specific point as
designated in the terms and then it provides more liquidity
because we let them out at regular intervals. A closed
ended fund involves the acquiring managing and the
ultimately the aim is selling, right, it's that big capital
event. Now, certainly there can be profits along the way and
there can be cash flow in that closed ended fund. But the main
purpose of the closed ended fund is that appreciation were an
open ended fund, the main purpose really is that cash
flow. And in an open ended fund in equity, we have more frequent
payouts generally, because of the purpose is that is that cash
flow. And so it also offers a lot more flexibility in managing
the investment itself, in terms of designing whether how cash
flow is gets dispersed. And lastly, the closed ended funds
have the potential for much higher returns, because we don't
have this calculation of Net Asset Value all the time, which
exists. So open ended funds on the other hand, they provide a
lot more stability because they can people can come and go as
they want. And it gives that liquidity. My name is Tilden
Moschetti. I am a syndication attorney for the Moschetti
syndication Law Group. I help syndicators and private fund
managers establish Reg D offerings for themselves by
providing them the compliance documents that they need in
order to be compliant with the rules of Regulation D rule 506 B
and 506. C. We basically help you put these funds together,
whether it's an open ended fund or a closed ended fund. I would
love to see if we can help you give us a call or visit our
website and set up an appointment and we can discuss
your project and figure out a way to get you from where you're
at today to your goal as a syndicator or a fund manager