Investment Period: Closed-end funds are set up as a vehicle that has a defined capital raising period, a defined investing period, and a defined harvesting period. During the capital raising period the fund manager is seeking capital commitments from investors, which will then be called incrementally during the investing period as the manager identifies assets for the fund.
Once the investing period concludes, the manager will work to implement the business plan for each of the assets and ultimately dispose of them to wind-down the fund.
Capital Call: After an investment commitment is made by an investor, capital is called in multiple stages (or “tranches”) once new investments have been identified by the fund manager.
Redemptions: Closed-end funds generally have no liquidity rights for investors and investors will not typically receive profits until after all of their committed capital has been returned, most often at the conclusion of the fund’s harvesting period.
Valuation: Since there are generally no redemptions and there is a finite investment period, closed-end funds generally are not marked to market.
Cash Flow: Unlike open-ended funds, cash flows from underlying assets in the fund are generally used to pay back original capital contributed and once all capital is returned, distributions would be made per the preferred return.
Preferred Return: Similar to open-ended funds, there is typically a preferred return for investors, which generally accrues until the fund starts disposing of assets. Any performance above the preferred return is typically split between investors and the manager based on certain predefined internal rate of return (IRR) hurdles. Since closed-end funds are generally less focused on cash flow, investment mandates are usually more value-add oriented, where profits are maximized upon the sale of all assets in the fund.