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Open end vs. closed end private equity funds

Open end funds are generally focused on assets that can be freely transferred and are traded on an established trading platform or market. These funds are designed to allow for regular re-calibration of the portfolio to meet the contribution and redemption needs of investors. These funds typically have no specific finite term.

Upon committing to invest, investors typically put in their capital at that time, with no future capital calls required.

For example, many hedge funds are open end funds. They allow investors to join or leave and redeem their capital at regular intervals. This is not possible in closed end funds.

Closed end funds are generally focused on assets that cannot be freely transferred for a ceratin period of time. These assets cannot be marked to market and are generally held on the books until a realization event, such as a refinance or sale of the asset, occurs. These funds typically have a 10-12 year term with 1-2 year optional extensions.

Closed end funds have capital calls when they need capital from investors. As such, investors may or may not contribute money to the fund directly at the time of commitment. The commitment time period lasts between 3 and 5 years. Aftwards, the GP will invest during the investment period, which lasts for several years, and varies from fund to fund. In addition, some funds allow for the recycling of capital during the extension period.

When capital is called from investors, they are contractually obligated to provide the pre-agreed upon capital amount to the fund. However, investors can pay late, which often results in an interest penalty. In addition, if the investor defaults on the capital call, the GP can terminate the investor’s right to fund future deals. The GP will likely also buy out the investor in any prior investments that they participated in. This happens at a fraction of what the investor contributed to the deal.

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