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