Closed-End Funds Cycle

Within the realm of investment funds, various types coexist. You may have already come across closed-end funds or open-ended funds.

Today, let’s dive into the operational cycle of closed-end VC funds, currently the most prevalent fund type.

Closed-end funds boast several characteristics, including:

• Fundraising from LPs occurs over a defined period, with no possibility of revisiting after closure (although, at times, multiple closings can occur for a single fund).
• The fund’s duration is predetermined. LPs expect fund managers to adhere to various terms, including the expected maturity of the fund.
• Additionally, GPs in closed-end funds employ active management methods. Unlike certain fund types such as open-end funds (e.g., mutual funds), fund managers actively commit to a strategy. They don’t just invest; they play an active role in preparing startups for potential exits, such as IPOs or acquisitions.
• After the investment period, closed-end funds transition into a waiting phase. Portfolio startups have time to grow, and GPs carefully monitor exit opportunities that could maximize returns.
• At the end of the predefined duration, the fund is liquidated. Remaining assets are sold, final returns are distributed to LPs, and the fund is closed.
• However, due to the mechanism of the closed-end fund life cycle, multiple funds can coexist. Fund managers may find themselves managing several funds simultaneously. Given that the active investment period represents only a fraction of the total fund duration, managers have the opportunity to launch another fund once this phase concludes.

This interlocking of multiple investment funds is what we could term the closed-end fund life cycle.