Advantages of Open-Ended vs. Closed-End Funds

The problem with close-ended funds for limited partners:

You can’t eat IRR.

The returns might be good, but the actual equity multiple (total cash returned to you) can be disappointing in many institutional-quality, close-ended funds.

Why?

Because large funds ($1 Billion+ in size) typically “call” capital over a three year investment period.

Say you’ve committed to invest $250,000 in a fund but perhaps they only “call” $25K the first month.

So what do you do with the remaining $225K while you wait?

Since you’ve already committed that capital, typically you might want to put it into something liquid and "risk free" like cash or short-term treasuries.

But a 0% or 5% return on reserved cash is going to reduce your overall returns.

Friction Costs

And if things go well, have a second problem with a close-ended fund.

What do you do with cash returned to you in years 7-10?

Cashing checks is a high-class problem, but you still have to:

• pay taxes
• pay transaction costs
• find & redeploy into a new private deal

These transaction and time costs create drag on your total returns.

It's quite typical for only 60-70% of a limited partner's total commitment to be utilized throughout the fund's lifespan.

On the other hand, open-ended vehicles offer investors the flexibility to manage their investment levels, with each subscription contributing to a fully funded portfolio

This is why a 12-15% return in an open-ended or “evergreen fund” is far more valuable than a series of periodic 18% returns.

For example. Over the course of 10 years a typical $1 billion closed-end fund with the same return (IRR) as an evergreen strategy will lag that evergreen strategy by $2 billion in value creation. ⁽¹⁾

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This isn’t to say you should ignore all close-ended funds.

Many high net worth investors have enough liquid or semi-liquid investments to manage this "draw-down" process without impacting their total portfolio returns.

Evergreen invests in both fund structures.

However, our anchor investments are all open-ended.

We have a strong preference for investments that require one decision for a potential lifetime of returns.

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(1) Source: Partners Group. All returns shown are net of fees and expenses. Capital calls and distributions based on real historical cash flow patterns from Cambridge Analytics and adjusted based on Partners Group’s forward-looking expected returns framework. Cash is assumed to return 0.4% per year for this analysis.

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